Digital in chemicals: From technology to impact
What
are the major opportunities from digital in chemicals, and what must leaders do
to capture them?
There is a lot of excitement about the
potential of digital in chemicals, just as there is about digital across
society in general. We believe that digital will have a significant impact on
many areas of the chemical industry, with the potential to change value chains,
lead to higher productivity and more innovation, and create new channels to
market. Given all the excitement about digital, it is essential to separate the
substance from the hype and carefully evaluate what this will mean for the
industry.
Let’s take a step back
and review the changes that are underpinning digital. The generation,
collection, and storage of data have never been so cheap, and this is happening
just as computational power is reaching unprecedented heights and at lower
costs. At the same time, the digital mind-set of society has expanded, spurring
a willingness to engage with digital technology as well as much higher
expectations for the quality of user interfaces and level of service.
The combination of
these factors has opened up new avenues for the chemical industry. Companies
can use advanced analytics to extract management-relevant information from the
large amounts of unstructured data that they generate. This information can
then be used to improve how plants are run and to make better-informed and
speedier decisions across the full range of a chemical company’s business
processes. In the wider world, the chemical industry is an essential supplier
to myriad other industries, and so the ways these industries are being changed
by digital is in turn translating to opportunities and challenges for chemical
companies.
The key issue for
chemical-company leaders is to understand more clearly where the impact of
digital will hit the industry and what it will imply for their companies.
Drawing on extensive work with leading chemical companies, proprietary
research, and our digital know-how, we describe in this article the interplay
of digital with the chemical-industry value chain and its subsectors, how
digital could affect the industry’s business processes, and the steps that
industry leaders need to take.
How will digital affect the chemical industry, and where
can the biggest impact be expected?
There are three main
ways in which digital will affect the chemical industry. The first is using
digital-enabled approaches to improve companies’ business processes, which we call
functional excellence. Second is the potential for digital to affect demand
patterns in end markets, with implications for the chemical industry’s value
chains. The third is where digital developments lead to changes in the business
models through which chemical companies capture and create value for customers.
Reaching a new level of functional excellence
Chemical companies’
business processes, including manufacturing, marketing and sales, and R&D,
present opportunities for performance improvement based on data capture and
interpretation. Functional excellence has generated significant productivity
improvements over the past two decades. Digital provides the means to unlock a
new level of productivity enhancement.
Manufacturing
operations present one of
the biggest and most readily accessible areas of opportunity, and this cuts
across all segments of the chemical industry, from petrochemicals to
pesticides. We see the potential for a three- to five-percentage-point
improvement in return on sales from employing digital in production operations. Most chemical plants continuously
generate an enormous amount of data but discard most of it. Instead, managers
should collect the data and interpret it to reveal ways to achieve higher yields and throughput, lower energy
consumption, and more effective maintenance. For many companies, these are potentially easy wins
that can be achieved using existing IT and process control systems, while
companies that expand the types of data they collect may be able to capture
further gains.
The contribution to
profits can be substantial. A major polyurethane maker applied advanced
analytics to half a billion data points that it collected from the main
production process at one of its plants. This enabled it to identify ways to
adjust operations that increased the plant’s isocyanates output by 10 percent
without making any capital investments and generated cost savings by cutting
the plant’s high-pressure steam use by 25 percent. A leading specialty-chemical
company went a step further at one of its main plants: it used advanced
analytics to model its production process to a new level of accuracy, and then
used the model to provide detailed, real-time guidance through a specially
designed app for the plant’s operators on how to adjust process parameters to
optimize performance. Just one month into the implementation, output at the
plant—already the company’s most profitable—increased by over 30 percent and
yields increased by six percentage points, thus saving on raw materials, while
energy consumption fell 26 percent.
Besides this
advanced-analytics-based opportunity, there are other digital-enabled advances
that may create significant value in the manufacturing operations area.
Examples include the use of automated guided vehicles, such as self-driving
forklifts, and the use of robots to fill big bags. These advances should reduce
costs and improve process stability and safety performance. At the same time,
deploying an automated and centralized plant performance-management system
should make it possible to steer operations better and to react faster when
corrections are needed.
For many subsectors of
the chemical industry, this opportunity extends beyond production to the
entire supply chain, including inbound and outbound
logistics and warehousing. Advanced analytics will make possible more accurate
forecasting, leading to improvements across the entire sales- and
operations-planning process. This will also make possible better scheduling of
batch production, shorter lead times, and lower safety stocks with a higher
level of flexibility. Integrated “no touch” ordering and scheduling systems
will help to stabilize production planning even further.
Sales and marketing also offers major value-creation potential through digital. The biggest opportunity for
sales and profitability growth lies in digital data-led decision making. We
estimate that digital-enabled initiatives in marketing and sales could improve
the industry’s average return on sales (ROS) by two to four percentage points.
Specialty chemicals could see higher ROS gains in the range of three to five
percentage points, with chemical distribution seeing one- to
one-and-a-half-percentage-point gains.
Digital initiatives in
marketing and sales include applying advanced-analytics-enabled pricing
systems, generating growth opportunities from data, and using algorithms to predict
churn at the individual-customer level and then suggesting countermeasures to
the sales force. The impact of these initiatives can be significant. One
leading global nutrition player used internal and external data sources to
create transparency at a detailed customer-product segment level. Advanced
analytics then scanned these millions of lines of data to develop suggestions
for additional sales to individual sales reps, with the suggestions delivered
via an easy-to-use app. The company saw 8 percent growth in pilot markets,
after experiencing no organic growth in the previous five years. A large
specialty-chemical company used advanced analytics to reset prices for hundreds
of thousands of product-customer combinations in seven core countries, based on
individual risk and willingness to pay. By combining analytics, capability
building, and change management, the company was able to achieve price
increases of 3 to 7 percent, compared to 1 percent increases in previous years.
The second area that we
believe will gain importance is customer experience and digital go-to-market channels. Our latest proprietary research
shows that 85 percent of B2B chemical purchasers would prefer digital channels
when reordering a product rather than interacting with a salesperson. Combining
a digital channel with process digitization will create an improved customer
experience, while lowering cost to serve. Again, how much of that potential
will actually become bottom-line impact will vary, depending on the competitive
situation in specific chemical markets.
We also see significant
opportunities in research and development to create
higher-value-added, higher-margin products at a faster pace, in particular in
specialty chemicals and crop-protection chemicals. Chemical companies will be
able to use high-throughput optimization to develop and adjust molecules that
offer more value. They will also be able to deploy advanced analytics and
machine learning to simulate experiments, to use digital’s predictive power to
systematically optimize formulations for performance and costs, and to
data-mine information available from past successful and failed experiments.
Not least, they will be able to identify the best possible resource allocation
to enhance the performance of R&D teams and the innovation pipeline. Many
of these practices are already established in the pharmaceutical industry but
were largely unaffordable for chemical companies. With the emergence of
inexpensive computing power on a massive scale, this is likely to change.
Digital-led disruption in end markets for
chemicals
Changes caused by
digital have the potential to remake some if not most of the value chains and
end markets that chemical producers serve, and this in turn could lead to demand-pattern
shifts.
Take the automotive
value chain. Digital is obviously behind the rapid advances being made in the
development of self-driving cars, but the consequence for chemical producers
may not be immediately obvious. One perhaps unexpected effect on chemicals
demand comes through the enhanced traffic safety that is promised by
self-driving cars. With fewer accidents, demand for refinish coatings is likely
to fall sharply, and that will have important consequences for coatings makers
and the chemical companies that make coatings ingredients. Should shared self-driving cars displace individual car ownership and
reduce new-car demand, then there will be
further and much broader consequences for chemical demand in one of the
industry’s major markets.
Digital-enabled
developments in agriculture such as precision farming could also affect
chemicals demand. Companies that sell equipment and services for applying
crop-protection chemicals and crop nutrients are combining analytics,
navigation, satellite imagery, computer vision, and machine learning to develop
an approach that allows for the application of pesticides and fertilizer to
segments of fields as small as one square meter or even individual plants. If
their endeavors are successful, the demand for agricultural chemicals could be
reduced significantly.
The migration of commerce to online platforms may also touch demand for
chemicals. For example, groceries are increasingly being purchased via online
platforms, with consumers making their purchase decision without seeing the
physical product—with possible consequences for packaging, the petrochemical
and plastics industry’s single largest end market. As the look and feel of the
packaging would become less important in shaping a purchase decision, this
could prompt changes in the packaging industry. While decorative packaging
would decline in importance, more functional aspects of packaging design could
gain importance, such as designs that can fit more packages in a delivery truck
or that include a cooling mechanism to prevent spoilage during delivery. Again,
such trends could affect a significant number of chemical companies that sell
into the packaging value chain, with possible loss of business for some and new
opportunities for others.
One further
digital-enabled area that is opening up opportunities for chemicals demand is
3-D printing, also referred to as additive manufacturing. The market for
polymers and chemicals used in additive manufacturing is growing at 30 percent
a year and is set to rise from $0.7 billion in 2015 to $2.5 billion in 2020. It
is possible the market will evolve toward tailored polymers and chemicals for
different additive manufacturing systems, which could open up innovation and
commercial opportunities for companies making photopolymers, high-performance
thermoplastics, and other chemicals used in these processes.
Digital and new business models in chemicals
Will digital change the
ways that chemicals are sold and distributed, and as a consequence, how value
will flow? Will we see a shift from sales of products to sales of services and
solutions? Will attackers emerge that disintermediate established producers
from their customers, as we have seen with B2C platforms in other industries?
Different segments of the chemical industry will have different answers to
these questions: as a general statement, while crop-protection chemicals and
some specialty-chemical segments are at risk of business-model disruption and
some chemical distributors see themselves as potential actors in future
possible disruptions, petrochemicals will probably be less affected.
First, business models
that remain connected to the product in use might provide a substantial
opportunity in some areas of the chemical industry—for example, through systems
that monitor chemical applications in industrial processes. One example drawing
a lot of interest is catalysts, where process catalyst manufacturers are
increasingly moving toward “performance pay” models, instead of simply selling
the product. Staying connected to the catalyst in use allows the catalyst
manufacturer to optimize the production process of its customers and presents
the opportunity to build a large and valuable knowledge base that can be used
to improve catalyst use across its customer base and charge for the service. A
number of such models have been in development for more than a decade in parts
of the specialty-chemical industry, and there is the potential for an
acceleration in their adoption linked to digital. But such approaches will not be
applicable for all of the chemical industry: the main focus is where a
specialty chemical does a particular job, such as a catalyst or water-treatment
chemical.
Second, opportunities
for intellectual-property-based business models that generate licensing or
consulting fees appear to be emerging. Under this model, a company could charge
a fee for providing guidance on how best to use its product, or it could
license production of a proprietary molecule to another producer. But examples
so far appear to be isolated and as yet unproven.
Third, data- and
analytics-led service models are emerging in targeted segments. In agriculture,
a company might combine geological, meteorological, and geospatial data with
its knowledge of seed, fertilizer, and crop-protection compounds, and rather
than selling these inputs, it might seek payment based on the yield or profit
that the grower achieved. Other chemical-industry segments that have a strong
B2C component in their business system might be facing a similar development.
On the other hand, a
number of models that are receiving substantial focus in other industries are
much less likely to have impact across most of the chemical industry. Building
platforms as channels, which connect third parties, is well established in many
industries. But this may be difficult to put in place in the chemical-industry
environment where the number of suppliers is limited, their names are known to
potential customers, and many chemical producers have proprietary know-how that
they will not be willing to share. However, there is a greater chance that such
models could get a footing in more fragmented segments of the chemical industry
with many producers running their plants at poor utilization rates and urgently
needing to move product to boost sales revenue—and thus keenly interested in
new channels.
Pursuing digital transformations in chemicals
Based on our experience
working on digital with leading players in chemicals and across other B2B
industries,2we see that successful
approaches to digital address the following six requirements:
·
Create a clear target
picture. Senior management needs to define where
it sees the company in the future with respect to digital. This needs to happen
centrally, and it cannot be pursued bottom-up through the business units. The
target picture needs to answer these questions: In which ecosystems and at what
position in the value chain do we want to play? What is the greater goal:
operating efficiency or increasing revenue? What are the focus areas across the
business model, the customer-facing front end, products, and operations?
·
Quantify the impact. Digital needs to be a business-led topic. Digital
tools such as advanced analytics, automation, and customer centricity should be
aimed at solving specific business topics, such as entering new markets;
increasing plant yield; improving on-time, in-full performance; reducing churn;
and increasing margins. This step should answer the following questions: What
value pools do we see? What initiatives are there, what impact do we aspire to,
and what are the related costs? How should we prioritize initiatives based on
costs and benefits?
·
Define the required
capabilities. While traditional chemical and
management skills will still be important, new skills will be required that are
not traditionally found in chemical companies. Some of these will require
hiring new talent, and some will require training existing employees. What
these skills are will depend on the target picture and the prioritized business
cases. This effort needs to answer the following questions: What capabilities
and talent pools do we need to execute our digital initiatives—including, for
example, user-experience design? How is capability building conducted for the
broader organization? What is our build-partner-buy strategy for technologies?
·
Design the right
organization and governance. Simply
adding new digital talent to an existing and often engineering-focused
organization will probably not be the recipe for success. Digital does not come
only in the form of apps, algorithms, and tools but also in a new way of
working that brings a bias for action, rapid testing, iteration, and often
failure. Failed digital transformations are typically not the result of legacy
systems but of legacy thinking. The organization
and governance need to be adapted to allow new digital approaches to flower. A number of questions must be answered: Which
capabilities do we need to own, and which can we get access to through
partners? Where do we base
the new capabilities—within a central digital organization, or
decentralized across the business units? What organizational structure do we
need over time? What is the role of the corporate group as the central unit?
Should a digital center of excellence be set up, and how? How does the digital
organization collaborate with other units and transformation programs? What
authority does it have?
·
Build the road map on an
agile approach and mind-set. Traditional
technology investment and strategy often relied on big bets, which frequently
took years to realize. Leaders today are seeking to prove or disprove concepts
in months—not years—creating fundamentally different risk profiles for the
journey than might be previously conceived. Among the important questions to
answer are the following: Where in our organization (or ecosystem of partners)
do we have a truly agile development capability? How will our capabilities,
organization, and governance structure reinforce an agile approach and mind-set?
·
Develop a digital culture. While organization and governance provide the
supporting framework, digital also needs the right culture and climate to grow.
It is therefore important to think through in advance how to help a digital
culture to take root and not only take these steps when organ rejection is
setting in. What contextual setup is required for the digital organization to
prosper, including values, leadership style, and workplace design? What key
performance indicators should be used to measure digital cultural development
and digital maturity? How do we communicate with the workforce and with
external stakeholders such as customers and suppliers?
Digital in the chemical
industry represents a very substantial opportunity, but companies need a strategy
to succeed in this new world. Changes are starting to happen and at a pace that
is unprecedented, but the impact of change is uneven and significant
uncertainty exists. Strategy is the art of making hard-to-reverse choices ahead
of time and in the face of uncertainty to create and capture economic profit.
Industry leaders should not shy away from this task but instead develop clear
digital strategies based on an understanding of where and how impacts will
occur in their sector.
Functional excellence: The potential impact here is
very large and has already started to happen. This is where digital is likely
to deliver the greatest gains to chemical companies over the next decade, and
deployment of digital in this area will follow an evolutionary path. Companies
that want to be leaders should be implementing now and rigorously pursuing
opportunities to stay competitive.
Disruption in end
markets: In certain end
markets, digital will trigger revolutionary changes that will be rapid and
large-scale. Senior chemical management teams need to be at the ready and
should start today to look out for possible risks and opportunities. If major
disruption is on its way, every additional day of preparedness that can be
captured will be of critical value.
New business models: The impact is likely to be
targeted to very specific industry segments and unfold in a more evolutionary
than revolutionary way. Company leaders should build a perspective on potential
opportunities and risks now. This perspective should be revisited often to
monitor leading indicators of change.
What is clear is that
the spread of digital will create opportunities for successful early adopters
of the new digitally enabled approaches, particularly where these approaches
can find a good fit to their specific segment of the industry. Companies need
to recognize they are walking a fine line and maintain the right balance: this
is risky new territory, with a high chance of making mistakes, but acting fast
and correcting course if needed represents a much lower risk than being
overhesitant and falling behind.
There is ample evidence
that many leading companies are working hard to define and implement new
strategies where digital plays a fundamental role. While it would be hard to
claim that any chemical company has carved out a significant competitive
advantage based on digital at this point, that is likely to change, and it is
going to be sooner rather than later.
By Alexander Klei, Marco Moder, Owen
Stockdale, Ulrich Weihe, and Georg Winkler
July 2017
http://www.mckinsey.com/industries/chemicals/our-insights/digital-in-chemicals-from-technology-to-impact?cid=other-eml-alt-mip-mck-oth-1708&hlkid=e44e59c2facc4858ae80ed28d1b9f6db&hctky=1627601&hdpid=ebf56abe-45a2-4fd9-b1eb-4ffe79b95ea0
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