By Gaurav Gupta
European share of chemical production has been steadily decreasing, but there are opportunities to be more competitive
The global chemical industry is a more competitive marketplace than ever before. For European manufacturers the high cost of feedstock and energy prices in relation to the US, and high labour, capital, and SG&A costs in relation to China and other low-cost producers create significant headwinds. The good news is that there are also significant advantages to manufacturing in Europe and opportunities to enhance the cost competitiveness of the European producers.
So if the production is here to stay what have European business being doing and what more can they do to continue to stay competitive?
What can European producers do to increase competitiveness
In addition to pursuing continuous innovation and geographical expansion to create strategic advantages, most businesses have also focused on rationalization and restructuring as ways to address overcapacity and reduce costs. The businesses that will emerge as the leaders in the space will be the ones that are able to implement these strategies most effectively.
In the past few years, many companies have engaged in some form of restructuring and rationalization of their European operations, in an attempt to reduce overhead and fixed costs. Examples of this can be seen across the European chemicals industry such as Lanxess’ on-going “Let's LANXESS again” programme, BASF’s recent reorganisation of its paper chemicals business in 2014, and AkzoNobel’s ongoing company-wide restructuring.
These efforts are having an impact and many organizations are looking for ways to do even more. In this article, we will discuss some ways that companies can maximize the value from their restructuring and rationalization efforts by combining these change initiatives with breakthrough operational performance improvements.
Increasing the value from rationalization and consolidation
As volumes decrease and new technology come online many businesses are finding themselves with low utilization on existing assets. Rationalizing and consolidation of production are common across the industry. The savings in overhead and fixed costs with reduced complexity of the supply chain are obvious and significant. These savings can be further amplified through operational improvement efforts that can lead to:
More aggressive rationalization by creating excess capacity at the receiving facilities, or additional flexibility to consolidate products that may otherwise not be possible
- Further reduction in post rationalization costs by minimizing the need for additional assets and labour at the facility that will be receiving the additional volume
When developing strategic consolidation plans, the limitations on what can be achieved often come down to the assumptions being made around productivity and capacity at the receiving facilities. Improvements through capital and new technology can, of course, relieve some of the constraints. However, by making focused productivity improvements part of the strategy, businesses can uncover new options and avoid capital expenditure. While this requires a thorough understanding of the opportunities for improvement and a high degree of certainty around what improvements can be made, by incorporating this effort early in the strategic plan with the targeted goal of creating capacity and flexibility you may be surprised at what is possible.
As an example, in businesses with a large number of different products, consolidation plans could be limited by the excessive time lost to changing over between products. By planning for and incorporating improved changeover and product turnover times, this limitation can be stretched.
Finally, by improving productivity at the receiving facility, the impact of the rationalization effort can be enhanced by realizing improvements in labour costs once the rationalization has been completed. Planning for and realizing these improvement pre-consolidation rather than hoping for them post-rationalization can have a significant value on the improvement you can see from these efforts.
Don’t just benchmark – seek to understand the entire potential when restructuring
In order to reduce overhead costs, restructuring efforts have become a core part of many competitiveness plans. Benchmarking against other divisions, segments, competitors, or industries has been used to help identify gaps and areas where opportunities exist. For example, our SG&A costs are at 8% of sales compared to 7% at the competitors so we should be able to make improvements. While this method can show results, it also obscures the unique potential in your business.
Whilst benchmarking and striving towards the “best-in-class” is a good way of setting targets, its effectiveness is reliant on the quality of the benchmark, and it leaves a lot of opportunity on the table. For example, let’s assume that our organisation is already the best-in-class. Who do we benchmark off and how do we set our targets? Does this mean that there is no opportunity to improve?
By looking internally at the process or business department and performing a “zero-based” analysis where the theoretical best can be modelled, an organisation can uncover all of the opportunity that exists. This is particularly important when restructuring since frequent incremental steps are costly and disruptive. By understating the theoretical opportunity, you can make the best decisions around right-sizing the organization.
The strategies being followed by the leading businesses in Europe are paying dividends and the competitive landscape is forcing improvements in costs. However, much more is possible when combining breakthrough operational improvement with the rationalization and restructuring efforts that are currently underway in many businesses. By planning for and making these improvements early in the change process the ongoing efforts can be significantly enhanced. Current methodologies for understanding the level of improvement available are limited in scope and reinforce the belief that most of the gains have already been captured. By taking a radically different approach and developing an understanding of the full theoretical performance of your business, you will be surprised at how much the impact of your strategic plans can be enhanced by these performance improvements.
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