CHEMICAL PATHWAYS

Logistics Insight Asia, 1/7/2008

Safety, speed, environmental friendliness, conveyance modes - G VENKATESH checks out the state of logistics in the global chemical industry.

Without the free flow of impure and purified blood through the veins and arteries of the body, respectively, human metabolism is impaired. Likewise, for “industrial metabolism” – supply of raw materials, efflux of finished goods and disposal of wastes – an efficient transport network is indispensable.

Eco-friendliness and safety have become increasingly desirable characteristics of the “mine-millmarket” movements of goods, in addition to reliability and timeliness. Logistics, a mundane and taken-forgranted necessity till not very long ago, has found a place for itself in high-level corporate planning in the chemical industry, as a core competency, thanks to a plethora of external factors affecting business.

More diverse than one can imagine, the chemicals sector is organized in several tiers – integrated or otherwise – and serves numerous end-use sectors, industrial, commercial and domestic. The products that exit the chemicals sector are petrochemicals, inorganic chemicals, paints and dyestuffs, agrochemicals (pesticides and fertilizers), and specialty chemicals like sunscreens, anti-oxidants, antiknock agents, emulsifiers, biocides, anti-coagulants and so on, for a plethora of uses. Upstream, the chemicals sector is linked to the mining and the oil & gas sectors. The textiles sector is the largest consumer of dyestuffs which also enjoy a sizeable export market. Paints find buyers in the fastgrowing construction and building sector, automotive sector, machinery manufactories, among others, while inorganic chemicals (salts of sodium, potassium, calcium, silicon, phosphorus, etc) are used in the mass-production of necessary consumer items like detergents and soaps.

Plastics – polymers like PVC, PE, PP and others of their ilk – are not just consolidating their hold on applications specific to them but also slowly replacing metals and emerging as a material of choice for many applications.

The growth in demand for chemicals (specialty and otherwise) has been met by a growth in production in all the sub-sectors. Figures 1 and 2 give an idea of the contribution of chemicals to trade in 2006 (latest available data from the WTO) to different regions of the world.





For Asia, chemicals accounted for seven percent and 9.2 per cent of value of exports and imports, respectively. As a percentage of value of manufactured products imported and exported in 2006, it was 14 per cent and eight percent, respectively. In the US, the chemicals sector is the leading contributor to the country’s export earnings. In many other countries – even in Asia – the chemicals sector is among the top three as far as contribution to export earnings is concerned.

OUTSOURCING IS IN
The steady increase in the traded value of chemicals over the years, courtesy the rise in demand from the developing world of late, along with the widening supply chains of chemicals manufacturers has expanded the market for logistics service providers, who ensure that the industry is fed with the necessary raw materials and that the finished products find their way to the market. Some 3PLs in the US have reportedly been able to double their business volumes (and turnover) within a very short period of time

Needless to say, the movement from node to node is more than just displacement. There are several concerns which govern the execution of transportation operations: safety, timeliness (which is affected by such challenges as congestion at loading and unloading terminals), environmentfriendliness, economy of operation, minimization of losses of materials en route, hazard minimization, mode of conveyance, inter-nodal distances, etc.

Intuitively, the current rise in oil prices impacts logistics operations directly, and as Robert Samuelson pointed out recently (Newsweek, June 23), “Since year 2000, the cost of shipping a 40-foot container from East Asia to North America has risen from US$3000 to $8000. With oil likely to shoot to $200 a barrel by 2012, this would increase further to $15,000 – a five-fold growth in 12 years.”

A decision-making model (Figure 3) captures in a nutshell what 3PLs and their clients in the chemical industry have been working towards, in this era of rising costs and competitive markets.



Time, money (for fuel among other things) and manpower – the resources which the chemical industry expends in order to keep things moving in and out, are finite, and efforts are constantly being made by the industry in concert with the 3PLs, or independently, to optimize the utilization of these resources.

The days when every industry had its own logistics cells with specialists working with carrier management, order management, shipment management, claims and financial management of the logistics operations, are slowly fading away. Outsourcing is gradually becoming the in-thing, as it allows the chemical industries more time to focus more on what they are essentially good at – manufacturing and production, research and development.

While many chemical industries have benefited by outsourcing their logistics operations to 3PLs, there are some who have also licensed the 3PL tendering and tracking technology (a kind of “in-sourcing”), making use of transportation management system (TMS) products. The software vendors who fulfill this demand from the chemical industry include Oracle, Manugistics/JDA, i2 Technologies, SAP and RMI.

In a recent development, the chemical industry in the US and Canada has been urging the carriers and the 3PLs to become partners and adopt the “Responsible Care” initiative, to minimize untoward happenings – losses of lives and property - in transit. By the end of this year, the Dow Chemical Company expects all its logistics service providers to have become a Responsible Care company.

KINETIC & STATIC
There are two main operations associated with chemical logistics – the kinetic (transportation) and the static (storage).

The kinetic component requires a means of movement – a medium of transportation in other words, and there are five basic modes of conveying materials from one node to another. The Dow Chemical Company, for example, moves 50 per cent of its outbound raw materials, intermediates and finished products by road; nearly 25 percent go each by rail and marine transport (ships and barges); it utilizes pipelines to obtain some of its inbound supplies; and some outbound specialty chemicals take the aerial route.

The annual freight bill for the company is reported to be around US$2 billion, which is close to four percent annual revenue in 2007. It may have been much greater than that, if Dow Chemicals had not resorted to outsourcing some of its logistics operations to economize. Over 75 per cent of Dow’s shipments are within Europe and North America, while 20 per cent of the total involves crossing an international border, involving customs clearance.

Kai Minck from Corporate Media Relations of the global chemicals giant BASF tells Logistics Insight Asia that BASF spends about 2.4 billion euros (US$3.8 billion), which equates to 4.6 percent of total 2007 revenue, on logistics services. Quite like Dow, which had reined in expenses by outsourcing, BASF has also succeeded in optimizing its logistics costs by global coordination for procurement of air and sea freight, regional planning for the control of land freight providers.

It is also a known fact that road transport is costlier than rail which in turn is costlier than marine, when compared on a cost-per-unit-masstransported basis. In addition, the energy efficiency of transportation (comparison of ton-kilometers per unit fuel consumed) by inland waterways is 3.4 times greater than rail transport, and 8.7 times greater than road transport. It follows that with a rise in oil prices, road transport is impacted to a much greater extent than rail and waterways.

This, however, is true for the internal costs only. There are external costs as well – accidents, ecosystem damage, noise, air pollution, climate change, upstream effects, etc – and internalizing these is a subject of ongoing debate and discussion. When the total costs – internal + external – are considered, one may get a slightly different picture.

Congestion, rising fuel costs, and non-availability of skilled drivers are some of the challenges which beset logistics in general. Chemical shippers and 3PLs alike have been focusing on assiduous scheduling, reducing transportation distances, resorting to higher capacity utilization of vehicles, using more energy-efficient vehicles, and stressing on training programs for transporters, to tide over these challenges. And safety remains a paramount concern.

Elmar Ockenfels, Business Analyst at Chemion Logistik (logistics services provider and railway enterprise), says that rail freight traffic is expected to grow by over 40 percent between 2001 and 2015, eating into a part of the pie-share held by truck freight traffic.

By doubling up as a “stockist” for suppliers, Chemion takes away the burden of storage from its client, Degussa Chemicals, and by delivering on-demand to the purchaser, it lightens the inventoryhandling onus of Degussa’s clients. The so-called “rolling pipeline” concept puts Chemion in a vantage position just when chemical shippers have started choosing rail over road.

Moving on to static, storage is an integral part of logistics. Vendormanaged inventory and radiofrequency identification which have been implemented in discretegoods manufacturing, have also forayed into the chemical industry. Locating warehouses for chemicals has become as key a decision to be made as the organization of the transportation of the chemicals to and from them.

Strategic locations enable timely deliveries and thus prompt service, and reduction in transportation fuel consumption. Storage sites essentially act as cushions between the suppliers and the process industry, much like capacitors in an electric circuit or equalizers in wastewater treatment plants.

Bertschi, a Swiss intermodal logistics company, has entered into a partnership with Shell Chemicals in the UK, whereby Shell’s products – a slew of chemicals – are loaded onto Bertschi’s tank containers directly from the production tanks, and shipped to the customers on demand. IT systems bind the partners together and keep both of them in the know about the production, order and dispatch status.

REIN IN, RISE UP
Global management consulting company Accenture carried out a survey on the supply chain management of chemical companies around the world in 2007. The survey results indicate that 60 percent of the surveyed companies were “average” or “poor” in resilience planning, 58 per cent in rate management and freight payments, 52 percent in network sharing and facility management, 48 percent in transportation management, 47 percent in customer segmentation and 45 percent in inventory target setting and deployment.

Accenture claims, however, that there has been a significant improvement in performance compared to 2005, considering that the pace and degree of relocations to the developing countries (to save on labor costs) and to regions where easier availability of raw materials and proximity to the market yield conspicuous benefits, have accelerated.

The survey also concludes that only 11 per cent of the industries which participated, documented best practices in supply chain management, and translated them into required standard operating procedures.

Meanwhile, Arnold Allemang, Senior Advisor and Member of Board of Directors of the Dow Chemical Company believes that 50 percent improvement in response time to resolve in-transit problems, 20 percent reduction in excess product inventory, 20 percent container fleet reduction, and elimination of theft and human errors, can be achieved in the years to come.



As far as the burgeoning Asian market goes, Thomas Hoyer, the CEO of Hoyer, believes that non- Asian logistics service providers will still be in the forefront for some years to come, owing to the quality and safety requirements which they would be able to meet more effectively than their Asian counterparts.

Some players like Germany-based Lehnkering Logistics and Services, may not be eyeing the Asian market very keenly, as Janssen Georg, Business Development Manager informed Logistics Insight Asia, but TALKE Logistic Services, also from Germany, has entered into a partnership with market leader Kerry Logistics in China, and looks all set to make the most of the growth in the Chinese chemical industry. Meanwhile, there is ample room at the top for Asian logistics service providers keen on flexing their muscles.



And of course, all the 3PLs and shippers are growing increasingly conscious of carbon emissions and global warming and are attempting to improve the energy efficiency of their operations. For instance, Maersk Logistics, which works with major petrochemical producers and is the only supply chain provider on the Logistics Committee for the GPCA (Gulf Petrochemicals Association), the rest being liquid terminals and material handlers, started a carbon check service last year, known as the SupplyChain CarbonCheck.

With this service, calculations of carbon emissions are made door-to-door, and all transportation modes can be modeled for both normal and refrigerated cargo. When the findings are put into place, Customers typically enjoy lower carbon emissions together with lower overall logistics costs – thus benefiting the environment as well. The company is also working towards accreditation on obtaining carbon credits for its clients.

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