Sept. 11, 2000

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Efficiency Is New Byword

Chemical companies use E-commerce to cut costs and enhance supply chains

By Rick Whiting

More on chemicals:

Industry Charts: Chemicals (PDF File) sidebar:Geon Leads Chemical Industry In E-Business Changes Internet Week Transformation Isn't Easy (7/24/00) Internet Week Chemical Companies Create Marketplace (5/22/00)

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ooking to cut costs and reach new customers, chemical manufacturers have taken major steps in the last year to expand their own E-commerce and supply-chain management initiatives. At the same time, some of the industry's biggest names are behind efforts to create competing online exchanges for chemical buyers and sellers. All this is forcing chemical makers to rethink how they do business.

"The E-business pressure is really a huge component of our overall activity now," says Yannick LeCouedic, CIO at Lubrizol Corp., a Cleveland supplier of chemicals for fuels and lubrications. "We're now developing our E-business strategy--that's really our challenge. The question is, how can we leverage our current IT application foundation? And how quickly can we do it?"

Earlier this year, Lubrizol launched its Lubrizol Express extranet for North American customers to obtain product information and to place and track orders. Plans are under way to expand the extranet to include international customers.

Beyond chemical companies' individual E-business efforts, several consortiums have emerged. In May, a dozen chemical industry companies, including BASF, Dow Chemical, DuPont, and Rohm & Haas, said they would invest $150 million to create the Elemica chemical-industry

E-marketplace, scheduled to begin operations by year's end. It will connect buyers and sellers of chemicals, providing them with a single system for negotiating contracts, contract and order management, fulfillment, and payment.

The plans for Elemica were revealed shortly after Envera--a business-to-business exchange for the chemical and petroleum industries backed by a consortium of companies, including Eastman Chemical, Lyondell, and Occidental Chemical--was opened for business. Neither Elemica nor Envera is in operation yet.

The consortium-based busi-ness-to-business market-places are themselves a response to the rise of online venture capital-backed exchanges such as CheMatch .com Inc. and ChemConnect Inc. They have captured a larger share of the spot-purchase chemical market, particularly for commodity chemicals where buyers don't want to be locked into long-term contracts, says George Young, a senior manager with the Deloitte & Touche consulting firm that advises the chemical industry. But backers of Elemica and Envera maintain that the consortium-led exchanges have greater staying power because they pose less of a disintermediation threat to chemical manufacturers, Young says.

Elemica will provide customers with an online catalog, or superstore, for purchasing chemical products, says David Kepler, Dow Chemical Co. CIO and VP of electronic business. In addition to backing the new company, Dow also sells through ChemConnect and has been a leader in laying the groundwork for online exchanges for specific classes of chemicals, such as thermoplastics, and for exchanges that cater to vertical markets, such as the construction industry. "We're going to see a significant change in how business is done in the chemical industry," he says.

Other manufacturers are taking a wait-and-see attitude before jumping on the marketplace wave. Geon Co., an Avon Lake, Ohio, manufacturer of chemicals for making plastics, will decide by year's end whether to join Elemica or Envera, says CIO Ken Smith. "They may reduce our costs to serve our customers, but that remains to be seen," he says.

Smith isn't alone in his skepticism. "It's not clear how all this is going to pan out," says Roy Pike, CIO at Millennium Chemicals Inc., a Red Bank, N.J., company that makes a variety of commodity, industrial, and specialty chemicals. He questioned, for example, whether online exchanges can resolve conflicts in the different Extensible Markup Language standards on which they're basing their systems.

In addition to examining the emerging online marketplaces, chemical companies are aggressively launching their own E-commerce initiatives, including linking enterprise resource planning systems with suppliers' and customers' ERP systems and setting up online catalogs from which customers can order products.

In February, Geon inaugurated its GetGeon Web site, where the customers can check inventory, place orders, check the status of shipments, and review invoice data. Because the Web site is integrated with Geon's SAP R/3 ERP system, most of the site's processes are automated. By midsummer the company had conducted some $10 million in business through the site. "It makes us a more cost-effective, more reliable, supplier," Smith says.

Geon has taken similar steps to automate its supply chain. This summer the company created the Geon business-to-business system that establishes direct ERP-to-ERP connections with key suppliers over the Internet. Geon uses that system to purchase 80% of its raw materials.

Supply-chain issues have become so important that Millennium Chemicals has created a new position--global supply-chain VP--to manage its inventory and match it to expected customer demand.

Air Products and Chemicals Inc., an Allentown, Pa., manufacturer of industrial gases and chemicals, just went live with its own APDirect Web site where customers can place orders online. A pilot site generated $1.5 million in sales, the company says, and additional capabilities such as order tracking will be rolled out during the next year.

Similarly, Dow late last year launched its MyAccount@Dow extranet, which gives customers a way to electronically place orders, check order status, and obtain product literature. Dow is developing links between MyAccount@Dow and its call-center operation, which uses customer-relationship management software from Siebel Systems Inc. to provide customers with technical support and services.

In another effort to improve customer service, Geon has assembled a data warehouse of sales information that tracks which customers bought what products, when they made the purchases, in what volumes, and at what price. Tapping into that system helps Geon understand its customers' buying patterns, forecast demand, and plan inventories. Through this analysis, Geon can anticipate demand and sell more proactively.

Chemical manufacturers also leverage IT to provide vendor-managed inventory services. Air Products and Chemicals monitors customer inventories using PC technology that collects data from customer production and storage facilities and transmits it back to the chemical manufacturer. The company's chemicals group monitors 110 tanks of various chemicals for 40 U.S. and Mexican customers.

Air Products and Chemicals' gases group, which supplies specialty gases such as argon, helium, and hydrogen, monitors nearly 4,000 tanks for 70% of its customers. Product levels are fed into a database and monitored by Air Products and Chemicals. Chemical customers have access to the database via the Internet; access for gas customers is being developed. When a supply falls to a level specified by the customer, the manufacturer's customer-service group automatically reorders.

As E-commerce shapes the chemical industry, manufacturers continue to merge in an effort to realize economies of scale or divest themselves of operating divisions and product lines as they slim down to their core competencies to stay competitive. These changes, which the chemical industry has been undergoing for several years, are the result of falling prices for commodity chemicals and overcapacity at production facilities. Dow Chemical and Union Carbide Corp., for example, expect to complete a $11.6 billion merger by the end of this month. "There's a high rate of consolidation, rationalization, and specialization," says Patricia Zajac, IT communication and global resourcing manager at Air Products and Chemicals.

As chemical companies merge, IT managers are faced with the chore of integrating often disparate information technology systems--a task that Geon CIO Smith faces with the just-completed merger of Geon and M.A. Hanna Co., a Cleveland manufacturer of chemical products for making plastics and rubber. Although Smith's task is made somewhat easier because the two companies run on SAP's R/3 system, he expects that the entire project will take a year and a half to two years.

Helping chemical manufacturers operate more efficiently and cut expenses remains a primary focus for many IT operations, particularly as outside pressures such as the rising cost of petroleum--a key raw material for many chemical products--squeeze the bottom line. And they are succeeding. Dow Chemical estimates that in the last year its IT initiatives contributed $190 million to the company's bottom line through increased revenue and improved operating efficiencies.

Chemical manufacturers have spent the last year implementing information technology to make employees more productive. Air Products and Chemicals, for instance, recently rolled out Microsoft Exchange and Outlook E-mail software to 14,000 workers in 30 countries, replacing a hodgepodge of messaging systems that made communications within the company difficult, IT manager Zajac says.

During a four-month period last year, Dow Chemicals upgraded PCs and desktop software for 35,000 employees in 150 countries, ensuring that all its employees worldwide could communicate and share documents. Dow has also built what it calls Dow eMart, a procurement system, using purchasing software from Ariba Inc. Employees use the system to buy everything from office supplies to computer software from an online catalog of more than 100,000 items.

Air Products and Chemicals recently assembled a similar system. These systems help lower purchasing transaction costs and increase volume discounts.

Lubrizol employs workflow software from Action Technologies Inc. to streamline product development by improving the dissemination of engineering information, says CIO LeCouedic. Lubrizol is also in the third year of a four-year effort to implement SAP's R/3 throughout its global operations. The company has installed R/3 at its North American and European facilities, and the system handles 80% of its revenue. This year R/3 is being installed in Australia and Singapore. Lubrizol is also using SAP's Business Information Warehouse business-intelligence technology initially to help manage product inventory.

Dow is building an intranet-based knowledge-man-agement system, using Microsoft's Exchange groupware and NetMeeting collaboration software, to take worker productivity to the next level. The system provides employees with access to corporate information such as training materials and provides a way for employees to collaborate in product development, Kepler says. IT at the company is also building into the system expertise-locator capabilities that will let users identify people with specialized knowledge and expertise. Millennium Chemicals is in the planning stages for its own knowledge-management system.

But IT isn't just about cutting costs. True, Millennium Chemicals has cut its finished-goods inventory by 40%--with an annual savings of $15 million a year--by using SAP R/3 to globally manage inventory, CIO Pike says. But because E-commerce can improve customer service as well as reduce costs, Millennium Chemicals is focusing its early efforts on customers rather than procurement.

The company has a pilot project under way to link its R/3 system to a major customer's IT system for the company's titanium oxide products.

"We see electronic business as one of the major tools we can use to cut costs," Pike says. "But we're feeling a lot of pressure from customers to reduce supply-chain costs and serve them better."

Illustration by Jeffrey Fisher
Photo of Zajac by Bill Cramer

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