The global supply chain has been a challenge for manufacturers in the chemical manufacturing industry for several years now, particularly with the onset of the pandemic. Material shortages, shipping delays, and other issues have made it difficult for businesses to reliably source supplies and to ensure that products reach customers on time. While these challenges have eased somewhat over the course of the last year or so, a majority of chemical manufacturers are still dealing with increased costs and disruptions. Careful supply chain management is therefore more important than ever in order to mitigate losses and disruptions.
Continued Supply Chain Disruptions
Transportation is a key issue for the chemical manufacturing industry. In the US, for example, while the situation improved in the second half of 2022, most chemical manufacturers find it to still be worse than it was before the pandemic. They continue to face lost orders and high prices, with many companies experiencing order cancelations from customers fearing their orders would arrive late or not at all. Many have increased their inventories to help compensate for supply chain uncertainty, taking on added warehousing costs in exchange for reducing risk. The vast majority of US chemical manufacturers have changed their operations in response to these issues, and over half have seen transportation costs continue to rise. Factors such as driver shortages, fuel prices, and extreme weather are all impacting transportation.
There are other challenges for the chemical manufacturing industry supply chain besides just the movement of goods, however. International trade has been impacted by global events such as the war in Ukraine and other tensions between countries, as well as changing tariffs and other costs. Some of the materials used in chemical manufacturing and the products made from them are sensitive to environmental factors such as temperature and moisture or can deteriorate over time, meaning that supply and stock quantities must be managed carefully to avoid losses and adding an extra dimension of risk to maintaining larger inventories. Material prices and demand can also fluctuate substantially, leading to higher and less predictable costs.
A More Local Focus
One way that chemical manufacturers and their customers are adapting to these supply chain challenges is by making more local purchases. While suppliers in other countries may offer better prices, greater variety, or other advantages, the increased costs and uncertainty involved in international purchases have made local suppliers more affordable and less risky. Today, customers in both the US and the EU are more likely to buy from suppliers located in their own region. Companies are also using a higher number of suppliers than in the past to ensure they have backup options if their primary suppliers cannot meet their current needs.
Collaborating with Suppliers
Another strategy chemical manufacturing industry businesses are using to adapt to current conditions is lead time–based contracts. Suppliers offer discounts for delivering at a longer lead time, allowing manufacturers to lower costs and giving suppliers more time to supply the product, benefitting both parties. Close communication and collaboration between supply chain partners can improve inventory management, lower costs, and make it easier to address unexpected setbacks.
An example of close collaboration between suppliers and manufacturers is sharing production schedules: some manufacturers are letting suppliers know their future needs so that the suppliers can plan their production accordingly. Suppliers benefit by having a more accurate demand forecast and manufacturers benefit from knowing their suppliers are likely to have the materials they need when they need them.
The Advantages of Industry 4.0
With so much uncertainty in the global chemical manufacturing industry, information is an invaluable tool. Tracking inventory levels, shipment progress, customer demand, and supplier stock availability allows chemical manufacturers to make the best choices possible in terms of purchases and production. Businesses are increasingly adopting Industry 4.0 technologies in order to better automate, monitor, and predict. Collecting and analyzing data using AI and machine learning provides a better understanding of what to expect from the market, letting manufacturers plan their inventories based on expected customer demand and supply availability.
Industry 4.0 technologies can also create digital twins and other models in order to build more accurate forecasts. Creating a digital replica of manufacturing facilities, warehouses, transportation channels, and more allows companies to see how various market situations can impact performance. Changes in demand, supply constrictions, and may other factors can be modeled and this data used for planning and decision making.
Manufacturers across sectors have been adopting and benefitting from Industry 4.0 technologies, but chemical manufacturers have been slower to join the digital trend. This is a missed opportunity for businesses in the industry as it can be difficult to create an accurate picture of the end-to-end supply chain without detailed data collection and analysis, especially when it comes to sharing and integrating data with other companies in the supply chain.
For larger companies, vertical integration is another way to make the supply chain more predictable and controllable. The business can have barrier-free insight up- or downstream into inventory quantities and costs, allowing for more accurate demand and supply forecasts and favorable pricing. This business structure can still be challenging, however, without adequate data collection, storage, and analysis. Siloed businesses and databases that don’t communicate with each other can hinder communication and make it difficult to obtain an accurate picture of overall business operations. The right software solutions and data sharing policies can have a significant difference on transparency and success.