Chemical Logistics—June 2009
The chemical industry copes with an uncertain economic climate.
Volumes Down, Spirits Up
While much of the news about the current recession has been focused on Wall Street, the housing market, and the automobile business, the chemical industry has not been spared. Chemical companies are also suffering—facing rising costs, lower profits, and the need to cut jobs and close plants.
"The chemical industry's decline was driven by the collapse of domestic demand, the disappearance of export markets—which experienced their worst decline since 1952—and severe inventory de-stocking," says Kevin Swift, senior economist for the American Chemistry Council (ACC).
And it is not just American chemical companies that are in trouble; the industry is feeling the pinch around the globe. "The chemical industry downturn is global and synchronized," Swift notes. "Nations that depend on manufactured goods exports have been affected the most."
Chemical shipment volumes are down significantly across the board, but because chemical manufacturers supply products to a large variety of vertical industries, some companies are faring better than others. "Volumes in the chemical industry have declined on average from five percent to 30 percent since last year, depending on the sector the company is serving. Chemical producers serving the auto industry, for example, are worse off than companies selling product to food manufacturers," says Steve Hamilton, CEO of ChemLogix, a Blue Bell, Pa.-based third-party logistics provider (3PL) for the chemical industry.
The fact that chemical producers are so well-diversified is one advantage during this recession. Profits from more successful units can make up for the loss of business in other units, helping companies weather the storm until the economy picks up.
Philadelphia-based chemical producer Arkema, for example, credits a global mix of customers and business units for keeping its balance sheet fairly stable. One of its major products is plexiglass, which is used in tail light assembly for most vehicles produced in the United States. With demand for vehicles way down, demand for plexiglass has dropped off, too.
Arkema's plexiglass business—as well as other units that rest heavily on the auto and construction industries—is hurting. "But we have enough global exposure to other market segments that, across the board, we are doing well," says Ron Keegan, director, IS&T business management for Arkema.
The company is in the midst of a "reinvent Arkema" project, with a goal of insulating against recession by thoroughly examining overall operations and improving processes wherever possible. Logistics heads the list.
"Logistics is an important area to focus on because we spend a good deal of money on it, particularly for transportation," Keegan explains. Contracts for inbound logistics, for example, are getting a second look.
"In the past, we didn't pay much attention to inbound logistics; we just took the product price from our suppliers with freight and transport costs included," he says. "Now, we are breaking out transportation from the actual product cost to see if we can improve our rates—perhaps even by bringing transportation in-house."
Technology will play a big role in helping Arkema improve supply chain efficiency during the recession, and beyond. While budgets for new technology are slim this year, the company plans to boost its logistics technology spending in the not-too-distant future. For example, Arkema currently uses its transportation management system in the United States only, but plans to roll it out to units in Mexico and Canada as well, to improve and unify its North American transportation strategy.
Global chemical giant BASF shares a similar tale of recession impacts and intentions. "Chemicals are an essential cross-sector industry, and we supply virtually all the other industries, so we were naturally impacted by their declines," says BASF spokesperson Betsy Arnone. "But over the past few years, we have adopted measures that equip us to face the difficult situation: a long-term strategy for value-adding growth, solid financing, and a more robust and competitive product portfolio."
BASF is taking steps to tailor production to reflect worldwide demand, and is working to reduce inventory, actively manage costs, and reduce expenses wherever possible. "If necessary, we will implement further measures to improve the performance of individual businesses and assets," Arnone notes.
One area where BASF has not cut back is research and development. The company believes that a high level of R&D spending is essential for maintaining a leading position in the chemical industry, and to continue to shape the industry's future when the economy recovers.
PROVIDERS FEEL THE PINCH
Producers are not the only companies in the chemical business impacted by the recession; service providers catering to the chemical industry are taking a hit, too. Carriers and third-party logistics providers that focus on chemical companies have watched volumes fall precipitously and have had to adjust business plans accordingly.
Asset-based providers—those who own the trucks that products are shipped in or the warehouses where chemicals are stored—are particularly vulnerable because so much capital is tied up in those assets. "Volumes on the asset side of our business have dropped between 15 and 20 percent," says ChemLogix's Hamilton.
In some cases, asset providers have had to furlough employees, and park trucks or take rail engines offline to cut costs and reduce the amount of available capacity.
Asset-based warehousing and transportation company Weber Distribution has also seen its chemical shippers' volumes drop, and is adjusting its business accordingly. "We are trying to work smarter and be more efficient internally. We also need to be more flexible with customers," says Carl W. Neverman, vice president, client solutions for Los Angeles-based Weber.
The focus today is on specific services that make sense when volumes tumble. "We are doing more just-in-time deliveries and trying to consolidate shipments from different chemical companies moving to the same consignee," Neverman notes. "Companies can gain an advantage by combining orders going to one destination into a larger LTL shipment or truckload, as opposed to sending them individually as smaller LTL shipments."
Chemical companies are also paying more attention to their warehousing and distribution strategy, which works to Weber's advantage. Where companies targeting West Coast customers might previously have expanded an existing DC or opened a new one, today's economic climate has largely stalled those efforts. Instead, to avoid the overhead of operating their own facility, many chemical companies are turning to an outsourced provider such as Weber to handle warehousing needs.
CASH IS KING RULES
Another recession-driven shift occurring in chemical logistics is an increased focus on inventory optimization—companies are shedding inventory to free up budgets and increase cash flow. "The cash-is-king theory is now taking hold in most industries," explains Hamilton. "Companies are looking closely at obsolete inventory, and analyzing how much product customers are ordering to ensure they maintain the right inventory levels."
Some chemical producers have turned to technology solutions such as transportation management systems (TMS) as a way to cut costs, fine-tune inventory, and improve transportation processes during the downturn. Producers have been hard-pressed to wrestle any further efficiencies out of logistics staffs that are already pared down to bare-bones levels, so technology is an obvious next step.
"Chemical companies have been slower than other industries to adopt technology, but now they are embracing it as they look to cut costs every way they can," explains Hamilton, who notes that because of this increased need for technology systems, ChemLogix's business is growing.
ChemLogix also reports an increase in its freight payment business. Due to the problems in the U.S. financial sector, some chemical producers are not comfortable having a bank handle freight payment. "There is an underlying fear of banks going belly up," Hamilton explains. As a result, many companies are seeking out 3PLs with solid financing to handle freight payment needs.
One interesting impact of the recession is that the drop in chemical producers' shipping volumes has brought with it a drop in freight rates. Where ever-increasing transportation costs were the norm for years, rates have been on a steep decline since the economic contraction began.
"When the economy was cooking, certain transport modes were very expensive," says Arkema's Keegan. "Now we've had some relief. From a transport buyer's perspective, the good news is that plenty of capacity is available and transportation is generally less expensive than it was six months or one year ago."
While Keegan is certainly not hoping for the current economic environment to last too long, the drop in freight rates has eased some cost pressure, and provides some short-term relief. "During the next year, as volumes increase and markets start to recover, we'll be able to take advantage of the low transportation rates and perhaps increase our profit margin," he notes.
STOP AND SMELL THE ROSES
For "glass-half-full" types, the recession-driven lull in demand also creates time to complete the logistics version of stopping to smell the roses.
"During a normal business climate, the pace of work is so busy that you focus on getting product out the door, and don't have time to think about business process improvement," says Keegan. "The hidden blessing of this recession is that we've been able to stop and analyze our business and put in place plans that will make us stronger when we come out of the downturn."
When will that be? ACC economist Swift is looking to next year.
"Leading indicators suggest a near-term trough is approaching, but it is recovery of final demand and inventory swing that will engender a sustained upturn," he says. "We will see signs of industrial recovery in 2010."
The Oil Factor
Last summer, oil was ringing up at $140 per barrel and rising—today's prices fall in the $60-per-barrel range. What a difference a year makes. But to think that chemical producers and transportation providers are not still worried about oil is incorrect.
"The oil pricing situation will remain for the foreseeable future and will be volatile," predicts Steve Hamilton, CEO of ChemLogix, a 3PL based in Blue Bell, Pa. "Oil price spikes are a big concern in any economy—but especially now."
Though he's admittedly not an oil-pricing expert, Hamilton doesn't expect prices to return to last year's record triple-digit numbers because the current market would not sustain those levels. "When demand is down as much as it is now, it's hard to see how fuel prices could spike that much again," he says.
The fuel wildcard also comes into play for chemical companies in the raw materials arena. Because so many chemicals are petroleum-based or contain petroleum in some form, increases in oil prices mean increases in material costs.
"When raw material prices go up, companies often have to accept less margin or walk away from business," says Carl Neverman, vice president, client solutions for Weber Distribution, a 3PL based in Los Angeles, Calif.
So, in addition to hoping for a fast turnaround in the economy, the chemical industry has its eyes on oil prices, hoping they don't spike the way they did last year.
The need to comply with regulations and mandates makes training a top priority for the chemical industry.
To protect against accidents and spills, and to ensure workplace safety, chemical producers and their supply chain partners are subject to a litany of regulations and mandates. Complying with these regulations is not always easy—and often requires extensive training. "To avoid costly penalties, companies need to commit resources, including training, to assure that they meet all their regulatory obligations," says Scott Dunsmore, vice president of business resources for Lion Technology, a training company that specializes in environmental, hazardous waste, hazmat transportation, and health and safety regulations.
Areas of Risk
Regulations come from three main sources and cover three major areas of risk for the chemical industry:
1. Workplace safety. The Occupational Safety and Health Administration (OSHA) developed its Hazard Communication Standard (HazCom) to make sure that the hazards of all chemicals imported into, produced, or used in U.S. workplaces are evaluated, and that this information is transmitted to employers and employees.
Typically, HazCom safety training introduces employees to the regulations, offers information on the various types of chemicals found in workplace environments, and trains them to handle the chemicals appropriately.
"HazCom is one of the standards most often cited by OSHA; employees must be trained to read labels properly, and know the location of materials safety data sheets," says Robert Ernst, associate editor, workplace safety for Wisconsin-based J.J. Keller & Associates, which provides safety and regulatory compliance products and services.
2. Transportation safety. The U.S. Department of Transportation's (DOT) Hazardous Materials Regulations (HMR) govern the transportation of hazardous materials by highway, rail, vessel, and air. These regulations also address hazardous materials classification, packaging, hazard communication, and emergency response information.
"Training employees to meet HMR standards includes general awareness, as well as function-specific, safety, and security training," explains Randy Skoog, J.J. Keller's associate editor for transportation.
Because of the multimodal nature of chemicals transportation, DOT has built into its rules that different risks and hazards may be present through various transport modes.
"For example, highly magnetized materials that impact navigation systems pose risks in air transportation that aren't critical in other modes," notes Dunsmore. This makes sense—but also means that multimodal shipments require more training.
"For companies that transport by various modes, training content will increase," Dunsmore says. International hazmat shipments—usually those sent via air or ocean—are also tricky to train for because employees must be mindful of other countries' regulations.
3. Hazardous waste safety. The Environmental Protection Agency (EPA) takes hazardous waste seriously, and has developed regulations for the generation; transportation; and treatment, storage, and disposal of any such waste. "EPA regulations include specific training requirements for managers and operations personnel, and they require initial training mandates as well as recurrent training," Dunsmore explains.
A reporting component to the EPA's roster of regulations adds to the training burden—employees must understand what, when, and how to report hazardous waste information.
"If a company holds certain toxic chemicals in excess of specific thresholds, it is required to report those chemicals to the EPA, prepare emergency response plans in case of any incident with those chemicals, and be able to provide information to emergency response personnel," notes Pete McLaughlin, editorial manager, workplace safety, with J.J. Keller.
Safety and security training is one additional area that many companies in the chemical supply chain are investing in. After Sept. 11, the United States enacted various security regulations that are driving much of the demand for this type of training. The DOT is taking a lead role in this arena.
"The DOT has added security awareness to its requirements for training, meaning every hazmat employee should be aware of security risks associated with transporting hazardous materials," Skoog explains.
But can all this regulatory activity result in training overload for chemical companies and their partners? "There's no such thing as too much training when you're dealing with hazardous materials," Skoog says.
Responsible Care: 20 Years and Going Strong
The American Chemistry Council's standards program combines industry knowledge and regulatory expertise to ensure chemicals safety.
Though there was no cake or candles, last year marked the 20th birthday of the American Chemistry Council's (ACC) Responsible Care (RC) program. Started in 1988, RC is a framework adopted by ACC member companies and partners to improve the chemical industry's environmental, health, safety, and security (EHSS) performance. RC has grown into a global initiative practiced in 53 countries, and consists of responsibilities such as implementing a stringent code of security practices, measuring and publicly reporting safety performance, and committing to continuous EHSS improvements.
Through RC, chemical manufacturers and their global supply chain partners can share and leverage best practices. "This enables the industry to not only maintain a safety performance four times better than the U.S. manufacturing industry in general, but to continually improve it," explains Dan Roczniak, senior director of Responsible Care for ACC.
Safety is serious business in the chemical industry. Handling, storing, and transporting chemicals all present possible safety hazards to workers, companies, and communities surrounding the chemical industry. RC seeks to help protect all chemical production, distribution, and transportation touchpoints. "Understanding the hazard and risk potential of each chemical process operation helps ensure the safety of all stakeholders," Roczniak says.
Though RC's mission has remained the same, the program has evolved during the past 20 years. The original set of six Codes of Management Practices has been replaced by the comprehensive Responsible Care Management System (RCMS), which incorporates concepts from the original codes, and combines the practices of leading private sector companies, the International Standards Organization, and federal regulatory requirements.
In addition, while members previously conducted annual self-evaluations of code implementation, ACC now uses a mandatory third-party certification process. "To demonstrate our industry's commitment to responding to stakeholders' performance expectations, ACC members and partners report their EHSS measures on a public Web site," Roczniak explains. Additionally, ACC has recently adopted a set of five-year performance goals and targets around worker safety, product stewardship, and greenhouse gases.
One big change to RC occurred in the early 1990s, when membership was extended beyond chemical manufacturers to include other companies involved in the chemical supply chain, such as distributors and transportation providers. This change enabled the adoption of common practices throughout the supply chain and allowed chemical producers and their partners to interface on a common basis.
"As a liquid bulk hauler of chemicals, we have common interests and issues that need to be addressed with our chemical shippers. ACC's Partner Program gives us a connection and a platform to work with the industry on safe handling and transportation of chemicals," explains George Peirce, vice president of marketing for Transport Service Co., a bulk transportation and logistics provider and Responsible Care Partner since 1997.
In order to be certified as an RC partner, companies such as Transport Service Co. must maintain a sound management system covering EHSS processes. "We have to meet and comply with specific performance standards in the areas of policy and leadership; planning; implementation, operation, and accountability; performance measurement; corrective and preventive action; and management review," explains Peirce.
The company is also audited by an independent firm to assure that its procedures are in place and being followed. The effort pays off because being an RC partner "gives us credibility in working with chemical shippers and, in some cases, a competitive advantage over carriers who are not certified partners," says Peirce.
So what will the next 20 years bring for RC members and partners? ACC will soon embark on a strategic review of the Responsible Care initiative, inviting industry representatives and external stakeholders to make recommendations on how to improve Responsible Care. Look for these efforts to begin later this year, with recommendations forwarded to ACC in late 2010 or early 2011.
Desperately Seeking Seamless Logistics
Elemica's technology helps chemical manufacturer BASF seamlessly collaborate and connect with carriers.
The chemical industry is based on science. The art of chemical logistics, however, is increasingly based on technology. Chemical manufacturers and their logistics partners—trucking, rail, and ocean carriers, as well as third-party logistics providers—have begun to rely on technology for everything from processing orders and managing warehousing and transportation needs, to connecting electronically with trading partners.
Communicating with trading partners is often done through Exton, Pa.-based Elemica, which offers a global system of manufacturers and distributors who collaborate and integrate supply chain processes through a unified electronic network. The company's "single supply chain execution solution" helps some 1,800 business partners integrate their business systems—such as transportation management, warehouse management, inventory management, and enterprise resource planning (ERP) systems—with the corresponding systems of business and trade partners. Through Elemica, a chemical company's ERP system can "talk" to the systems of any of its carriers.
Global chemical giant BASF, one of 22 companies that partnered to form Elemica, uses the company for a number of business functions including procurement, order creation and management, and vendor managed inventory. When BASF recently decided it needed a better way to collaborate with its more than 100 North American motor freight carriers, it turned to Elemica once again, implementing its Logistics Road solution. The solution helps BASF seamlessly connect, standardize, and automate logistics processes with its carriers, a set-up that "gave us built-in efficiencies before we even started conducting transactions," says Tom Warner, manager of e-commerce systems integration, BASF.
By streamlining connection to its North American road carriers—who transport several hundred thousand shipments annually—BASF expects to yield benefits including reduced freight costs, faster shipment turnaround times, improved visibility into transportation processes, lower administration costs, and fewer errors. The Elemica network integrates completely with BASF's ERP system, improving invoice and shipment accuracy. In turn, carriers can view the loads and bookings that BASF has tendered to them, respond to tender offers, set pickup and delivery appointments, communicate shipment status information, and submit freight invoices.
CALL, FAX, REPEAT
Before implementing the Logistics Road solution, BASF used a typical manual process to correspond with its carriers. "We used to fax or call carriers with a load tender, then fax or call again if we needed to make changes, and hope the carrier would answer the phone or send another fax to confirm our changes," Warner explains. "Now, we don't need a customer care rep or a warehouse employee to babysit the process. We can automate the backend procedures because we've automated communication and connectivity with carriers."
This full automation and connectivity between BASF and its carriers is exactly what Elemica aims to achieve. "We see ourselves as a collaboration module," explains Rick Bushnell, vice president of sales, Americas for Elemica. "The same way SAP offers a module that handles procurement, for example, our goal is to be the module that handles the collaboration space between external trading partners and their business systems."
But as any experienced logistics manager knows, trading partners are not always on the same playing field when it comes to technology. BASF sometimes worked with large, national carriers who were able to adopt the latest technology; other loads were tendered to small, local carriers with no technology background. For this reason, Elemica offers BASF a way to connect with both types of business partners, essentially removing technology as an obstacle so BASF could focus on getting business transactions done.
The ideal approach for BASF is to integrate with carriers in a system-to-system fashion. "But if carriers aren't able to move fast enough on technology, we can set them up through our Web portal capability," Bushnell explains.
"The advantage for us is that the traffic we get in and out of Elemica looks the same whether the carrier uses the Web site or has a fully integrated backend solution," Warner says. "And carriers don't have to make a big investment to connect with Elemica if they opt out of full integration."
GETTING CARRIER COMMITMENT
BASF also worked closely with carriers before getting to the implementation point to ensure that their service providers were on board with the process changes. The company conducted workshops with carriers to show them how the Elemica system would function and to garner feedback. "We reached out to carriers early and often during this process so we didn't get too far without making sure they were along for the ride," Warner notes.
The company also did in-depth preparation and testing for about six to eight months before launching. The rollout was done on a scheduled basis, a few business units at a time. Now BASF merely onboards new carriers using the same process each time.
While they are still getting various business units up and running and do not have specific results to share yet, BASF is pleased with the system and the benefits it brings. Warner's European counterparts are also looking into using the Logistics Road solution for their business units.
"This used to be a 'gee whiz, how cool!' solution," says Warner. "Now it's just water from the tap, and we completely depend on it."