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Article | December 14, 2018

Operational Challenges in a Chemical Company: Key Solutions

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14, 2018

Operational Challenges in a Chemical Company: Key Solutions

At a Glance

  • Despite macro factors such as rising interest rates and impact of tariffs, Chemical industry in the US is expected to increase production in 2019.
  • Per estimates by the American Chemistry Council (ACC), chemical output in the US is expected to rise from 3.1% in 2018 to 3.6% in 2019.
  • Higher production translates to higher capacity, and production managers need to equip themselves well to brace the changing environment.
  • Technology is one such critical area that modern-day production managers see as a key enabler to ease their growing challenges.
  • In chemical industry, raw materials weigh in close to 50% of the cost of production. With the US government proposal of hiking tariff by 25%, the cost of raw material from China to US could go over $3B.
  • A sophisticated business application (ERP) will help Plant/Production Managers keep up with the challenges and track key metrics such as inventory turnover and manufacturing throughput to optimize cost of production.
  • Noncompliance to GHS Labeling standards could lead to penalties of up to $127,000. Production managers will benefit from integrated labelling solutions to streamline shop floor activities.

Production in modern-day chemical companies involves a plethora of unforeseen challenges - all the way from raw materials and their procurement, to quality, fluctuating demand, tariffs, dwindling margins, capacity and resource planning, and more importantly, confidentiality of formulas.

Regulatory and compliance needs are relentless and require utmost care operationally. Off late, the tariff imposed by the government adds additional stress on the margins and supply chain.

Tariffs require you to leverage your resources more efficiently to achieve better margins while promoting trade. As a result of tariffs, you are now required to explore local near-shore vendors that can fulfill your organization’s supply needs within the constraints of your price. Despite the short-term instability, in the long run this is only good for the growth of your local ecosystem.

Necessity is the mother of invention. Due to the changing market dynamics, Plant Managers are now forced to engage in technology alternatives that will help realize sustained efficiencies in people, process and technology. Regardless of these inherent challenges the responsibility of the Production Manager to keep the plants production moving forward without any hindrance takes precedence and requires deep industry knowledge, relentless watch and extreme skill.

The job roles of Production Managers have only grown in complexity, demanding higher amount of control and planning within supply chain. They operate in an environment which is seeing heightened competition, higher expectation from customers, stringent regulatory norms, coupled with volatile raw material price that stresses margin. They ought to comprehend the multifaceted relationships between the unpredictability of raw materials, optimal utilization of operating units and highly fluctuating demand from customers. The industry relies on technology solutions to optimize planning and production schedules.

Production Scheduling is a quintessential function of a Production Manager. Scheduling is complex and needs to take into account numerous elements such as -

  • Planning of resources
  • Continuous production
  • Optimal asset planning
  • Fluctuating demand
  • Tighter lead time
  • Procurement delays
  • Outages
  • Quality check
  • Recalls, etc.

This article examines 5 key challenges faced by Production Managers to optimize planning and ways to mitigate them.

01. Fluctuating Demand for Products

Per Institute of Supply Management (ISI), the industrial sectors in the US are expected to increase capital spending from 8.7% in 2017 to 11.4% in 2018. E.g. the housing sector is forecasted to increase capacity from 1.2M units in 2017 to 1.31M (2018) and 1.34M (2019). Per ACC every new house contributes on an average $15,000 to the chemical industry. Per estimates by the American Chemistry Council, chemical output in the US is expected to rise from 3.1% in 2018 to 3.6% in 2019.

3.7%

Unemployment Rate

With business confidence growing and unemployment dropping, the US economy is set to hum, if not roar, through the rest of 2018.

- Bureau of Labor Statistics | 2018

2.7%

Capital Expenditure

The capital spending in the industrial sectors is expected to rise by 2.7% in 2018.

- Institute of Supply Management (ISI)

With the economy picking up, below are the estimated earnings from some leading chemical manufacturers in the US.

Companies Headquarters Expected Earnings growth in 2018 Top product
Kronos Worldwide Dallas, TX 41.1% Titanium Dioxide
Westlake Chemical Houston, TX 25.7% Vinyls and Olefins
Kraton Corporation Houston, TX 30.6% Polymers
Albemarle Charlotte, NC 16.9% Lithium
Celanese Irving, TX 20-25% Acetyl intermediates

While these developments position chemical companies in a bright spot, not all is bullish. Such growth intensifies competition among peers to capture market share and innovate to differentiate their offerings. The race for differentiation and providing niche services to gain customer loyalty results in higher operational complexities. Production Managers now handle unprecedented demand from customers, tight deadlines, and overstressing resources.

Production Managers need an air-tight strategy to meet such sporadic demand and ensure business continuity. A sophisticated full-function Enterprise Resource Planning (ERP) software is equipped to handle such strategies and ensure complete visibility and control over the entire supply chain and underpin informed decision-making.

Some of the critical elements in production planning and control includes Master Planning, Production Scheduling, and Production Control (see below).

This is an on-demand economy. Production managers often run into situations where customers increase sales order quantities on the fly. Though this is good from a sales perspective, it adds immense pressure on Production.

Let's take an example of a Chemical plant:

  • Your customer calls and asks to update order quantity from 5000 to 10000 pounds.
  • To meet this demand, the production manager needs to be able to respond quickly by evaluating resources at hand and scale batch sizes in the reactor.
  • If your order management system is designed well, your customer service can update the sales order quantity and set the priority on the order to high.
  • Order priority can be designed to consider criticality of demand, customer categories - A, B, C etc. or even your relationship with your customers. This signals your MRP system to issue an updated production order to reflect the higher batch size.
  • The production supervisor needs to review production schedule and adjust resources as required to accommodate this expedited demand.

Such situations are quite common at a chemical company. Plant Managers recognize the need for an integrated ERP system to manage communication between all functional areas seamlessly.

The production control module within Microsoft Dynamics 365 offers powerful Gantt Charts to visually represent the flow of production, map resources, checks on material availability or inventories, utilization of machineries, etc., helping PMs to control and optimize the production plan and make informed decisions. Gantt charts within Dynamics 365 for Finance and Operations provide a uniform view of scheduled activities within a defined time interval including:

  • Scheduled jobs from production orders – Gantt charts allow the production managers/schedulers to modify production plans either through a drag and drop mechanism or from the menu option. Job scheduling indicator on a Formula or a BOM needs to be turned on in order to schedule jobs for production.
  • Jobs from planned production orders – These are planned production orders that are to be scheduled. Scheduling will only be in place when the production plan converts to an actual order and the production order is in a scheduled status.
  • Hourly schedules of all jobs – A calendar that has active working times is a prerequisite for all production activities. Scheduling can be done on hourly timelines if needed and gives you the true picture of job status for the day such as “jobs that have started”, “jobs that have ended”

The Gantt Chart in Microsoft Dynamics 365 provides a view of production orders organized by order and resources respectively. Production Managers get a real-time pictorial view of a production schedule that displays scheduled production orders, material availability as well as resource capacity within the organization. These screens provide the ability to drag and drop and change schedules as deemed required.

View of the resources available or engaged -

02. Raw Materials - Volatility in Commodity Prices

Chemical manufacturers use crude oil and natural gas byproducts as the base for their product, which accounts for about 50% of the production cost. Oil and gas are extremely volatile commodities, and their pricing is subject to a multitude of macroeconomic factors, including geopolitical risks, OPEC member nation policies, sanctions, currency fluctuation, etc. – which chemical manufacturers have no control over.

US was ranked amongst the most expensive destinations to manufacture chemicals, but ever since the accessibility to extract shale gas in 2014, the country’s indigenous chemical companies has had an edge considering lower energy cost and raw material.

25% tariff hike effective January 2019 will impact nearly 1,363 chemical and plastic productsWith raw materials weighing in about 50% of the cost, it is important for Chemical companies and their Production Managers to be vigilant of the cost of raw material. China is a key exporter of major raw materials to the US, and with 25% tariff hike effective January 2019, it will impact nearly 1,363 chemical and plastic products valued at about $13B in 2017.

An effective ERP solution will help Plant Managers keep track of key metrics such as inventory turnover and manufacturing throughput to optimize cost of production. As ERP tracks data real-time, it offers the following benefits to help minimize the effect of price fluctuation in raw material:

  • A modern-day ERP system is best suited to give Production Managers an effective and transparent solution to track actuals and accordingly account for cost of goods sold, revenue, margins, cash flow, etc.
  • For organizations with cross-geographic manufacturing locations, ERP can be used to analyze the arbitrage available in low cost manufacturing destination and offset it with any other high cost location. This helps in finding newer efficiencies to ease the strain on high cost areas.
  • It can help analyze order volumes, budget for cost, and arrive at better pricing and production planning.

03. Hazardous Chemicals & Associated Compliance

Supervising the production of hazardous chemicals requires highest attention for safety, and this isn’t a unique cite for a Production managers. Safe handling of chemicals is not only a regulatory compulsion but also a moral obligation on part of chemical companies. Labeling is one of the major operations in the production routes and would need availability of a functioning label printer on the production floor to complete the packaging step in production.

Noncompliance to GHS standards can attract monetary penalties to the tune of $12,600 per violation, while the more serious ones could range up to $127,000. It is also detrimental for your company reputation.In the US, companies dealing with hazardous chemicals including manufacturers, distributors, transporters and end-users must adhere to the Globally Harmonized System (GHS) label compliance requirements.

Production managers must ensure that there are systems and technologies in place to schedule shop floor activities diligently to avoid two or more reactive chemicals to come in close contact during staging. This brings out the need for a labeling solution that prints properties, characteristics and batch information of the chemical such as batch/lot number, test specifications, etc.

Hazardous chemicals need to be distinctly marked for readability and cautioning. Labeling applications such as Integrated Chemical Management (iCM) within the Microsoft Dynamics 365 are capable of addressing regulatory requirements that require embedded workflows with Production. iCM not only provides label management (including private labels) as per GHS standards, but also includes Safety Data Sheet authoring and management. iCM reduces human error in printing labels during a production run as the system automatically knows which product labels to print during the process.

04. Stringent Quality Checks

Quality checks and recalls are key activities that have a long lasting impact on the reputation of the organization. Chemical industry is subject to stringent regulations that requires heavy documentation across processes such as production, use of raw materials, packaging, etc. Such documentation improves visibility in the supply chain and enhances traceability of the product in an event of an inquiry, recall or audit.

Chemicals are used as a base in multiple industries such as automotive, paints, food & beverage, appliance, electronics, packaging, textiles, cosmetics, toys, etc. The graph below captures an indicative number of recalls across industries in 2016.

A closer look reveals the reasons for such recalls. In the IT and Electronics industry, faulty batteries was one of the most cited reasons for the recall. The medical industry attributed voluntary recall of stimulants due to hazard concerns as one of the reasons, while the chemical industry blamed faulty packaging/labeling chemicals for the recall.

Microsoft Dynamics 365 has the ability to track and trace products at a batch or lot level from the source to the end user. The application can help in many ways:

  • Ensure regulatory compliance
  • Track and trace batches/lots to identify damaged or contaminated products
  • Visualize the journey of the product from the manufacturing site to its end-users
  • Using analytics, chemical companies can trace the root cause of the issue and treat it accordingly

05. Resources & Production Throughput

Managing the production shop floor requires diligent planning of human capital and other interdependent machine resources such as blenders, reactors, mixers, hot ovens, separators, packaging, tanks etc.

Production Planning and Scheduling can get overwhelming depending on the number of resources and shifts you manage. Getting more output from less resources is something Production Managers can relate to. They are under pressure to increase production volume with resource constraints. Recurrent variation in batches to meet higher volume demand and continuous production often sways away from achieving consistency in batch results.

Real-time data monitoring using measured and inferred values can increase production by up to 4%Microsoft Dynamics 365 can be instrumental in tracking real-time production data using measured and inferred values to track batch completion, thereby reducing batch cycle time. The solution can help determine the quantum of ingredients that goes in to production at each stage to achieve consistency. Data collected over a period can be modeled using analytics to predict any event that can potentially disrupt the cycle and decrease operating cost.

Being able to track & analyze real-time data can also improve asset/resource effectiveness by up to 4%. Unscheduled downtime due to maintenance or breakdown isn’t new to manufacturing plants. Using predictive analytics, past performance of assets can be harnessed to model scenarios to detect equipment health and prevent failures.

Key Takeaways

  • The US Chemical industry is facing strong tailwind from harnessing its shale gas reserve and soaring crude oil price. As a result US chemical companies are benefiting from lower cost of production (affordable raw material and energy), and at the same time reaping higher profits due to increase in global crude oil price.
  • While the tailwinds are favoring the industry, there is a growing competitiveness among participants to distinguish their offerings, increase production, gain customer loyalty, and comply with stringent regulations.
  • The life of a Production Manager in a chemical industry is complex. Production Managers are at the crossroad where the buoyancy of the industry is increasingly putting their ability to test and stay relevant. They should embrace technology to achieve their goals and ensure highest compliance with regulations.
  • Microsoft D365 offers easy-to-use visualization of data across all functions of an organization including production, sales, compliance, marketing, etc. Unified access to data seamlessly across multiple sites or location enhances transparency, improves track and trace in case of an inquiry, audit or recall, leading to effective decision making.

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