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September 27, 1999

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IT Opens Doors For Chemical Makers

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(InternetWeek)Chemicals Industry Is E-Biz Lab

Acquisitions and spin-offs create need for more efficiency and innovation

By Rick Whiting

ow Chemical Co. unveiled plans last month to acquire Union Carbide Corp. for $9.3 billion in a deal that will create a chemical-industry colossus second only to DuPont Co. in size. The proposed merger reflects the changes and restructuring that have swept through the chemical industry in the past year. Corporate acquisitions and divestitures, falling prices for commodity chemicals, production overcapacity, and growing demand for "life science" and other new categories of chemical products are shaking up the industry.

At the same time, IT is creating opportunities for chemical companies, such as the ability to leverage new supply-chain management systems to bring chemical makers closer to their customers. The Web is also creating new sources of competition, such as chemical distributors that sell online and threaten to steal customers.

By nature, the chemical industry is very cyclical, according to industry analysts and IT executives. Plagued by overcapacity in production plants and falling prices for many chemical products during the last year, the industry is at the nadir of one such cycle. "There's lots of excess capacity and low prices," says Bob Ridout, CIO and VP of IS at DuPont, in Wilmington, Del. "Some companies are finding their product portfolio to be full of more commodities than they would like."

That excess is forcing some chemical manufacturers to split off businesses. DuPont, for example, has taken steps to divest itself of its Conoco oil and gas subsidiary in Houston as it focuses on more profitable life science-pharmaceutical and agricultural-chemical products. Olin Corp., which manufactures many commodity chemicals, spun off Arch Chemicals Inc., a Norwalk, Conn., maker of specialty products, including pool chemicals.

In other cases, overcapacity and falling chemical prices are spurring acquisitions and buyouts as manufacturers seek greater operating efficiencies and sales. Lyondell Chemical Co. purchased Arco Chemical Co. last year for $6.5 billion; in 1997, it formed Equistar Chemicals LP, a joint venture with Millennium Chemicals Inc. and Occidental Chemical Corp., of which Lyondell owns 41%. In June, Rohm & Haas Co. acquired Morton International Inc., a maker of specialty chemicals and consumer salt products, boosting Rohm & Haas from a $4 billion company to a $7 billion company.

"There's an awful lot of consolidation going on in the industry right now," says David Stitely, CIO at Rohm & Haas, in Philadelphia. "And clearly that's an issue for us as a company and here in IT."

For one, it means the pressure is on for IS organizations to run more effectively and to help their companies run more efficiently. To that end, a number of companies are in the midst of massive domestic and even global implementations of enterprise resource planning (ERP) systems.

"To benefit from all those acquisitions, you have to move toward common pro-cesses. And to support that, you have to move to common systems," says Robert Tolbert, VP and CIO at Lyondell, which runs SAP's R/3 throughout the company. System standardization helps the Houston company control costs through better decision making, Tolbert says. Lyondell installed the SAP software within Equistar in late 1997 and is now deploying it throughout Arco's domestic operations, with Europe and Asia to follow. Eastman Chemical Co. in Kingsport, Tenn., is rolling out R/3 at its administrative and manufacturing facilities around the world in a project expected to last until Jan. 1, 2001.

Praxair Inc. is a year and a half into a multiyear, global rollout of J.D. Edwards' ERP system. For Praxair, in Danbury, Conn., the issue is the need to "think globally, but act locally," says CIO John Hill. Most of the company's industrial gas products are distributed to customers within 200 miles of its manufacturing plants. Although those facilities operate semiautonomously to serve customers' needs, the company needed a way to maintain centralized control over global data and system architecture. Only that way could it leverage best practices-such as plant engineering techniques developed locally-across thecompany's operations in 43 countries.

Chemical manufacturers are also taking steps to implement supply-chain management technology, both as a means of controlling costs and of adding value to increasingly commoditized products. "The supply chain is becoming less forgiving," says Leif Eriksen, a research director with AMR Research. Customers are demanding that chemical manufacturers deliver higher-quality products more quickly.

"We've completely redone our supply chain, from demand-planning to delivery," says Stitely at Rohm & Haas. Beginning in the early 1990s, the company deployed demand-planning and forecasting software from Manugistics Group Inc., manufacturing and order-entry applications from Marcam Solutions, Inc., scheduling software from Aspen Technology Inc., and transportation management applications from I2 Technologies Inc.

A pilot project Lyondell is undertaking with a European customer, which Tolbert declines to identify, provides a glimpse of future customer relationships within the industry. Lyondell monitors the amount of liquid chemical products a customer has in its storage facilities via an extranet and automatically ships more product when inventory levels reach a predetermined point. Tolbert says the next step will be to give customers direct access to Lyondell's information system to check on order and product delivery status. "We want to build that electronic and business partnership where we both benefit from the technology," Tolbert says.

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