Investing for Value in Chemicals

Nov. 15, 2002

Chemical companies are challenged today with conflicting objectives. They must save money by reducing operating costs, yet must spend money to invest in the future. The days of incurring huge cash outlays over an extended period of time on major initiatives such as multi-year enterprise resource planning (ERP) programs are no longer in fashion nor feasible.

Instead, chemical manufacturers are being increasingly cautious with their limited investment budgets and are targeting specific initiatives that promise quick paybacks and significant return on investment. But how do chemical companies decide which investments to fund?

As a chemical company begins to analyze its portfolio of initiatives, it should consider a number of criteria. A few suggestions on some implementation-related tactics follow.

1. Align with your business strategy, business model and future trends. Initiatives that do not support your existing business model, future business strategies or future trends should be scrapped immediately. For example, if your business strategy calls for growth through acquisition of new customers and increased volume sales, seek initiatives aimed at providing a differentiated approach to meeting customer needs.

However, that initiative would not be as attractive to the bulk chemical producer that has customers who make purchasing decisions solely on product cost and availability. Investments that allow savings in purchasing, manufacturing or distribution costs are a lot more attractive for a commodity chemical manufacturer.

2. Contribute to shareholder value. Chemical executives need to be certain the initiatives they fund will add value. Shareholder value can be positively influenced by initiatives that promote revenue growth, increase operating margin and/or improve asset utilization.

By gaining an understanding of the drivers and levers that impact these measures, you will be able to make decisions to fund programs that contribute to shareholder value and ultimately lead to higher stock prices. For example, a project aimed at production planning and scheduling process automation likely will lead to cost reductions, which in turn will lead to margin improvements and improve shareholder value.

3. Provide a known benefit in a short time period. Consider starting your improvement program with "easy"-to-implement projects that require minimal resources and can be accomplished quickly.

Also, introduce and embrace the concept of 100-day wins ," that is, take a modular approach to implementing new and large initiatives. Rather than implementing the full suite of a project lifecycle management (PLM) system, consider rolling out the functionality in "chunks."

Deliverables should be scheduled so tangible outcomes and benefits are delivered every 100 days. These short-term benefits and cash savings can be used to fund future project phases.

4. Increase your flexibility options. Evaluate initiatives with an eye toward providing options for further optimization and growth. For example, an initiative targeted at upgrading your existing IT infrastructure should consider ," continuously ," both business growth prospects and the possibility of future acquisitions as they plan the sizing work.

5. Simplify/standardize existing processes and leverage them across products or divisions. Initiatives that provide common approaches to work performance and that can be leveraged across businesses provide significant value. By implementing a standard process across an enterprise (with minor variations to address unique divisional needs), you will reduce cost and have a positive effect on customer impacts.

In addition, each implementation minimizes the end cost and needed resources. Although financially justified, these initiatives often face internal resistance because they require both individuals and entire departments to discard old processes and embrace new ones.

Lessons learned

Chemical manufacturers also can learn much from the mistakes other companies have made in embarking on performance-improvement programs.

Involve all impacted stakeholders in the change process. The majority of initiatives fail as a result of people-related issues. Make sure communication plans are in place and that all affected employees are involved in the process. Seek buy-in early.

Ensure initiatives support a clear business case with measurable results. Initiatives involving cost savings often are easy to quantify, while those promising improvements in customer retention are more difficult to assess. Many initiatives have mostly intangible benefits and might have to be justified as "strategic" and "must do."

Show visible progress. Establish momentum early. Kick-start your improvement program by implementing initiatives that require little effort but show measurable results. A series of early "victories" signals management's desire and seriousness in making improvements.

Chemical companies can begin to manage the often-competing objectives of saving cash vs. spending money by selecting the right sets of initiatives to pursue and being mindful of implementation pitfalls. CP

Portugues is a senior manager in Deloitte Consulting's Stamford, Conn., office. He can be reached at (203) 905-2654 or at [email protected].