Supply risk management in the chemical industry

1 2 3 4 5 6 7 4 Supply risk management Supply risk management remains one of the key areas of procurement. Data from the CheMonitor survey indicates that most chemical companies are strongly concerned about future raw material prices. Even with an uncertain development of the global economy, this is one of the main issues for most chemical companies. Since margins are dropping, the focus on raw materials is continuously increasing in the chemical industry, especially for businesses that plan to reduce costs in 2012. Forty-seven percent of chemical companies see prices of raw materials as the leading concern compared to administration or personnel. The greatest threat to further growth is seen as rising prices and the availability of suf- ficient resources. Almost 40% see this threat as strongly increasing, while over 50% say it will remain stable or grow slightly. More than 70% also see a negative impact on operating margins due to the rising prices of raw materials. These figures illustrate the importance of an integrated supply risk management in 2012. Lately, a lot of businesses in the chemical industry have realized cost savings due to successful imple- mentations of strategies like lean manufacturing, process optimization or purchasing spend initiatives. Those strategies led to a significant increase in process efficiency. The benefits of these strategies were accompanied by a rise of risk along the value chain. While the benefits are spread over the whole value chain, the risk is mostly concentrated on the procurement department. Whereas currency risks through fluctuating currencies are well-known, other risks that may have a huge impact on a company’s success may be disregarded, especially those risks connected to the supply chain. If one considers the raw material bottlenecks in 2011, the necessity for a strategic role of the purchasing department in the risk management process is obvious. The lack of Xirallic supply, a specific pigment, which is mainly used in the automotive industry for paints, is one of the most familiar examples of these bottlenecks. After the catastrophe in Japan, Xirallic was not available on the world market for several months. Bottlenecks can occur for lots of different raw materials, especially for a wide range of pre- cious metals and rare earths. 20 Industry Pa p e r F o cu s T o pics 2 0 1 2 f o r t h e C h e m ica l I n d u s t ry The role of the purchasing department in the risk management process The purchasing department has to face a much broader spectrum of risks compared to any other functional unit, due to the high number of external partners and interfaces which need to be coordi- nated. Therefore, the purchasing department has a vital responsibility for the overall company’s success by identifying potential risks as early as possible and handling risks in a proactive way. Furthermore, the purchasing department has a strategic position in the overall risk management in the chemical industry. Driving this risk management process increases planning reliability and adds a sustainable value to business success. Figure 16 illustrates the typical risks in the supply chain: Figure 16: Risks in the supply Upstream risk Internal risk Downstream risk chain Sourcing Supplier Inbound Outbound Customer Sales Enterprise markets basis logistics logistics basis markets Major impact areas Implications for purchasing Upstream risks can have significant impact on the company success/profits Delivery Price Active supply risk management is required to ensure business continuity Purchasing is the most appropriate Quality Compliance function to handle the upstream risks in the supply chain Chances & risks: As often indicated, risk management is not about avoiding all possible risks, but about managing risks in an appropriate way. Active risk management is accompanied not only by additional efforts, but also enables new chances. Business developments and trends can be identified and anticipated, the scope of actions and activities is wider. Furthermore, the analysis of risk sources along the value chain en- hances understanding of the company’s partners and thus promotes a more intensive collaboration with benefits for all. Hence, successful risk management in procurement is not only about minimizing potential loss, but also about generating sustainable comparative advantages over competitors. 21 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry Risk management process A holistic approach for a risk management process has different phases. Figure 17 illustrates this multi- step approach which has to be aligned for the specific context of the business and the risk situation at hand. Figure 17: Multi-step approach Establishment of early warning indicators, for the risk manage- Avoid +1 IT-support for supply risk management process ment process risks Steering, controlling and monitoring of the risk 5 Controlling management process & risk treatment activities Define risk treatment activities and evaluate 4 Risk treatment their associated impacts and costs activities Structure risks by probability and impact, 3 Risk classification & define the priorities & norm strategies prioritization Evaluate risks based on their likelihood and 2 Risk evaluation potential impact Identify and structure the relevant risks 1 Risk identification Define the focus areas of supply risk Definition of action fields management to minimize conjoined efforts Supply Risk Management in the chemical industry Supplier management is one of the core processes in purchasing and an important lever to generate value for the company. Due to the complex value and supply chain of the chemical industry there are particularities of Supply Risk Management in the chemical industry which need to be addressed in the overall risk management process. Depending on the supply category different trends, risks and impacts on supplier management are found. Figure 18 shows selected supply categories: 22 1 2 3 4 5 6 7 Supply category Trends Risks Impact on supplier management Figure 18: Specific risks in selected supply categories Petrochemical Rising and volatile Cost increase threat- Insourcing of raw material feedstock oil price ens profitability supplies (e.g.