The Role of Enterprise Application Software in the Chemical Industry

Transcription

1 The Role of Enterprise Application Software in the Chemical Industry W H I T E P A P E R Summary Rising costs and reduced margins, increasing competition, vacillating customer demand, and stricter regulations were mentioned in Chemical Industry Issues and Competitive Strategies For the Mid-size Chemical Company as the leading challenges effecting the Chemical Industry today. Today s chemical manufacturer must compete on many fronts and enact competitive strategies that enable them to remain competitive in the industry. Since reducing costs, increasing quality and agility, and improving customer service demands operational excellence and business insight, many successful chemical manufacturers align their business processes with enterprise application software, namely Enterprise Resource Planning (ERP).

2 In today s world, having systems in place that enhance, not hamper, operations is essential. For example, as to optimize the product mix and asset usage, supply chain optimizing tools with advanced analytical techniques should help with mapping the demand forecast across the supply chain, providing sales and production plans that accommodate the enterprise s capacity limitations while maximizing profitability. Product and customer mix can then be analyzed interactively to find a business blend that improves the use of the equipment, while alternative scenarios can be easily run to assess the impact of various customer and production options. Optimizing the distribution network and rationalizing inventories at each point in that network are hence the keys to an efficient supply chain and smoother operations. An optimal inventory targeting capability that calculates all the components of inventory at every point in the supply chain, that then compares historical forecasts to actual sales data and models all the processes that contribute to inventory, should allow users to quickly identify problem areas and make adjustments that decrease inventory without reducing customer service. As to maximize inventory efficiency, at each point in the supply chain, one should get the information needed to determine optimum inventory levels and re-deploy the excess to improve service at highpriority locations. Additionally, some optimization tools should help companies minimize the combined costs of manufacturing and holding inventory, but without necessarily sacrificing service. These tools must allow users to examine all the factors that contribute to inventory and production costs, such as cycle times and cycle stock levels, production line transition costs, inventory tradeoffs and so on. By using the cycle optimizing tool, production planners should be able to determine the optimal policies for product frequency, cycle length or production campaign length, as well as target levels for cycle and safety-stock inventories. This way, one might be able to set realistic inventory policies that support both good service and good profit margins. In fact, chemical companies tend to pride themselves on their "operations excellence", whereby the entire industry has invested heavily in capital assets for economies of scale and competitive variable costs, resulting in high fixed costs of depreciation and often-limited refusal ratios. During lean times, the push for plant utilization, with maximum capacity and expediting of short production schedules, actually consumes capacity and introduces quality variability and reject material that negatively affect manufacturing costs and profit margins. According to AMR Research, manufacturing operating costs make up more than 80 percent of bulk chemical manufacturers' total supply chain management costs, and average more than 40 percent of revenue, which is almost three times that of other industries. Most players are still unable to profitably respond to highly variable demand, and to execute predictable product supply strategies. A recent analysis of many chemical companies found similar situations; these companies had installed Enterprise Resource Planning (ERP) software in the early 1990s. Such software had been excellent choices at the time. However, comparing the impact of these software applications on the business was revealing. In most cases, it was necessary to augment the software with extra efforts by people and other ancillary software applications. In most cases, the software had a negative impact on the companies ability to compete. Even with extraordinary efforts from the staff; gaping holes existed between what customers expected and what could be delivered. These software applications lacked business process support for many functions, since they had been designed in the 1980s to meet the needs of 1980s-era chemical manufacturers; but those needs have evolved, and the software could not easily handle the new business requirements. The base technology supporting enterprise application software applications has also evolved, making older software applications difficult to use and lacking flexibility relative to newer software applications. As a result of the limited flexibility and usability of these older software applications, customer service and the supply chain are greatly impacted. Take for example the case of one chemical manufacturer that received a rather demanding and complicated order from a major customer. Like most chemical manufacturers trying to compete today, they were eager for the business and happily accepted the order. However, meeting the expectations of this major customer proved far more challenging than they anticipated as the older software applications they were using did not provide the detailed visibility into their inventory and scheduling, took a significant amount of time to fulfill, and required costly manual steps. Another example involves a chemical manufacturer requiring fast turnaround on a procured raw material to fulfill an order, but its planning system could not produce the purchasing requirements fast enough to fit within the expected lead time. Therefore, the Purchasing department was forced to order certain items without even knowing the final requirements. In both cases,

3 limited flexibility and visibility into operational data proved costly and even seemingly simple tasks took too long to complete. Many chemical manufacturers maintain decent service levels, but are forced to maintain service levels with excess inventory. The business processes of forecasting, planning, scheduling, and production were sub-par, relying on multiple software applications with multiple databases and with many manual steps. In both cases, costing used a standard cost approach with monthly variance analysis. Costing did not provide timely, adequate detail to allow operations to attack costing elements and drive down the company s costs. Reality Check Most Enterprise Application Software is a Commodity Although vendors hate to hear it, most enterprise application software is a commodity. Most ERP software applications were designed for generic manufacturing, and therefore have generic functions. Functions like general ledger, accounts payable, etc. are common across all industries, however, the operational needs of many industries differ from those defined for the generic manufacturer that was the model for most ERP designers. Chemical companies were not the design target for most ERP software applications and therefore, most ERP software applications are weak in providing for the operational needs of chemical companies. While some of these generic ERP vendors have invested in meeting the needs of the chemical manufacturer, many have failed to meet the test. Schenectady initially selected a large, generic ERP vendor to support its business needs. After a reanalysis of business requirements and strategic direction, Schenectady realized that the generalized software package lacked the specific capabilities required for a chemicals manufacturer. Their software applications were complex lacking both focus and functionality. The increase in complexity and cost had exceeded the value that was being derived from the investment. Schenectady sought a new business solution that was focused, easy to use and allowed the company to fully utilize an enterprise business solution to clearly differentiate Schenectady from its competition. In the Chemicals industry, the vast majority of general ERP products show a number of fatal flaws -- those must have capabilities whereby the omission of this functionality would impede the prospective chemical company s operations and competitiveness. In other words, what makes the difference amid ERP software applications for chemicals? Not the universal, me too commodity features, but rather Fatal Flaws, or the features without which success is impossible. Ironically, these typically entail 5 10 percent of the entire huge list of products capabilities, and are typically in the realm of operations management. To understand the impact of selecting a Generic ERP, we can look at SI Group (formerly Schenectady International, Inc.), which is a privately-held, global chemical company that produces a wide range of products, including coating resins, adhesive resins, electronic and specialty chemicals and imaging products. Each of the company s four operating divisions chemical, electronic specialty chemicals, performance resins and specialty coating supplies diverse products to global markets and shares a company-wide commitment to provide technologically superior, high-quality products to customers worldwide.

4 Finding the Fatal Flaws and the Right ERP In the upcoming paragraphs, we will try to identify some fatal flaws for the prospective chemical company. Of course, no comprehensive list exists which will match a specific chemical companies needs, each is different. Many potential fatal flaws would come from the issue of variability. Namely, raw materials, processes and end-products have variability that must be managed. Consistency and quality in end-products depend on the effective handling of variables in the ingredients, such as potency, grade, moisture content and shelf-life, throughout their continuously changing chemical and physical treatments. Recipe formulation and process control are thus primary concerns in automated, capital-intensive chemical manufacturing operations. For most chemical manufacturers, this variability creates significant challenges for process specifications. These dynamic trigger delays and incremental costs, consequently impact customer satisfaction, especially if quality is not maintained within strict tolerances. To that end, the ERP solution should be able to support the following capabilities: Material definition must include specifications, at all levels including customer orders Manufacturing procedures must include manufacturing standards and recipe instructions that reflect process and raw material variability Material selection is based upon exact specifications Receipt management that reflects variability including adjusting batch details to reflect variability of raw materials Integrated quality management and lot traceability Lot tracking and tracing, including lot variation tracking as new ingredients are added Closely related to the above would be the issue of customer-driven quality, which means that a customer demands specific quality attributes. To that end, the ERP solution should be able to support the following capabilities: Inventory items and customer orders include specifications Automatic attribute matching of materials on hand to customer specifications Customer certificate of analysis (COA), whereby the vendor (manufacturer) provides the customer certification and documentation of the customerdemanded specifications for the specific lot(s) being shipped. The formulae and process models must reflect the complexity of chemical processes. Processes should be broken down into steps, each with process instructions, quality specifications and control and test criteria that can integrate with or even replace manufacturing execution system (MES) and Laboratory Inspection Management System (LIMS) packages. Some of the regulatory fatal flaws that have been added to process manufacturing by the chemical industry would be the introduction of hazardous materials and dangerous goods that are closely regulated and must be reported. Since government regulations are a fact of life and integral to operations, they create conditions that can be greatly simplified by software. For example, when creating a new formula or modifying an existing one, the formula must be analyzed for the presence of hazardous materials. This check requires a continuously updated and current list of regulated materials that are considered hazardous. The MSDS is a second example. Creation, maintenance, distribution and MSDS audit trails should be integrated into operations and therefore into the ERP software applications. Here is a simple test; does the ERP sales person know what a MSDS is? Does the ERP product manage the MSDS simply as a document or does it understand and manage the rules for providing customers with MSDS data that satisfies governing regulations?

5 More Potential Fatal Flaws Other typical must-have capabilities would revolve around product costing, yield planning and tracking; scheduling; container movements; top-down & bottom-up traceability (e.g., if one needs to trace back from a particular tin of paint to find the test results of a batch material that went into it, or if one needs to identify all the other completely unrelated products that were made from a particular tank of crude oil); integrated and automated customs & excise (C&E) controls and documentation; enterprise performance management (EPM); location validation control; dip tanks with correction controls; contract manufacturing; Vendor Managed Inventory(VMI) with continuous replenishment, etc. Management of inventory at customers' and other consignment locations, with customers specifications of quality, packaging, and transportation, are also often required. Variable scheduling horizons (to de-couple packaged from bulk material), rate based production (long batches), handling flow rates from feedstock to bulk (rail cars, barges), pipeline versus "on-hand" inventory management, modeling unprocessed materials including recycles and multiple produced items from a single feedstock, finding equivalent products, locations, and packages, and so on would be additional intricate features that the system should support. As for effective production planning and scheduling, like in the case of inventory management, the growing complexity of the chemical industry has made achieving this goal more challenging as well, due to the need for long-term upstream scheduling with short-horizon finished product plans. Accordingly, savvy production planners should know how to reshape plans smoothly and responsively, without breaking the rhythm of the plant, and they should be able to visualize the impact of a planning decision on the entire supply chain. Apt scheduling software has to be built on a production model unique to chemical operations, with features like product-toproduct transitions, lot quality variability, cycle and campaign simulation, tank farm and complex storage modeling, available to promise (ATP), capable to promise (CTP), and sales monitoring in a production environment that runs at maximum capacity. The ATP capability comes in handy here to provide a tool to almost instantly analyze and commit customer orders while regarding profitability, whereby users can also instantly determine if an order is within forecast, and see the best way to fulfill the order (i.e., whether from existing inventory, planned production or alternate sourcing locations). One should be able to have aggregated and detail views of the supply chain model for decision support during sales forecasting, production scheduling, and product distribution. Also, there is often the need to stabilize production cycles in a "make to inventory" business through calculated inventory target levels based on planned customer service levels. These levels typically must calculate inventory target levels at the Product, Package, and Location level and show the aggregate inventory levels required for a business to support a given service level. Summary The pressure is on every chemical company worldwide to proactively address the industry challenges and to protect or grow market share. An important part of the strategy must be enterprise application software applications. Can a chemical manufacturer keep up without an industry leading ERP system? A manual system, one that is a mix of manual and spreadsheets or an ERP installed for a number of years, does not give the mid-size manufacturer a competitive platform to address these pressures. The lack of a competitive platform means expensive and time-consuming efforts to meet customer demands, and the growing weight of regulations. The lack of a competitive platform limits a company s ability to benefit from or protect its markets against globalization and other threats. Larger companies are leveraging large, recent investments in ERP to meet the needs of major trading partners, increase customer service, cut costs, and grow market share. Industry data tells us that these large companies are succeeding and that small-tomedium chemical manufacturers are falling behind. Competing and defending your position means lots of things, but a key strategy is operational excellence, and that means leveraging ERP investments. Can the chemical manufacturer find an ERP system that meets both its business requirements and its budget? The answer is clearly Yes. Suppliers that focus on the mid-size chemical manufacturers provide the business processes required but with a full understanding of the constraints of these companies.

6 Enterprise application software applications have proven to bring many benefits to chemical environments, but gaining these benefits requires the selection of a solution that can deal with the unique needs of these businesses. Although a handful of vendors claim they can support these needs, some first-class options exist. Only by focusing on the requirements that will make or break the project will the chemical operation select the right solution and gain these benefits. When looking for a vendor, some considerations should include: Can the vendor provide a list of relevant chemical industry references? Does the vendor provide for the unique requirements of the chemical industry? If the model cannot fully detail the specific chemical processes and practices, it cannot possibly manage these processes. Was the solution built specifically for the chemical industry (good) or, does it utilize a generic solution employing templates (OK but not necessarily excellent) or, is it just a generic product (bad)? Is the solution a single, integrated application with one common model or is it a bunch of interfaced modules? Is the solution a complete application or a modeling language that forces users to create their own solution? Can existing personnel (IT, Planners) support the system or does it require specialized assistance from an Operations Research or modeling group? After painstakingly identifying your fatal flaws, prospective chemical companies should request a long list of vendors to complete the fatal flaw check list or requirement for information (RFI) documents. Then, the prospective chemical companies should demand short-listed vendors to demo the fatal flaws, bearing in mind that the devil is in the detail. After asking a very short list of finalist vendor(s) to show the chemical manufacturer their entire product, the selection decision making should be much easier.

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