Chemical manufacturer design the right operating model
By analyzing these indicators in its product portfolio, a chemical manufacturer can understand how it should shape its own operation: as a professional participant, as a commodity manufacturer, or as a mixed mode of professional production at the same time as a core commodity product.
Once we have identified which products will become commodities, the chemical manufacturer can start to design an operation mode so that it can produce and sell these products and profit from them. There is no universal method, but there are some requirements that must be met. The right mix of these changes will depend on the company's portfolio, the nature of the products involved, and the needs of its commodity customers and markets. For some organizations, the scope of this business model will extend to the whole company; for others, it will include specific business units or lines of business within these units.
Regardless of the scope, there are some guidelines that will greatly increase the opportunity for organizations to design and implement successful business models. First, it should start from scratch and put cost minimization first. It is difficult to achieve the impact necessary to compete in the commodity market by merely tinkering with the methods that are more suitable for special products - or to create an organization that is flexible enough to cope with the periodicity of commodity business. Second, change should cover the entire organization, including sales, manufacturing, supply chain, management and support functions. Third, design should be from the perspective of customers, bearing in mind that the needs and expectations of buyers of goods are different from those of buyers of special products.
Commodity customers want simplicity and standardization. They usually don't need technical support and are satisfied with the standard delivery scale and schedule, while professional customers usually want extensive sales and technical support as well as different batches. A good commodity business model is specially designed to meet these needs. This usually means a reduction in the number of products offered. It always requires standardized sales, marketing and services - tailored to a limited customer base - and measures to minimize the cost of serving these customers. This should be supported by appropriate low-cost sales and distribution channels.
Such conversion must be carried out with care and clear and consistent communication with customers. Chemical manufacturer has to admit that not all existing customers are willing to accept this change. Losing a certain proportion of customers with high cost and low profit is inevitable, planned and part of the transformation to commodity mode.
For many businesses, digitization is a powerful way to reduce service costs. It can reduce the cost of order management, especially in the case of online sales support. If done well, it can also bring a more satisfying customer experience.
Commodity businesses need streamlined manufacturing and supply chain processes to meet new customer service requirements. This means that the shift from "production order" strategy to "production inventory" strategy, in terms of production planning, will achieve automatic forecasting and clearly defined and strictly implemented "frozen areas" (i.e. areas that can not make any changes). The goal of manufacturing operations is to achieve a high level of equipment utilization, and apply Lean principles to continuously improve quality and productivity. Cyclical commodity industries also need a different way of capital investment: it's hard to do, but increasing capacity at the bottom of the cycle, rather than at the top of profits, can greatly boost value creation.
Commoditization usually requires a change in the basic mode of thinking in production operations, because employees need to learn to give priority to standardization, comply with agreed service levels, improve efficiency, and give up expensive single orders and exceptions to meet specific customer needs. Transparent pricing helps here: when customers understand that they will have to pay for delayed specification changes or shorter delivery times, they are less likely to make such requests.
The commodity management strategy puts forward fundamentally different requirements for the innovation Department of the organization. Its focus will shift from research to development - especially the development of formulation and process improvements to reduce costs and increase production. Efforts to reduce the amount of raw materials used and standardize the required specifications can be rewarded by improving equipment utilization and reducing costs in other aspects of the supply chain.
