The global chemicals industry is highly complex and diversified, with end products often composed of a number of chemicals combined in a number of ways to provide the required properties and characteristics. Margin management, cost management and the ability to be price competitive in the market place are some of the major challenges that bulk chemical manufacturers face. Feedstock and raw materials generally make up about 40% of the bulk manufacturers total cost. A large investment in capital equipment is required by manufacturers and drives the emphasis on asset utilization and high occupancy. The competitive nature of the business creates ever lower margins and as a result, bulk chemical manufacturers sometimes make a loss. Added to this are the environmental and safety requirements for hazardous installations and product handling, which do not come at a small expense. From a business perspective, this industry is characterized by boom-and-bust business cycles across the spectrum of base chemicals to higher value chemicals. These cycles are mainly due to oversupply or shortages, which result in the rise and fall of commodity prices. Chemicals are divided into four broad categories: • Base chemicals (ethylene and other petrochemical building blocks, ammonia and acids) • Intermediate chemicals (waxes, solvents, polymers) • Chemical end products (Paint, explosives and fertilizers) • Speciality end products (Pharmaceuticals, agrochemicals) Lorenchem is a global manufacturer of chemicals, comprising twelve (12) business units that produce chemicals ranging from ethylene to polymers. Although it primarily serves commodity chemicals markets abroad, it also has a relatively big local market share for its product range. The executives leading this organization once believed that its fragmented business approach owing to a large number of business units and country based organizations inhibited its ability to reap the benefits of global reach and scale. Through a peer benchmarking report, Lorenchem determined that its operating cost structure was fairly high relative to that of the competition. 5 Lorenchem’s business strategy indicated that to survive and grow its business in this industry, it would have to restructure its portfolio of businesses, lower its operational costs and create operating discipline (This all within the ever changing demands and requirements of the customers). Restructuring meant more sharply focusing on Lorenchem’s core business units and facilities that did not strategically fit anymore. The reduction would enable the organization to concentrate on producing chemicals that are more basic, which could realize enormous near term cost reductions. The creation of operational discipline meant the globalization of business operations and the development of significant competence in procurement, manufacturing and distribution. Lorenchem had largely run its chemical operations on a regional basis (each having its own sales and operations group with its own set of practices and procedures). The globalization effort would establish consistency across regions and enable Lorenchem to leverage its scale on a worldwide basis. To create competence across the areas of procurement, manufacturing and distribution, Lorenchem though it good to establish a project team with the purpose of formulating and implementing an appropriate strategy for each of the refocused business units. One of the key changes anticipated was to migrate from a supply/push operating discipline to a demand/pull customer strategy. With a mandate to dramatically improve operations and become more market focused, Lorenchem began to explore an approach to increase its effectiveness with its customers by better understanding their needs and buyer values. 1. Given the business strategy and the objectives set, what are some of the major Supply Chain strategic focus areas for Lorenchem? (20 MARKS) 2. For the proposed strategic focus areas and strategic actions, what approach would you suggest Lorenchem follow to ensure proper implementation? (20 MARKS)
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