November 2008 | Case Studies | I.T. Toolkit

Good Chemistry Yields Better Inventory Management

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Chemical manufacturer Celanese experiments with a formula for solving its inventory woes.

If you've ever been in a car accident and were protected by the windows' safety glass, you can thank Celanese, a global manufacturer of specialty chemicals. The company is a leading producer of polyvinyl alcohol, which is a main component of polyvinyl butyrate, the material used to hold safety glass together and keep it from shattering.

But while the company's chemicals boast indestructible qualities, Celanese's inventory management process was hardly shatterproof—until it began using an inventory optimization solution from Optiant a few years ago.

In addition to polyvinyl alcohol, Celanese manufactures a number of basic chemicals used in colorants, paints, adhesives, coatings, and medicines. Its end users comprise businesses within a wide range of industries such as paper, building and construction, and textiles.

The company's supply chain hits all points on the map, with headquarters for its three main business units in Dallas, Shanghai, and Germany; manufacturing operations in the United States, Europe, Singapore, China, and Mexico; storage terminals located near major ports such as Houston, Singapore, Antwerp, and Nanjing; and customers evenly distributed across the globe. In addition, Celanese ships inventory internally among facilities—and the locations can be on opposite corners of the world.

COMPLEX JOB, SIMPLE TOOL

Keeping track of inventory within such a large global footprint is a complex job, but one that Celanese previously managed with a surprisingly un-complex tool.

"Most of our inventory optimization efforts were done with unsophisticated spreadsheets," says Jeff Kirkpatrick, director of supply chain for Celanese's acetyl intermediates business.

Because of this system's limitations, the company could only optimize inventory on a location-by-location basis, an approach that worked from a functional perspective but didn't provide strategic planning capabilities.

"We could only do single-stage calculations, which didn't allow us to obtain all the synergies or understand all the overlap we had throughout our large network," Kirkpatrick notes.

In addition, setting and changing inventory targets was a difficult manual process, leading Celanese to carry more than the optimal amount of inventory.

MASTERING SUPPLY CHAIN COMPLEXITY

This unsophisticated approach to inventory management is common, even among large international firms such as Celanese, because companies often overlook strategic inventory theory in their quest to meet the everyday demands of global operation. And many companies struggle to balance the costs of holding substantial inventory against the threat of stock-outs, which require expensive expediting and other last-minute arrangements to meet customer needs.

But companies that make inventory optimization a supply chain goal often gain the strategic advantage that is so crucial in today's volatile business environment.

"Supply chain complexity continues to increase," says Fred Lizza, CEO of Optiant, the Burlington, Mass.-based inventory management software provider that Celanese partnered with. "Companies face demand volatility—what customers want, and how and why that changes. They also face many other issues, such as fuel costs whipping up and down, that make supply chains difficult to manage."

For the chemical industry, managing commodity costs presents another huge supply chain challenge. Raw material prices that were once stable are now subject to speculation and the financial markets' whims as well as the underlying forces of supply and demand. And because the industry depends on bulk rail and ocean transportation, it faces another source of variability, and is particularly susceptible to high energy costs.

"Companies such as Celanese are now faced with managing these changes," says Lizza. "These companies need analytical tools that can help them make more effective inventory decisions, properly manage business risk, and reduce volatility. They also need tools that provide modeling capabilities so they can play out different inventory scenarios and determine their options."

LEARNING TO LOOK FORWARD

These inventory management challenges, and the capabilities needed to manage them, prompted Celanese to implement Optiant's PowerChain suite.

"We were managing inventory in a disjointed and on-demand way rather than strategically in a forward-looking manner, and we realized that approach wasn't good enough," recalls Kirkpatrick.

Additionally, because the company did not have ample control over, or understanding of, its inventory at each location, it wasn't satisfied with the service it provided customers. "We needed to determine how to carry the right amount of inventory to meet our commitments and provide the right level of service," he explains.

During the selection process, Kirkpatrick and executives from Celanese's acetyl intermediates business listened to presentations from several software companies and spoke with existing customers before deciding that Optiant's products were the best fit for its needs. Both companies shared the belief that Celanese should trade its location-by-location approach for a holistic, end-to-end view of inventory management.

"Optiant's solution gave us what we needed from a multi-echelon standpoint," explains Kirkpatrick. "Rather than optimizing inventory around single stages, we could optimize it across our entire network—something we could never build on our own or manage properly with Excel."

Also key to Optiant's selection was the breadth of its offerings, which "start at the strategy level and go all the way down to the workbench for the person managing inventory each day," Lizza explains.

To implement Optiant's PowerChain solution, Celanese began with a test drive of the software in June 2004 within its acetyl intermediates business. "This pilot allowed us to build three product models and get our hands in the software, acquaint ourselves with the data requirements, and see the model outputs, including inventory targets and the analytical tools capability," notes Kirkpatrick.

MODELING SUCCESS

With favorable results from the pilot, in 2005, Optiant embarked on the process of bringing the remaining products and business groups on board, and training Celanese users.

The heart of the implementation process centered on building supply chain models for each Celanese product that would be managed through the PowerChain application.

"Optiant modeled the total supply chain cost for all products within Celanese, then ran a sophisticated optimization process for each one," explains Gokhan Usanmaz, the Optiant project manager who oversaw the Celanese implementation.

The models map out each aspect of the supply chain so users can see how a product flows from origin to destination, and shows how each stage—manufacturing, production, shipping, distribution—is connected.

For Celanese, the models helped to calculate actual lead-time variabilities across manufacturing locations and transportation legs/modes, and took into consideration operational limitations such as tank capacity, service time commitments, inventory holding locations, and replenishment frequencies that impact inventory levels. It was all done with the objective of minimizing total supply chain costs without sacrificing service levels.

INVENTORY AND SERVICE

That inventory-capacity-to-service-level ratio was the subject of many discussions during implementation. "We looked at what we call 'fill-rate sensitivity curves'," says Kirkpatrick. "If the goal is to be at 'X' service level but with our current inventory level we are at a 'Y' level, how much do we need to invest to get the right amount of inventory needed to most efficiently please our customers?"

By looking at those curves within the Optiant models, Kirkpatrick and his team could determine for each location whether they needed to increase inventory to attain desired service levels, or if they could reduce inventory without sacrificing customer service quality. Unlike the spreadsheet method, Optiant's solution allows users to run a scenario and determine what will actually happen if they increase demand in one location or move inventory to another location.

"We went through many of those sensitivity curves and were able to see what our business looks like and how changing inventory levels would affect it," Kirkpatrick says.

Though the model-building and sensitivity curve-analyzing phase is largely behind them, Kirkpatrick and his team still use the models whenever they want to tweak the inventory network.

"Every year at budget time, we re-analyze the entire network and reset inventory targets for the next year," he explains. "We continue to use the tool to pull inventory dollars out of the supply chain."

Those cost savings are one main benefit Celanese has reaped by optimizing its inventory through Optiant's solution. Though Kirkpatrick does not cite a specific dollar figure, he notes that, "we've saved substantial dollars by utilizing the tool to better understand our networks and make changes."

Overall, Celanese's inventory optimization efforts have made a significant impact on its business. Positive results include reduced inventory levels, improved fill rates and customer service levels, more control over lead-time and demand variability, and a more comprehensive understanding of how inventory management impacts the entire supply chain.

"Going through the Optiant training, using the tool, and reassessing my assumptions and understanding of inventory theory made me more knowledgeable about my own supply chain," Kirkpatrick says.

Celanese's revamped inventory management approach has also provided the ability to better communicate supply chain and inventory issues to other departments within the company, thanks to Optiant's graphical interface.

The tool allows users to build models with pictorial icons representing each aspect of the supply chain—a picture of a plant or manufacturing facility; a truck, ship or plane icon for the shipping method—and shows how each stage is connected.

The result is an end-to-end diagram of a particular product's supply chain that is quick and easy to understand.

"The tool's graphical views help people who aren't usually involved in supply chain details to quickly understand what we are talking about," explains Kirkpatrick.

Today, Celanese's inventory and supply chain decision-making is a more streamlined, data-driven, and holistic exercise than it had been in the past. Overall, the manufacturer has found good chemistry with a strategic partner and achieved the desired results from its inventory optimization experiment.

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