Trusted Advisers - Despite strong growth prospects in the industry, chemical supply chain managers are increasingly cautious in the face of continued uncertainty and relentless competitive pressure. Logistics providers are well-placed to help and should position themselves increasingly as trusted advisers.

Global Outlook

Following the global economic crisis and cyclical downturn of 2008, there has been a rapid and largely unforeseen recovery of the chemical industry in 2010. An ICIS Chemical Business article from December 2010 reported growth in the chemical sector of 12% in 2010 and predicts a growth rate of around 8% for the next two years.

This turnaround can be attributed to strong growth and profitability in emerging markets, most especially around increased demand in China. The industry has yet to experience the impact of lower-cost exports from the Middle East flooding the European market. At the other end of the spectrum, a favorable exchange rate coupled with abundant, cheaper shale gas has given a significant boost to U.S. exports. The turnaround story seems set to continue with China expected to overtake the United States as the largest export market for chemicals in 2011 (approaching $700 billion).

The shape of the industry is changing fast and will continue to do so over the next few years with global scale super-sites emerging. According to the Gulf Petrochemical Industry, the next seven years will see a 50% increase in global capacity as more than 22 million tons of new chemicals and polymer capacity come on-stream across major sites in the Middle East.

Despite these growth trends, managers remain cautious in the face of potential challenges. Volatility in the price of commodities and currencies as well as greater austerity measures imposed by cost-conscious governments will pose a serious threat to the chemical industry. In addition, concerns about political instability across certain Middle Eastern countries have cast a shadow of uncertainty over supply chain operations in the region. Despite last year's strong performance and a positive outlook for 2011, many chemical companies continue to be very cost-conscious and in an economy where cash is king, companies are holding inventories at or close to historic lows.

Managing Uncertainty And Risk

Forecasting has traditionally been viewed as a "business as usual" activity. However, the events of the last two to three years have made for unprecedented uncertainty. Strategies to manage these levels of uncertainty are now critical in achieving alignment across businesses and supply chains, with scenario-based planning, accurate visibility and supply chain agility all required more than ever to mitigate risk.

In the new world, supply chain managers and business leaders must anticipate and plan for upside and downside risk. More than ever, there needs to be a plan b, c or even d - plans that promote visibility throughout the supply chain and feature management styles and mechanisms that are responsive, dynamic, flexible and hands-on. This can only be achieved through the alignment of external stakeholders and service providers and through developing deeper and more trusting, flexible relationships. It is only when these elements come together that companies will be able to better manage risk and uncertainty.

New Opportunities As Emerging Markets Develop

A new set of opportunities is emerging as the production portfolio within emerging markets drifts downstream with companies converting oil and gas into a larger range of value-added commodity chemicals and derivatives. In the Middle East, for example, countries that have traditionally been exporters of chemicals are becoming importers as they require more inward process chemicals. This presents interesting supply chain challenges both in terms of scale and complexity. The logistics infrastructure in these regions needs to change to support this new and more complex product mix. Lessons can be learned from the mature markets in Europe and North America as to how more complex logistics requirements can be integrated into the supply chain.

In meeting these new and distinct challenges - and in taking the new opportunities they represent -logistics providers have an absolutely indispensible role to play in helping companies manage continuing uncertainty and in adapting. Leading logistics companies will need to anticipate the emergence of new chemical trade lanes and, in working with producers, develop the necessary infrastructure and gateways between emerging manufacturing hubs and their demand markets.

Mainstreaming Sustainability, Delivering On Corporate Social Responsibility

In a context of higher oil prices and increasingly scarce resources, businesses are under pressure to change the way they manage sustainability and social responsibility in their supply chain. High-profile industrial accidents, such as BP's mammoth oil spill in the Gulf of Mexico, have renewed and strengthened global consumer conscience and have intensified this pressure. More than ever, all players must take into account sustainability and environmental factors - a robust and meaningful corporate social responsibility strategy will be nothing less than essential for operating in this brave new world.

Traditionally, supply chain managers have long focused on four key objectives - cost, quality, speed and reliability - with corporate social responsibility all too often a peripheral activity run in parallel to the core operations of the organization. This approach has delivered good results and many incremental improvements. However, the real winners in the future are the companies fully able to integrate CSR through the lifeblood of their businesses. Coca-Cola for example set out to reduce water usage per liter of Coke in their manufacturing facilities from around three liters of water per liter of coke to two liters of water per liter of coke. However, this overlooked the 200 liters of water required to grow the necessary sugar - Coca-Cola then worked with farmers to improve the overall water footprint in the value chain and moved to more sustainable farming methods - with benefits both to the company and to the planet.

The Harvard Business Review reported in 2010 that only 33% of supply chain managers were confident that they understood the sustainability performance of their first-tier suppliers. The number halved when quizzed on second-tier suppliers. With new consumer technologies changing the corporate playing field, supply chain managers will need to identify and deliver real change, developing closer relationships between cost and sustainability. In consumer product labeling, for example, more and more data is included regarding the origins and sustainability of a particular product. Already 2D bar coding is a technical reality - allowing a consumer to scan a product with a phone and get instant, accurate information - accessing video feeds from manufacturing sites and CSR ratings.

Although there are a number of stages upstream, the chemical industry will need to play its part and consider all aspects of its supply chain both internally and externally to drive change. Companies will need to look beyond their immediate network of suppliers and customers and implement far-reaching changes. Some of today's challenges - such as ensuring environmental sustainability through recycling - are far too large for individual companies to tackle and will thus require meaningful industry collaborations.

Now is a Good Time To Start

The challenge to the chemical industry and the leading logistics and supply chain companies is to develop true gateways between supply and demand, fully integrating all components - the physical, the commercial and the information. The industry needs to deliver lower cost and lower carbon supply chains together with better utilization and occupacity of the infrastructure. It also needs to develop new technologies that maximize transit payload, postponement of packaging and post process manufacturing, compounding and blending.

In a world where the future arrives earlier than we expect, now is a good time to start.