Good Chemistry: Chemical Companies Tackle Multiple Challenges
In a volatile industry, chemical companies tackle multiple logistics challenges.
For chemical company Hercules, logistics management has become a task worthy of its namesake.
"The industry is changing so quickly," says Bill Adams, Americas logistics director for Wilmington, Del.-based Hercules, a $2-billion company that produces an array of chemicals for paper, paint, and textile manufacturers.
Chemical companies such as Hercules already bear high logistics costs due to the nature of their products, which are typically heavy, bulky, difficult to store, and hazardous. Now these firms face additional challenges, including skyrocketing energy prices, new regulations, and a chronic shortage of suitable carriers.
Interestingly, logistics costs have begun to outweigh manufacturing expenses for chemical companies, says Beth Enslow, a supply chain analyst with Boston-based research firm Aberdeen Group. "Chemical companies realize logistics may be the next ‘spend bucket’ in their company, and they need to gain control to make sure they remain cost-competitive," she explains.
Good Times and Challenges
Despite the many challenges, these are actually good times for the chemical industry. "U.S. chemical industry growth was relatively stagnant from 1997 to 2003, and it boomed in 2004," says Balaji B. Capaloor, senior chemical industry research analyst at Frost & Sullivan, a business research firm located in San Antonio, Texas.
Global chemical trading grew by 67 percent between 1999 and 2004, reports Capaloor. Meanwhile, the industry has become more global, with the North American market increasingly relying on chemical imports, primarily from Asia.
As their market expands and shifts focus, chemical companies face problems that are unique to their field.
"The chemical industry is highly regulated, plus their transportation mix is different than most other industries. They have a higher percentage of rail and ocean shipments," says Enslow.
"We ship products via every freight mode—rail, barge, ocean container, bulk, air, pipeline, and truck," says Tom Schick, senior distribution director of the American Chemical Council in Arlington, Va.
The growing diversity of modes and destinations means new supply chain and security challenges for chemical companies. "As more of the industry’s customers move manufacturing abroad, chemical firms have to handle a greater number of cross-border shipments, and their inherent security issues," says Enslow.
Increased global sourcing is one reason Hercules joined the U.S. government’s Customs-Trade Partnership Against Terrorism (C-TPAT).
C-TPAT, which began in 2002, is a voluntary government-business initiative that aims to strengthen supply chain and border security. Through the project, Customs and Border Protection asks importers, carriers, brokers, warehouse operators, and manufacturers to ensure the integrity of their security practices, and to communicate security guidelines to business partners within the supply chain.
"We are impressed with the way the partnership works," says Adams. "Faster import clearance at ports and borders is the immediate benefit of membership, but C-TPAT also gives importers a structured process to evaluate risks across the supply chain and to proactively upgrade standards."
Hercules relies on motor freight carriers to get products to its customers. But access to carriers has been compromised in recent years by factors ranging from stricter government regulations to rising costs and even natural calamities.
And Hercules, like its competitors, felt the impact of tighter U.S. Department of Transportation (DOT) Hours-of-Service rules in 2004 that limited the amount of time drivers could spend on the road. Chemical firms and their trucking partners have long struggled to find skilled and certified drivers to haul their cargo, and the DOT’s new rules made a difficult situation more challenging.
"The government’s action created an almost instant driver shortage, because shipping volumes were cresting at the same time," explains Adams.
Hercules reacted by working with its third-party logistics provider, Danbury, Conn.-based Odyssey Logistics & Technology, to widen its trucking carrier mix.
Most shippers, including Hercules, have adjusted to carrier scheduling challenges through improved planning and lead times, and by rebalancing carrier-shipping lane matchups. But the situation continues to be somewhat fragile, notes Adams.
"Truckload package freight is one mode where we still see lingering problems," he says. "If you try to buy in the spot market to cover these loads, it is common to experience lower on-time pickup rates." The tighter transportation market has resulted in new cost pressures and less flexibility among carriers to meet short-notice demand.
"Chemical companies can still get competitive rates, preferred treatment, and good service, but the market is not as flexible as it used to be," says Adams.
Like many other U.S. chemical companies, Richmond, Va.-based Albemarle, which supplies specialty chemicals for water treatment, oilfield services, and high-tech parts cleaning, uses rail for long-distance shipments to ports and domestic customers.
"Because of safety factors, we prefer shipping via rail," says Barbara Little, the company’s vice president, government relations. "We transport chlorine and other chemicals; those shipments shouldn’t travel on the nation’s highways and byways."
Hitting the Rails
Unfortunately, the chemical industry’s dependence on rail transportation, and the limited number of rail carriers in any particular geographic area, has led to a distorted rail market. The situation is exacerbated by the fact that chemical plants are often located in out-of-the-way places close to raw material sources.
"Inherently, rail shippers end up being captive to one rail line," says Little. "Nearly 60 percent of U.S. chemical companies are in that situation."
The railroads’ upper hand has led to a certain amount of customer frustration, according to Little. "We sent one shipment from our plant in South Carolina to Houston," she recalls. "The direct route is through Louisiana, but this rail carrier wanted to take the shipment almost to the Canadian border and back again, just to keep it all on its line." The carrier eventually relented.
Chemical companies have little recourse but to bargain with the only rail carrier at their disposal. "If a trucking company gives you high rates or poor service, you can use another provider," says Schick of The American Chemical Council, adding that plenty of choice also exists among barge lines and ocean and air cargo carriers.
"But when one railroad is the only way in or out of your plant, you have no alternative."
Another financially important aspect of rail transport is that chemical companies must provide and maintain nearly 100 percent of the rolling stock they use.
"The cost of buying or leasing cars falls squarely on the shipper," explains Schick. "The railroad does not supply rail cars, only the locomotive to power them."
As a result, most chemical companies must manage large numbers of rail cars, including tank cars and covered hopper cars, which are used to move dry chemicals. "That constitutes another cost element, in addition to freight rates and fuel surcharges," Schick says.
A Double-Shot of Pain
As if trucking and rail headaches aren’t bad enough, chemical companies are also dealing with soaring energy costs. While rising oil and natural gas prices increase fuel surcharges for all shippers, the upward energy spiral presents a double shock to chemical manufacturers.
That’s because chemical companies must pay for petroleum as a key ingredient in a wide range of products, as well as for use in the vehicles that transport their raw and finished materials.
"Any manufacturer that relies on petrochemicals or petrochemical derivatives is feeling cost pressure," says Adams.
Frost & Sullivan’s Capaloor concurs. "High crude oil and natural gas prices have increased raw material costs," he says. "They reached an all-time peak in 2005."
Chemical companies have little control over natural gas and energy pricing, however. Worse yet, sudden price hikes can quickly demolish carefully planned production and transportation budgets, while encouraging consumers to conserve their use of chemical products.
"Natural gas, other petroleum products, and the cost and availability of energy are crucial issues to the chemical industry in the United States," explains Schick. "They put pressure on our industry’s competitiveness."
Adams knows that pressure all too well. "Like most chemical firms, our raw material expenditures were up significantly last year, due to the cost pressure on petrochemical-based raw materials," he says. "We have to pass these along in our pricing, while at the same time pursue alternate, more cost-effective raw material sources.
"We are aggressively developing new and less costly sources in Eastern Europe and Asia," he adds.
But to take advantage of these more distant sources, a company’s global logistics processes must be robust and efficient. "Companies with a manual, clumsy process for managing global transportation and inventories can easily wash out the benefits of cheaper material sources," says Adams.
New dynamics in the transportation market are forcing chemical companies to reexamine—and sometimes radically alter—their logistics infrastructure.
Prior to 2003, for example, Hercules operated its own transportation group, which managed the company’s freight operations and dealt directly with carriers and other transportation service providers.
"But we realized we didn’t have the leverage or the technology to achieve the best overall transportation cost and service values, let alone respond to changes with the agility needed to be competitive," says Adams.
That’s when Hercules decided to work with 3PLs. The company turned to Odyssey Logistics & Technology to handle its North American logistics operations, and de Rijke Logistics in the Netherlands to manage its European shipments.
By partnering with a 3PL, Hercules is part of a growing chemical industry trend. These days, most small- to mid-sized chemical companies use some form of outside logistics help. For most chemical producers, 3PLs are the wave of the future, says Adams.
"Major chemical manufacturers may have the critical mass to justify in-house transportation, but for a company our size, using a 3PL makes a lot of sense," he says. "Most importantly, it frees up resources we’d prefer to use to enhance the value of our chemical products and services."
All chemical companies, whether or not they outsource logistics, are streamlining operations.
"Companies are synchronizing their transportation assets," says Enslow. "Rather than building a big warehouse, they are going directly from the production line to the rail car or tanker truck, skipping the intermediate storage area."
To better coordinate loading, unloading, and other operations, companies are turning to transportation management systems (TMS) to optimize their transportation networks. TMS products automate key elements of a company’s shipping infrastructure, including strategic and operational planning, network design, transportation execution and monitoring, invoicing, billing, and settlement.
A variety of TMS software vendors, including i2 Technologies, Manugistics/JDA, and Oracle, serve the chemical industry.
Atlanta-based RMI offers a rail shipment tracking system for chemical shippers. The tool traces railcars contained in permanently assigned fleets, or rail shipments loaded in "free-running" equipment. It monitors both inbound and outbound rail shipments using car movement information from Class I railroads, and from more than 300 shortline and regional railroads.
SAP targets the industry with a TMS product specifically geared toward chemical producers: SAP for Chemicals. The software is part of the vendor’s mySAP customer relationship management suite.
"We offer compliance documentation, demand planning, and supply network planning capabilities for chemical companies," says Marty Etzel, director of chemical solutions marketing for Walldorf, Germany-based SAP.
Chemical companies also use technologies such as RFID and satellite-driven global positioning systems to maximize shipping efficiency and cut costs.
Logistics-oriented technologies help companies in two ways, says Enslow. "These technologies give companies real-time goods visibility, which helps them improve supply chain management and address government regulations and security concerns," she notes.
The other key benefit is improved asset management. "If a company knows where its goods are, or when a tanker car enters its customer’s yard, for example, it can automatically be alerted before it has to pay detention charges," Enslow says.
Like all businesses, chemical companies’ main goal is to earn profits by selling products and services its customers need. Yet, due to their business’ inherently hazardous nature, thinking about safety and security comes naturally to chemical logistics managers.
Hercules, for example, conducts random audits of carrier unloading activity to be sure carriers are performing these tasks safely, says Adams. It can be tempting for chemical companies to turn a blind eye toward carriers that sacrifice safety and security for the ability to offer lower bids, but Adams and his counterparts resist the urge to use carriers that cut corners.
"It is incumbent on chemical shippers to be careful when selecting carriers. We must exercise due diligence to pre-qualify carriers that meet standards and will hold to those standards themselves," he says.