Chemical industry: Competing with the "China price"

Chinese producers are consistently offering materials that are cheaper than most American and European producers. This influx of lower cost supplies is threatening the welfare of some domestic plants. How are these American plants dealing with the issue? Voice your opinion on how you'd deal with it with our online poll inside the story.

By Bernie Price, Polaris Veritas Inc.

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(Editor's Note: There are two figures that accompany this article that can be downloaded in PDF format via the "Download Now" button at the bottom of this page.)

The climate of the U.S. chemical industry is now improving, but several black clouds remain on the horizon. A major one is the likely need to compete with the “China price.” This is the price at which Chinese producers can supply materials. It usually is significantly below the current manufacturing cost of most American or European plants.

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With stiff foreign competition and declining margins, some poorly performing U.S. manufacturers are, or soon will be, nearing a crisis situation. Many of them, seeking to be “lean” rather than efficient, have already slashed costs and weakened their manufacturing organizations. They might now feel that they have no alternative but to follow the herd, closing domestic facilities and transferring manufacturing capacity to the Third World.

This might be the only sensible survival route for some domestic companies faced with prohibitively high labor or raw-materials costs. However, a majority of American chemical producers can become much more competitive simply by applying a range of commonly available techniques to improve manufacturing efficiency. Such methods already are successfully being used at dozens, if not hundreds, of plants across the country.

As proof of their power, consider the success of the domestic semiconductor industry in fighting, if not slaying, the Asian dragon during the last 20 years. One of its underlying defenses was to strive for continuous improvement via techniques such as Six Sigma, and by fostering employee-wide participation in these efforts.

Operational effectiveness
To understand the potential for improvement, it first is necessary to measure current performance. While it has some limitations, a good metric is overall equipment effectiveness (OEE), which can be used for an individual piece of equipment, a process, an entire plant or even an organization.

OEE (%) = Process Reliability (%) × Current Operating Rate (%) × Quality RFT (%)
where:
Process Reliability = Time Available for Production ÷ Total Time Available × 100;
Operating Rate = Actual Operating Rate ÷ “Best Ever Demonstrated Rate” or Maximum Design Rate × 100; and 
Quality RFT = Salable First-Quality Product ÷  Best Demonstrated or Maximum Design × 100.

Many American and European plants operate in a “reactive mode” with an OEE of around 65%. This contrasts with two or three leading companies at 85% and world-class performance, which is an OEE of about 90%. Sites often can improve OEE by at least 20% over two to three years, which translates to 30% or more salable product for only the additional cost of raw materials and power. Why aren’t more plants operating at these higher efficiencies?

Simply stated, reaching world-class efficiency poses serious difficulties and mandates radical changes. It demands a sustained and integrated approach, incorporating the best technology, design and maintenance practices, along with improved operational discipline and employee empowerment. It requires a commitment to a program of systematic, continuous improvement and problem-solving. And it takes time -- typically three to five years.

Ten key points
Companies compromise efficient operation by failing to understand these crucial concepts:

1. Typical plants are full of defects that must be addressed while they are still small.
2. It is necessary to transform the organization into one that is focused on combating problems, not just dealing with them — i.e., one that strives for continuous improvement.
3. Even within the same organization, different plants might exist in one of four different, stable operating states (as discussed below).
4. Plant-based individuals will find it almost impossible to boost OEE (moving up the scale) without significant external assistance.
5. Improvement will require changing from a “command and control” style of management to one that offers employee empowerment, financial or other incentives, changed work practices and equal effort by individuals at all levels of the organization.
6. Process equipment does not fail according to the “bathtub curve” (Figure 1).
7. The necessary techniques must be implemented on a routine, scheduled basis, not just occasionally.
8. The maintenance program should be based on the actual condition of equipment and the consequences of failure, not on time or history.
9. Planning and scheduling of all activities results in efficiency gains.
10. It is necessary to document the “best practices” that are developed so they are institutionalized.

Given that for this type of efficiency-improvement project little can be done to upgrade fundamental design or chemistry, it usually makes the most sense to begin by concurrently working to boost two key and inextricably linked factors -- equipment reliability and operational discipline. They share several common elements that are described below.

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