Reducing Overall Spend by Efficiently Operating Asset-Heavy and Inflexible Production Systems for a Chemical Company
Download Free Resource Chemical Industry Overview Despite facing immense pressure from a multitude of sources, the chemical industry in the US has continued to perform spectacularly. To keep up with changes, companies in the chemical industry have devised strategies to manage feedstock volatility and handle prices drops driven by key buyers in industries such as [...]READ MORE >>
Chemical Industry Overview
Despite facing immense pressure from a multitude of sources, the chemical industry in the US has continued to perform spectacularly. To keep up with changes, companies in the chemical industry have devised strategies to manage feedstock volatility and handle prices drops driven by key buyers in industries such as automotive and construction. This case study is a classic example of how we helped a leading company in the US chemical industry to identify opportunities and take advantage of changing market conditions while addressing their key purchasing and procurement challenges.
Key Challenges Faced by Companies in the Chemical Industry
- Fluctuating prices of raw materials and commodities.
- Strict compliance requirements from governments and regulatory bodies.
- Obtaining and consolidating data on the pricing and quality of raw materials from suppliers
Business Challenges Faced
The client is one of the leading companies in the US chemical industry with an annual revenue of approximately 7 billion. However, feedstock was taking an average 40% of the company’s total costs and the client was falling victim to feedstock price volatility. They were facing problems in predicting supply costs and finding suppliers who can ensure availability of reasonably priced chemicals while meeting stipulated quality standards. The client, therefore, approached SpendEdge to eliminate the possibilities of undesirable risks by shifting them through contracting, financial hedging, and internal operational choices.
Key objectives the client aimed to achieve through this engagement were:
- Reduce operational costs by ensuring the availability of petrochemicals needed by the client to create chemical products.
- Identify suppliers who can offer chemicals of the required grade at favorable terms at correct time.
- Address customers’ request of niche products to suit particular end uses or to meet diverse local regulations.
Our Research Approach
The experts at SpendEdge understood that high-quality raw materials were imperative for the client to produce high-quality end-products. Any compromises made at the procurement stage will result in customer dissatisfaction. Therefore, they decided to source chemical supplies from global markets. They obtained detailed market intelligence information on the supply market and supplier landscapes from specialized databases.
The team at SpendEdge also identified and selected the best cost sourcing locations, where the cost of raw materials were significantly lower. At the same time, the team ensured that that raw materials procured were meeting the quality standards laid down by the client and the stipulated delivery schedule.
When looking for alternative sources for their chemical requirements, the experts analyzed different markets and rising trends in the chemical industry. They provided detailed insights to keep the client aware of developments in the global chemical industry to negotiate better terms with suppliers. They also tracked the emergence of new suppliers to help the client identify opportunities to reduce costs and establish multiple sources of requirements.
The experts also gained a thorough understanding of the business model of suppliers who were providing chemicals to the client. They obtained in-depth insights into different cost structures and pricing policies to work on a cost-plus pricing strategy. This enabled the client to minimize costs and procure the best quality suppliers.
Engagement Results and Benefits
Since the purchasing expenditure of the client was equivalent to 30% of the total sales revenue, the solutions provided helped the client to explore new resources such as low-priced US shale gas coming to the market. This reduced the overall spend of the company by 10% and identified products that were strategic and critical to the company’s operations. This helped the client to profitably operate their asset-heavy and inflexible production systems.
Gaining a better understanding of the production costs and suppliers’ capabilities, helped the client to make key decisions regarding the form where they wanted to obtain the key inputs. As obtaining some materials in a dry state instead of as a solution, decreases the weight and volume of the product and reduces transportation costs substantially.