Rewiring of global chemical supply chains for the future
GPCA Insight caught up with Per Hong, Partner, Kearney, Jose Alberich, Partner, Energy Practice, Kearney, and Sachin Halbe, Partner, Strategic Operations, Kearney MEA, about the latest supply chain trends looming on the horizon
What are some of the key events shaping, disrupting, and transforming chemical supply chains currently?
In 2023, we enter a fourth year of constant disruption – fuelled by the COVID-19 pandemic, geopolitical tensions and the global impacts of climate change. These and other mega trends driving value chain disruption show no sign of slowing down. Climate-related risk events are up by 96%, technological disruptions increased by 113% and disruptive events driven by geopolitical tension have skyrocketed by 311% compared to 2021.
Manufacturers (including chemical companies), in particular, are facing headwinds in the form of double-digit inflation, labor shortages and energy scarcity, along with new regulations that are driving an increasing imperative to reduce waste and emissions. This is leaving them trying to find a balance between safeguarding margins and ensuring delivery capability. On the other hand, customer needs have also evolved where they are now used to short lead times and high product availability. All of this creates a case for rewiring of global value chains where revenues and profitability will no longer be constrained by generating demand, but by generating supply.
 World Economic Forum, in collaboration with Kearney, “Global Value Chain Barometer”, January 2023
How have these events impacted the way leading chemical companies revaluate and redesign their global operations?
The world is now increasingly moving towards a supply-constrained world. In the aftermath of the pandemic, chemical companies that lacked a strong contract base with suppliers and service providers were significantly impacted by increased costs and constrained supply. This laid stress on the need for accurate and agile demand planning, and building long-term relationships. Hence, after years of following a cost-focused paradigm revolving around outsourcing and economies of scale, firms have begun to consider reshoring considerable parts of their production capacity and supply base, and establishing parallel manufacturing networks to build resilience and ensure better supply availability. At the same time, governments in the region are continuing to push new industrial policies and strategies to boost localization efforts and reduce dependency on imports for key commodities.
Both these developments are already impacting flow of materials – for example: during the past two years, the number of active shipping ports has decreased 7% while the size of container ships has stagnated and the average distance travelled by cargo vessels has decreased. This could indicate that trade flows are becoming shorter and more diversified for the first time in decades.
As a result of the transition to a supply-constrained economy, firms should evaluate and fundamentally redesign their operations strategies rather than making only step-by-step adjustments. This means reconfiguring their value chains from the bottom up and end-to-end to put resilience and – in light of the climate crisis – sustainability at the core of their business agendas. The rewiring will bring a new mindset about global value chains and how they operate.
How will businesses rewire their global operations to bring a new mindset and stay competitive in a constantly changing business landscape?
Through consultations with senior operations and supply chain executives, as well as public sector and academia leaders, three connected trends have been identified that will dominate the rewiring of global value chains of chemical companies:
1. From global to globally connected multi-local value chains:
Firms will start to diversify their operations and have multiple regional setups rather than one global value chain. This will lead to increased re-shoring and nearshoring activities, “in the region, for the region”, partly also driven by regulations around localization. While this trend helps build resilience and improve overall flexibility and agility, it also poses a few challenges, such as increased labor and overhead costs, and risk of silos and de-standardization.
As multi-local value chains start to proliferate, staying globally connected through new technologies will help coordinate and align networks of multi-local value chains, allowing manufacturers to better control the costs associated with localized operations.
2. From economies of scale to economies of skill:
Talent will become a key enabler to implement digital capabilities in multi-local value chains. However, there is currently a significant scarcity of (digital) talent and upskilling needs – firms will need to regenerate their talent base. Consequently, firms will move closer to markets and education hubs with high talent availability, and also start to build and upskill
talent internally. Whilst this trend helps boost innovation capability and allows for new configurations of teams, it also poses a few challenges such as investing into internal talent development programs and navigating cultural differences in global teams.
Value chain leaders have started branching out beyond traditional operations skills into areas like ecology, geopolitics, macroeconomics, data analytics and digital technology. With a new generation of talent that values diversity, inclusiveness and sustainability entering the labor market, leaders will need to bridge the gap between generations and cultures to secure talent and get the best out of their teams.
3. From regulatory compliance to innovative sustainability
Sustainability has moved from a “nice to have” to top of the agenda, as regenerative operations are required by customers, employees, investors and regulators. This will disrupt value chains globally, as firms will change their manufacturing footprint to meet sustainability requirements. While this trend helps make operations more socially and environmentally regenerative, it also requires investment and cooperation along the entire value chain.
With significant impacts on supply bases and cost structures, firms will decide how much they are willing to invest in sustainability innovations and how to measure the returns gained. As sustainability moves to the core of business cases, decision-making processes will become less cost-centric and more about managing these trade-offs to ensure long-term growth and customer value.
What top winning strategies are chemical companies adopting in order to build supply chain resilience?
We looked at transformative strategies that will support organizations in this redesign. Chemical and industrial companies need to form bonds, both in logistics and with suppliers, and ensure manufacturing adaptability to create great value chains. The following are the most applied strategies across chemical and industrial resilience leaders:
- Promote localization (including reshoring and near-shoring)
- Ensure efficient level of automation (higher vs. lower)
- Promote adoption of digital applications (e.g., shipment-tracking technology)
- Increase share of cash or cash equivalents
- Implement network-wide asset visibility technologies