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September 14, 1998

R/3 + Outsourcing Is Formula For Success

SAP's ERP package, often implemented by outsourcers, is becoming a standard in the chemical industry

By Hahki Alakhun El

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CHEMICALS

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With data from Hoovers Online

Global deployments of enterprise resource planning applications are helping to reshape multinational chemical companies, while smaller rivals are moving aggressively toward the outsourcing of infrastructure and application development.

The business drivers in the chemical market are universal-increased operating efficiencies, souped-up time to market, and improved customer responsiveness.

SAP R/3 is becoming a de facto standard in chemical companies of all sizes. The big players are deploying R/3 to streamline operations, standardize business practices, and minimize product lines across markets. Small companies also seem high on R/3 and are increasingly turning to consultants to help them realize its full potential.

Most chemical companies sell their goods to other industries and thus didn't initially see the need to implement Web marketing sites to preach to the converted. But that has changed dramatically during the past year as the Internet has become a key element in the industry's supply-chain efforts. System integration has become as important as custom application development in most chemical industry IT shops, bringing together vertical and horizontal applications to deliver competitive benefits and streamline business processes.

Big Bucks
Mega IT outsourcing deals attracted lots of attention last year. Dow Chemical Co., for example, awarded Andersen Consulting a $550 million outsourcing contract to implement vertical applications. Like most large companies, the $20 billion chemical supplier for the automotive, electronics, packaging, and forest-products industries wanted to reduce the complexity of developing custom applications by implementing packaged apps as much as possible. Andersen is implementing R/3 applications for Dow, as well as implementing financial and business software from J.D. Edwards and Manugistics.

Outsourcing lets companies focus on maximizing their competitive advantages in the market and improving the way business is managed. The more a company can focus on business challenges and less on managing technology's "plumbing," the more competitive it will be. Companies that follow this strategy are less likely to be burdened by complicated and inflexible IT infrastructure issues.

Randy Nelson, CIO at Millennium Chemicals Inc., says his company will use a consulting firm to build and operate its network infrastructure. Millennium is a leading manufacturer of flavor and fragrance chemicals. It's also a producer of methanol and titanium dioxide, which it supplies to companies such as Procter & Gamble and Sherwin-Williams.

The consulting firm, which Nelson declined to identify, will design and manage a companywide communications system that spans Millennium's many global locations. The contract is valued at $5 million over the next five years. Nelson says the contract will represent a significant piece of the company's overall IT spending, which ranges from

1-1/2% to 2% of the company's $3 billion in annual revenue. "We're in the midst of a significant transformation of our business," he says, "and IT spending is a big part of that."

Millennium, traditionally a conservative spender when it comes to technology, plans to integrate its primary business units from manufacturing, production, order entry, sales, and distribution to billing, accounts payable, and human resources. Over the next 12 months, R/3 will be rolled out in five phases worldwide in support of that integration effort.

Since 1995, Dow Chemical has outsourced IT resources to companies such as Andersen Consulting for large implementation activities-the most recent of which included the rollout of a global reporting system that replaces an IBM mainframe and VAX-based legacy environment. The goal: to build a common data warehouse system for financial, marketing, logistics, and maintenance information. For Dow, the focus was improving time to market, productivity, and delivery of IT solutions.

Outsourcing gave Dow's IT unitflexibility in managing its resources. Dow's long-standing consultants can come in and become productive quickly because they understand its priorities, CIO David Kepler says.

Dow spends more than $400 million annually on IT resources. Its IT priorities for the next couple of years will center on driving business productivity, enhancing the corporate culture to focus on improving value to customers, and repositioning the company's product portfolio. Dow sold more than $10 million in assets last year and acquired another $10 billion. Chief among these moves was the acquisition of Sentinial, a South African chemical manufacturer.

Dow's IT strategies reflect its global strategy. Its R/3 implementation encompassed the expansion of its enterprise systems across 14 business units worldwide. The value of this global deployment effort is the tight integration across geographic and operating environments.

Enterprisewide ERP is a clear trend. Chemical companies realize the supply side of the business is what they do at their core, says Ken Smith, CIO of the Geon Co., a $1.5 billion manufacturer of polyvinyl chloride compounds and resins.About 1% of Geon's sales is spent on IT development. Its R/3 implementation helped improve customer shipments by 10%-and increased billing accuracy by 80%.

Geon's day-to-day operations are run entirely by R/3, which integrates all levels of the enterprise. "We have 11 manufacturing sites throughout North America and we've integrated SAP down to the factory floor," Smith says. "It took two years to complete the implementation and it reached every inch of the organization, from process-control equipment in the factories to the general business systems."

While having an integrated enterprise has its advantages, chemical companies such as Geon still have to be prepared to handle unexpected business factors such as growth and change.

Earlier this year, Geon entered into a joint agreement with Occidental Chemical Corp., a $200 million petrochemical manufacturing subsidiary of Occidental Petroleum Corp., to create an integrated PVC resin business valued at $1.2 billion. Under the deal, Geon also acquired OxyChem's Burlington, N.J., operation, which produces transparent vinyl compounds. The challenge for Geon is to accommodate the venture by reconfiguring its R/3 systems to integrate the added operations. The goal: to integrate the human resources, accounts payable, and other financial systems over the next nine months. "We're going to spend a lot of time integrating those businesses with ours to give us a more outward focus," Smith says.

About $2 million of the $10 million Geon spends on IT includes outsourcing arrangements for applications development, help desk, and data center operations. Andersen handles Geon's application development support, IBM manages the help desk and PCs, and Digital Equipment is responsible for data-center operations.

Smith says about 70% of the chemical companies recognized as global players are implementing R/3. The business value of R/3 means a boost in a company's presence in other global markets. As companies become more globalized, they need uniform product quality and consistent sales and distribution processes, as well as a consistent look and feel to customers.

Standardizing on R/3 has let Millennium optimize production to match market conditions, stepping up product deployment in regions that have been profitable. Globalization gives companies the benefit of a balanced market strategy. "We used to view IT as a cost that had to be minimized," Nelson says, "but we now believe it's a major enabler of our global IT strategies."

Another benefit of a global application deployment effort is faster time to market. One challenge that chemical companies face is maintaining commitments to orders. It's common to have deliveries to customers delayed because critical business systems are out of sync with scheduling and production. Nelson says R/3 has helped to reduce time to market by nearly 90%.

"R/3 anticipates that the business is going to require us to change, which is why we implemented this architecture" says Patrick Fortune, CIO at Monsanto Co., a life sciences company that spun off its chemicals business as Solutia Inc. last September. This required Monsanto to split off a portion of its financial transaction system and rebuild it for the new entity over a six-month period.

After configuring multiple copies of R/3 in the United States, Europe, and Asia, the company deployed middleware from Neon Inc. that lets those operations share the same data on all three continents.

Other companies such as Lubrizol Corp., a manufacturer of performance chemicals for specialty markets such as fuels and lubricants, completed its R/3 implementation this spring, centralizing multiple systems and creating a coherent set of business processes. Lubrizol is engaged in the second leg of the project in Europe; it's expected to be completed by year's end.

The move to R/3 helped the company get its year 2000 issues under control, says Yannick Le Coudic, Lubrizol's VP of IS. Lubrizol's inventory of process-control systems containing date-sensitive data is almost complete, after which the company will be able to address the year 2000 issue uniformly worldwide. "The move to SAP R/3 will allow us to cover a lot of those challenges for our systems worldwide," he says.

Because chemical companies don't operate like retail organizations, there's less of a need for IT to expand into areas such as Internet and extranet development. Dow, for example, has historically used electronic data interchange to send and receive standard business forms with many partners. But Dow recently implemented an intranet designed to let the company communicate best business practices and career development information to employees.

Over the next few years, Kepler says, Dow wants to reduce its IT spending by 25% as a result of its own internal trend of increasing productivity as it expands into markets such as the Asia-Pacific region and Latin America. "We need to be positioned well to service those areas," he says, "and IT will help us accommodate that."

Clearly, global ERP deployments, partnering with subject-matter experts, and outsourcing are the keys to making this happen at Dow, and the many other leading-edge firms in the chemicals business.

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