© 2008 AMR Research, Inc. | Page 1 Growth and Innovation in the Chemicals Industry – AMR Research Bill Polk
Oct 24, 2014
© 2008 AMR Research, Inc. | Page 1
Growth and Innovation in the Chemicals Industry – AMR Research
Bill Polk
© 2008 AMR Research, Inc. | Page 2
Introductions
Bill PolkResearch Director, Value Chain Strategies
• 19 years of management experience in the manufacturing, supply chain software, IT operations and logistics industries
• Managed enterprise-wide infrastructure, technology upgrade, and outsourcing initiatives for IT Infrastructure group at State Street • For Oracle’s Internet Supply Chain Management group led business development and implementation efforts • Managed electrical component manufacturing facilities in the US, Mexicoand Europe • Logistics officer for the US Marine Corps
• BA Mathematics, College of the Holy Cross; MBA Stanford Graduate School Of Business; MA Stanford University School of Education
© 2008 AMR Research, Inc. | Page 3
Some of the Process Manufacturing Companies We Serve…Some of the Process Manufacturing Companies We Serve…
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Agenda
• Industry Trends & Issues
• Innovation
• Sustainability
• Service Providers
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Crude Oil and Natural Gas Spot Prices
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Industry Trends
• Volatile feedstock costs rippling through supply chain
• Avg housing start consumes approximately $17K in chemicals and plastics, avg automobile absorbs more than $2000 in chemical products
• 2/3 of all US manufacturers rely on chemicals directly or indirectly
• 90% of manufacturers say replacing chemicals in their processes is technically or financially infeasible
But…
• US Industrial Output decreased 11.4% in Q4 2008
• Global overcapacity, global demand plummeting even in emerging markets (China, Russia, India & Latin America)
• Last large global capacity push in 2002, next one was slated for 2009-2010 in Asia and the Middle East.
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Top Issues in Global Chemical Industry
• Rising Fuel Costs and impact on feedstock and transportation/logistics
• One major chemical manufacturer leases 6000 rail cars and averages only 4 return trips/year
• Feedstock cost increases had been outpacing final product price increases
• Excess global capacity (particularly Ethylene) by 2009/2010
• Sites will close in US and Europe, searching for advantaged feedstock regions
• Lack of Supply Chain Visibility
• Results in increased inventory (US Polyethylene industry $500M alone)
• Industry Peculiarities
• Terms offered
• Regional price protection differences
• Latency in settling feedstock accounts
• Uncertainty over future regulatory activity – REACH (KSCA), 10+2, TSCA, etc.
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Volatile Fuel Costs: What are Companies Doing?
Passing along increases – Dow 45% over 3 months
Network Optimization & Simulation Tools – fleets, routes,
warehouses and distribution centers
Increased use of IT – Asset utilization, visibility tools, web-enabled
communication, TMS and WMS solutions
Increased transportation cost awareness (true net delivered cost)
Purchasing price
Transportation and logistics costs
Customs and import duties
Inventory carrying costs
Overhead and administration
Risk and compliance
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Supply Chain Process Mfg Client Inquiries 2007 vs 2008
0%2%4%6%8%
10%12%14%16%
25%
14%
10%
2007
2008
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Top Priority Business Process for 2008Which of the following represents your top priority for improvement over the next 12 months?(% Respondents, top 3 responses are in bold)
COG Pharma HT CP Auto A&DProviding real manufacturing costs, capabilities, and capacity to the business for effective sales and operations planning 19% 12% 24% 14% 22% 18%Operations excellence programs such as six sigma, TQM, and lean to reduce process / product variability, improve first pass yield, and reduce waste 8% 9% 11% 10% 17% 18%Reducing the impact of new product, supplier, and engineering specification changes on the manufacturing process 14% 12% 5% 29% 6% 9%Design for manufacturing - ensuring that new products / configurations are designed for existing or readily acquired manufacturing equipment 8% 15% 16% 5% 11% 0%Asset performance management and reliability centered maintenance programs to improve availability and performance of manufacturing tools and equipment 11% 12% 11% 5% 6% 9%Providing visibility on up-to-date inventory (FG,WIP), capacity, and manufacturing constraints to the business for order promising 8% 9% 3% 10% 11% 18%
Providing manufacturing with accurate and timely forecasts of demand11% 9% 8% 14% 11% 5%
Acquiring near real time production information for site level performance metrics3% 9% 8% 5% 0% 5%
Managing inventory across the extended supply chain e.g. with contract manufacturers, component suppliers, and 3PLs 3% 6% 8% 0% 6% 9%
Managing supplier quality, compliance and performance11% 3% 0% 5% 11% 5%
Finite capacity scheduling to efficiently sequence production orders to meet inventory, cost, and service level targets 3% 6% 5% 5% 0% 5%
n= 37 34 37 21 22 18Total 100% 100% 100% 100% 100% 100%
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Business Process Importance vs. Performance
US - Top 2 Box Score Gap Aggregation Total Process Discrete <$1B >$1B IT LOB
Providing real manufacturing costs, capabilities, and capacity to the business for effective sales and operations planning (S&OP).
13% 14% 12% 13% 16% 11% 17%
Managing inventory across the extended supply chain e.g. with contract manufacturers, component suppliers, and 3PLs
9% 8% 11% 9% 12% 8% 13%
Asset performance management and reliability centered maintenance programs to improve availability and performance of manufacturing tools and equipment
14% 16% 12% 13% 20% 11% 19%
Managing supplier quality, compliance and performance 7% 6% 8% 3% 32% 9% 3%
Providing manufacturing with accurate and timely forecasts of demand 11% 8% 12% 9% 20% 16% 2%
Acquiring near real time production information for site level performance metrics 12% 10% 13% 10% 24% 10% 14%
Operations excellence programs such as six sigma, TQM, and lean to reduce process / product variability, improve first pass yield, and reduce waste
5% 10% 1% 4% 8% 6% 3%
Finite capacity scheduling to efficiently sequence production orders to meet inventory, cost, and service level targets
6% 6% 6% 5% 8% 8% 3%
Design for manufacturing - ensuring that new products / configurations are designed for existing or readily acquired manufacturing equipment
8% 2% 12% 4% 32% 9% 6%
Reducing the impact of new product, supplier, and engineering specification changes on the manufacturing process
6% 10% 4% 5% 12% 4% 10%
Providing visibility on up-to-date inventory (FG,WIP), capacity, and manufacturing constraints to the business for order promising
5% 4% 7% 3% 20% 6% 4%
BLUE = Notable performance gapRED = Significant performance gap
Most Im
porta
nt
Least Im
porta
nt
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Innovation
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Innovation Classifications
We provide reliable delivery and high volumes of well understood and commonly produced chemicals at a consistent quality and at market price
COMMODITY PRODUCER
PRODUCT SPECIALISTS
We have flexible production capabilities and manufacture batches of a wide range of specialty chemicals on demand, to customer specific formulations, + command a premium
PRODUCT INNOVATOR
We invest heavily in developing new chemistry and command a price premium for manufacturing and providing technical and joint development services on customer applications of (specialty) chemicals
PORTFOLIO MASTER
Based on the synergies of our integrated manufacturing and supply chain, we offer a wide range of chemicals/ products: We have a wide range of chemicals that fall into all three categories above
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Progress: Products introduced in last 2 years = 1/3 of revenues
Sample Size = 120
Q. What percent of your 2007 revenue is generated from product introduced...
14% 14% 17% 14%
17% 19%19% 21%
19%22%
32%24%
51%45%
33%42%
CommodityProducers
Product Specialists Product Innovators Portfolio Masters
More than 5 yrs ago
In the last 2-5 yrs
In the last 1-2 yrs
In the last 12 mo.
SMB ChemCos are recent innovators: 44% of their product have been introduced over last 2 years vs 30% of large enterprises
Suggests new applications, and branding/packaging, rather than new chemistry
Most new product revenue is generated from Innovators
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Q. Does your company have a formal New Product Development and Launch (NPDL) process in place?
Do not have a formal NPDL process
In the process of implementing formal
processFormal NPDL process in
place (<2 yrs)
Formal NPDL process in place (2 yrs+)
Most do not have a formal NPD&L process, or less than 2 yrs old
Sample Size = 120
33%30%
17% 20%
Have formal process in place:
38%
43%
68%
63%
Commodity Producers
Product Specialists
Product Innovators
Portfolio Masters
Still represents opportunity as companies try to get it “right”
Roughly half of SMB companies do NOT have a formal process in place / one-third are implementing
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Q. What are the top 3 reasons why product development and introduction or launch efforts do not meet expectations?
23%
23%
15%
8%
12%
0%
8%
4%
4%
4%
13%
5%
8%
13%
10%
15%
10%
8%
8%
8%
32%
16%
16%
8%
4%
12%
0%
4%
8%
0%
33%
10%
13%
10%
10%
3%
7%
7%
3%
0%
Product cost/pricing issues
No clear product differentiation
Regulatory issues
Poor promotion process
Product quality issues
Late to market or missed demand
Inadequate distribution channel
Poor commercialization process
Product does not meet customer needs
Inventory shortage / product availability issues
Commodity Producers Product Specialists Product Innovators Portfolio Masters
Expectations miss when market opportunity is ill-defined
Sample Size = 120
% who said 30%+ of introductions do not meet expectations:
23%
36%
48%
20%
Commodity Producers
Product Specialists
Product Innovators
Portfolio Masters
SUMMARY OF TOP REASON
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Significant process gaps in Prod. & Process Portfolio Mgmt
Sample Size = 120
Q. How important are the following processes to your company to ensure successful business innovation? (1= Not at all important / 10=Extremely important)How well would you say your company performs these processes today?(1=Poorly / 10=Extremely well)
53%
53%
48%
47%
33%
38%
28%
31%
Product portfolioprofitability analysis and
management
Project resourceallocation, scheduling
and reporting
Project review andworkflow management
Asset (mfg and R&D)portfolio profitabilityanalysis and mgmt
Importance
Performance
Gap=20%
Gap=15%
Gap=20%
Gap=16%
SUMMARY OF TOP 3 BOX (8, 9, or 10 rating)
Problem areas (gaps) are significant in Product & Process Portfolio Mgmt and Customer Needs Mgmt processes (see slide 21).
High in importance
But performance is low!
© 2008 AMR Research, Inc. | Page 18
Significant process gaps in Customer Needs Management
Sample Size = 120
Q. How important are the following processes to your company to ensure successful business innovation? (1= Not at all important / 10=Extremely important)How well would you say your company performs these processes today?(1=Poorly / 10=Extremely well)
68%
53%
38%
33%
29%
30%
Customer/Market needsassessment / idea
management
Marketing, promotion,and/or sales planning
Sample management forcustomer/market
development
Importance
Performance
Gap=35%
Gap=24%
SUMMARY OF TOP 3 BOX (8, 9, or 10 rating)
Ranks as most important process
Largest gap!
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47%44%
53%
69%
44%
17%
37%44%
27%
44%
27%
44%46%30%
23%
50%
67%
47%32%
27%
48%
71%
9%10%17%
8%6%
17%16%24%
47%
9%2%
Retail(n=32)
HealthcareBanking Oil&Gas Industrial Chemical A&D MfgHigh Tech Auto Mfg Pharma CPG
Increase Remain the same Decrease
Growth in IT Spending for 2009 by IndustryBudgetGrowth: 2.6% 3.3% 0.9% 3.8% 1.8 -0.8% 4.5% 11.3% 4.3% 2.2% 4.3%
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IT Adoption Curve – Spending TrendsIT Adoption Curve – Spending Trends
49% 46%26% 23%
50%48%
2%11%
24% 29%
42%49%
Innovator(n=106)
Early adopter(n=140)
Averageadopter(n=76)
Late adoper(n=31)
Decrease
Remain the same
Increase
IT Budget Direction 2009/2008
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Total addressable Chemical innovation tech market by revenue segment in North America (2007-2010)
Sample Size = 120
$737,100,521
$1,704,649,271
$483,798,750$483,750,000
$814,649,638
$533,509,072
$1,854,584,491
$506,425,781
11%
9%
10%
5%
$-
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
$1,400,000,000
$1,600,000,000
$1,800,000,000
$2,000,000,000
Total <$500M $500-$1.49B $1.5B+
Pro
ject
ed S
oft
war
e M
arke
t S
ize
($ M
M)
0%
2%
4%
6%
8%
10%
12%
2007
-10
Pro
ject
ed G
row
th (
%)
2007 2010 2007-10 Growth (%)
CALCULATIONS:
# of N. American ChemCos x Average technology spending to support innovation = Total 2007 investmentsTotal 2007 investments x Net change in 24 mo. = Total addressable market (2007-2010)(includes software and related services such as hardware and integration)
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NPDL initiatives impact on technology spending
Sample Size = 120
Q. Which of the following NPDL initiatives impacts your technology spending to support business innovation?Q. Which will impact your spending to support business innovation in the next 3 yrs?
48%
44%
40%
32%
30%
28%
36%
38%
53%
47%
34%
43%
46%
78%Development of a strong R&Dportfolio/pipeline
Improvements in collaborationprocesses/technologies w /inR&D, Mfg, SC + Sales & Mktg
Recruitment + retention of toptier managers and scientists
Redeployment of existing mfgtechnologies/assets for
new /higher margin products
Investments in IT to increaseR&D productivity
Formation of R&D alliances +partnerships w / other f irms
Commercialization of greenmanufacturing processes
Today
Next 3 yrs
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Information Technology Adoption Curve - Self AssessedInformation Technology Adoption Curve - Self Assessed
29%
36%
24%
10%
30%27%
23%
34%
25%
19%
22%
0%0% 0%
30%
40%
21%
7%
2%
26%
15%
35%
4%
23%
35%
56%
9%
Innovator - Leads theway by being among
the first to adopt
Early adopter - Part ofthe second wave of
adoption
Average adopter -Move with the masses
Later adopter - Waituntil the technology’s
presence in the
Laggard- Last toadopt new
technologies
Total Enterprise Net: LoB Finance job Mfg Ops job CIO Net: IT
56% CIOs believe their company is an Innovator, compared with 29% among all job functions
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Sustainability in US and European Chemical, Oil & Petroleum Industries
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Legislative Long View and Sustainability
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Expansion Plans– US vs. Europe by 2010Q12. Which of the following Sustainability initiatives will your company invest in by 2010? Select all.
32%
32%
37%
32%
26%
42%
37%
26%
26%
47%
42%
21%
32%
10%
36%
46%
37%
23%
31%
39%
24%
24%
34%
21%
19%
23%
0% 25% 50%
None - w e look at Sustainability as contraction
Dvlp renew able energy sources: w ind
Dvlp new energy sources: biofuels
Dvlp low er cost/larger fossils (coal for synfuels)
Alter ref ining to consume more sustainable feedstocks
Dvlp new energy sources: hydrogen
Dvlp renew able energy sources: hydro
Dvlp renew able energy sources: solar
New conversion units to align w /demand for "greener" product slate
Invest in green/sustainable chemicals
Alter/retrof it current exploration/production to improve yields
Process imprvmnts to Reduce COx/NOx emissions
Invest in energy mgmt/optimization for ow n operations
US 2010
Europe 2010
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