OR/MS Today - April 2000

April 2000

Cyberspace

Chemistry Lessons

By ManMohan S. Sodhi

Everything is chemical in origin, even sexual attraction. And the web is ubiquitous. That must be why there are so many web-based solutions for chemical companies. But do you have the right chemistry with the solution you are considering?

Let us take a look at the chemical industry and the web-based solutions against the backdrop of supply chain needs. Unsexy for some, the chemical industry is worth about $1.6 trillion in the United States alone. And there are many ways a chemical company can use the web for commerce and to streamline the supply chain.

Rather than going with your consultant's fire-and-brimstone exhortation of "do it, else you will be Amazoned," it is worthwhile to figure out the supply chain rationale and the means of moving to the web. One way to reason things out is to use the buy-make-move-sell supply chain viewpoint.

Buy - Your purchases can be categorized into three different categories to consider web-based solutions:

direct (key raw materials that are usually contract-based),
indirect or "maintenance and repair orders,"
miscellaneous including office stationery, worker uniforms and furniture.

You can join exchanges like ChemConnect for the broad chemicals market or more specialized exchanges like Chemdex or SciQuest.com for the research chemicals and laboratory chemicals and PetroChem.Net for petrochemicals. You can have one-on-one solutions for your major suppliers using technologies like those from WebMethods for direct purchases. Or, you could use collaborative planning software from the planning tools vendors like i2, Manugistics and SAP.

Make - A big part of this is planning and hence, collaborative planning, in particular collaborative forecasting using the web. I wrote about this in my April 1998 and June 1998 columns. Collaborative forecasting with your customers can help you plan your manufacturing better. This is an industry where sequence-dependent setup times are quite common (so longer decision horizons for planning production lead to efficiency). Also, inventory costs can be a significant proportion of working capital which makes collaborative forecasting and supply chain planning valuable.

Move - You can move orders by using EDI or web-based (XML) messaging to your carrier. Your ERP system (say R/3 from SAP) can also generate the necessary transportation orders and transmit them. You can use transportation exchanges, but, being a chemical company, chances are that your transportation is being managed by a third party which in turn could use the web for efficiency and to manage and track transportation orders.

Sell - As with purchases, there are different types of sales:

partnerships or contractual sales to a few large customers,
small orders experimental/samples/emergency shipments,
sales to independently owned and operated dealers.
selling excess inventory, second-grade material and scrap.

Symmetric to the options under the "buy" category above, there are exchanges like ChemConnect, Chemdex, sSciQuest.com and PetroChemNet. More than that, you may be selling to companies who are not chemical companies. For instance, you may be selling to the auto industry, so you can join the procurement net that Ford and GM are putting up for their suppliers. Or you can join the more broad-based mySAP.com or tradeMatrix with your major customers. For your dealers and large customers, you can have customized solutions using extranets. You may even have a B2C (business-to-customer) site where your customers can configure their orders and purchase. You could transfer small orders to appropriate dealers to avoid the cost of fulfilling a small order while still capturing the customer order information and avoiding "channel conflict." Finally, you can provide service to your customer by using the web to monitor your customer's inventory and automatically generate orders using VMI (vendor-managed inventory) solutions like the hybrid web/Lotus Notes solution created and used by Shell Chemicals.

The largest benefit is lowered transaction costs and the ease of ordering. The larger reach using the web may result in lower prices for raw material purchases and (hopefully!) better prices on sales. Most likely, you may find prices for your main products drop while finding better markets and margins for your scrap and second-grade products.

The biggest risk to switching to web-based solutions whether exchanges or customized solutions or something in between is the lack of a coherent strategy. There may well be an over-emphasis on technology, especially with customized solutions, or an over-reliance on technology in case you go with an exchange. Certainly, as economics would dictate, you should expect lower profit margins. And you risk exposing your fulfillment problems to a larger customer base. So you have to make up for lower margins with improved efficiency, not just lower transaction costs.

Most current solutions are for reducing the cost and complexity of B2B (business-to-business) transactions. We will slowly start seeing more collaboration-oriented solutions which will be much more valuable for you, your major suppliers and your major customers in improving the supply chain. That is also where operations research has a role to play, both conceptually as well as technologically.

Dr. ManMohan S. Sodhi (MohanSodhi@AOL.com) is director of enterprise e-business strategy with Scient in Chicago and president of the Logistics Section of INFORMS..

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