Developing a fresh perspective on the future of the chemical industry
By Bernd Elser, Accenture; Tobias Radel, Accenture; and Fernando J. Gómez, World Economic Forum
In the chemical and advanced materials industry, plants and assets operate for decades. Investment decisions are typically based on assessments of well-understood trends that have shaped the industry over long periods of time. But COVID-19 dramatically altered those trends, upending planning assumptions and undercutting that traditional basis for creating long-term strategies.
In looking at these altered trends, one may be tempted to see them as a new baseline that can be used to revise long-term strategies and plans. But doing so would be to miss a crucial point: The world is becoming a more unstable and uncertain place, making it harder to extrapolate trends into the future.
Figure 1: Global risk evolution examples
From natural disasters, interstate conflicts and cyber-attacks to shifting energy prices and stock market volatility, the frequency and impact of shock events are increasing significantly (See Figure 1). COVID-19 has demonstrated how a disruptive event can push established management practices and methods to the limit. But in an interconnected world, even seemingly isolated local events can have a tremendous impact—witness the Suez Canal container ship accident that disrupted supply chains across multiple industries for weeks, or the severe winter storm that shut down much of Texas earlier this year, slowing business and disrupting agriculture. And even when such events are over, their impact continues to be felt as companies modify their behavior in response to the altered conditions, driving further change in industry trends.
In discussions held by the World Economic Forum’s Chemical and Advanced Materials Industry Action Group, it became clear that companies today need to increase their resilience to shocks by reimagining three key areas: strategic planning, business portfolio management and their approach to collaboration and ecosystems.
Reimagine strategic planning
COVID-19 disrupted strategic and operational planning processes and demonstrated that static, linear annual plans are often inadequate in the face of daily changes in customer demand, raw materials prices, and the availability and cost of transport and contractors. The pandemic also demonstrated that while optimization that is focused on one or two performance indicators can work in a stable context with high visibility, it can also increase vulnerability to shocks. For example, minimizing inventory while relying on supply chains to replenish inventory exactly on time, or reducing the unit cost of purchases by moving to sole-source suppliers, can put companies at greater risk from sudden disruptions.
With more shocks on the horizon, companies will need to change their planning efforts to increase resilience. To do so, they can:
- Run scenario analyses instead of linear plans and projections. These can include models for investing in redundancies rather than short-term tactical optimization, while analytics and artificial intelligence tools can more accurately sense and forecast changes in demand and provide a better understanding of where the business is vulnerable.
- Develop dynamic monthly or weekly rolling plans instead of static January-to-December plans. Demand-sensing efforts should include external information, such as third-party data on customer purchases, trends and shipments, or insights gained from crawling web messaging and news releases.
- Shift some decision-making authority from the central, global level to the local level to increase responsiveness. This should include the establishment of fast, entrepreneurial management decision-making processes that don’t rely on multi-layered, iterative approvals that slow action.
Last but not least, companies should look beyond the routine contingency measures, such as short-term cost and investment cuts. Cutting costs and CapEx too much during a disruption can compromise mid-term growth and slow the return to the pre-shock growth path. Finding the right balance between cuts and continued investment can be difficult due to the level of uncertainty about the future that a shock brings. That means companies should focus on cost and CapEx efficiency before there is a crisis. Turning fixed costs into variable costs is especially critical because it will enable companies to more readily make adjustments during a crisis.
Reimagine business portfolio management
In the face of sudden, disruptive change, being agile and able to act fast to mitigate vulnerabilities is critical. Companies can benefit from greater exposure to a broader set of customer industries and value chains; the development of multi-supplier strategies; and working with an ecosystem of partners that can take collaborative action. Having these in place can help reduce the impact of a shock in the short term and put the company in a better position for recovery in the long run.
To work with this multifaceted approach to the business portfolio, companies need to:
- Embrace and foster diversity in customers, customer industries, markets, regions and so forth, rather than focus intently on a few targets. In doing so, they should carefully balance low costs with the need for redundancy and resilience.
- Take advantage of state-of-the-art technology. For example, digital technology, cloud platforms and software-as-a-service can bring greater scalability and flexibility, while remote operations and digital customer engagement capabilities can increase efficiency and enable continued operations during disruptions.
- Build the ability to shift smoothly across different customer industries and regions. Companies can establish agile organizational elements that can quickly redeploy teams, experts and growth capabilities, rather than keeping them in line-management structures that are independent of their unit’s growth outlook. Multi-skilling and job-rotation schemes can enhance agility.
Reimagine global and local collaboration and ecosystems
COVID-19 showed that the weakest link in a chain defines the resilience of the overall chain. This means that contending with shock events will require a broader, multilateral perspective, with more cross-company, value-chain and private-public collaboration. Companies will need to:
- Expand their ecosystems of partners beyond the direct supplier and customer. Engage in more multi-stakeholder collaboration, including collaboration forums, to share resources, capabilities or assets as needed.
- Shift from a transactional spot-buy mindset to a partnering mindset. Take a more comprehensive view of partners, considering not only price but availability, scalability, reliability and shared purpose.
- Build out local networks with suppliers, customers and communities. Strong working relationships with local governments and organizations can enable joint crisis-response planning and the creation of collaborative action frameworks that can enhance resilience.
COVID-19 has reshaped the industry landscape significantly, and dramatically highlighted the fact that established, relatively stable trends are a thing of the past. The frequency and impact of such shocks have grown in recent years, and that pattern is expected to continue. To thrive in the coming years, chemical companies will need to move quickly to find new ways to plan and manage. That won’t be easy, and it will require significant changes to existing structures and methods. But it will be key to building the resilience needed to navigate through an uncertain world.