The following article will guide you about how to control cost in the chemical process industries.
Introduction:
Cost management has taken a new meaning in the chemical industry, which earlier was busy in market development and product development. The industry is now looking for cost advantage in feed-stocks, technology, research, procurement and utilities, in fact, the entire chain of operations in the chemical process industry.
ADVERTISEMENTS:
Emphasis on optimising resource utilisation in water, energy and process inputs has begun to payoff, not just in terms of reduced costs but also in improving the environmental performance of the industry. New simulation tools and techniques are complementing software packages to better design and operate process plants.
Globally the chemical industry has never had it as difficult as now with margins squeezed, loss of consumer markets, and economic slowdown in Asia Pacific, Latin America, and South Asia—some of the large emerging markets.
Restructuring business operations has never been so widely carried out as now. Ranging from oil majors to bulk commodity to downstream speciality chemical firms-consolidation has become the watchword though routes are often different.
The world chemical industry is bracing for a challenging year ahead and economic revival in Asia will have much to do with its pace of recovery. In the meanwhile, the chemical industry is going through upheavals and revamps in all aspects of the business – research, production, business development and marketing.
While oil and petrochemical majors are busy downsizing and merging, life sciences, pharmaceuticals and crop protection chemicals businesses are cutting on research costs. Search for new chemical entities has become prohibitively costly for companies to go it alone. Keeping research costs down to low levels while keeping the molecular pipeline active is proving to be a major challenge for the industry.
Tackling Costs-Shifting from Products to Processes:
In the early 90s, cost management did not receive the kind of attention that it deserved, as companies were all focusing on growth, new markets and new product development. But the events of the last two years within Asia and globally, has brought about radical changes in the way companies carry on with their operations. In the highly competitive and depressed markets of today, cost management has emerged as a strategic tool for the industry. Cost control now holds centre-stage in the chemical industry and will continue to be so through much of the early part of the 21st century. This trend is likely to bring in its wake a totally new set of paradigms within the industry—from the way products are designed and developed to the way they are launched in the marketplace.
ADVERTISEMENTS:
While in the past, cost control measures had to do with either reducing staff or salary freeze, today the practice is to have lean organisations where every function is being converted into a profit zone.
In the chemical industry the shift is from product oriented or result oriented focus to process oriented focus. This has brought in new cost measurement systems which measure specific activities. Activity based costing (ABC) has now emerged as a valuable tool within the industry. These measures often give the planner an idea of how activities in different departments of a chemical manufacturing plant influence costs. Industry has also begun to benchmark these costs against the best practices globally.
It was the Japanese corporations which first recognised and evolved the tools of cost management which enabled them to penetrate the highly competitive markets of USA and Europe in the early 70s. Producing high value at low cost became the central theme to many Japanese companies. They gave the world new tools such as Kaizen, Kanban, etc. which are being adopted by companies around the world today.
Cost management within the chemical industry is also turning out to be a crucial tool to bridge the link between strategies being evolved and operational efficiencies, even as it serves to improve the competitive edge of the product as well as the company. In every segment of the industry companies are vying for cost leadership and focusing on how to serve the customers from a low cost base.
ADVERTISEMENTS:
In key functions spanning R&D, production marketing, procurement and customer services, decisions are now centering on cost implications. Complementing quality management and change management tools such as TQM and business process reengineering (BPR), today total cost management (TCM) is forcing companies to seek across-the-board solutions for managing their costs better. In their endeavours to frame new systems for quality and cost management, companies are also realising that the process is a continuous one and not a one off process.
The concept of TCM is reconstructed for different functions. While in R & D, it could focus on developing a low cost process, in production, the focus will be on optimising resource utilisation, and in marketing, it could be product launches. Key to TCM in chemical manufacturing is elimination of wastes and delays in operation as most operations are multi-step and multi-utility oriented. Cutting in wastes is an issue which requires detailed focusing on waste management measures and tools adopted for waste management.
Combining Environmental Goals with Cost Optimisation:
Cost optimisation and environmental goals have now emerged as key issues in the chemical industry where continuous search is on for new low cost options in technology and services.
International trade and environmental concerns will be increasingly viewed from a cost perspective. Innovations in technology are forcing shifts in raw material, energy usage and material balance within the industry. Technological edge is deciding the competitiveness and directions in most sectors of the chemical industry. The shifts within the industry pose challenges as many alternative techniques and feedstock change bring with them additional cost. Conflicts between environmental goals and business bottom lines reflected in monetary terms will need to be resolved by radically different ways.
ADVERTISEMENTS:
Discoveries in the laboratory are complementing modern tools on the shop floor and in the marketplace. Rational design of chemicals has become an intensive area of research, and analytical and research inputs needed for such activities will further push costs up. New approaches to technology development are being centred around the theme of maximising productivity through low, cost options.
Cost Control through Waste Minimisation – Tools and Techniques:
In process plants, the scope for cost control is enormous as process waste constitute direct and indirect cost ranging between 10 and 30 per cent. Cost of disposal, recycling and by-product processing, all keep the costs at prohibitively high levels.
Process integration has emerged as a key tool to develop new methodologies of waste minimisation that would enable cost savings. Process integration often acts complementary to the pollution prevention philosophy.
There are three main areas of process integration:
1. Pinch analysis.
2. Knowledge-based approaches.
3. Numerical and graphical optimisation approaches.
Thermal pinch and water pinch analysis are emerging as important tools within the industry to optimise energy and water usage, where costs are as high as 20 per cent of the total manufacturing costs. Thermal pinch analysis is being used widely in process plants to get insights into how heat flows take place through the processes. The technique helps to optimise energy utilisation in process plants.
In the context of environmental improvements, thermal pinch analysis is often useful in determining the scope for minimising energy consumption for the same amount of product manufactured. German majors such as BASF and Bayer have carried out detailed site pinch analysis to optimise their energy balance within their integrated sites and in the process, reducing emissions and energy consumption.
An approach which looks at systematic analysis of the overall process operation to seek reduction not only in waste water generation but also in fresh water use has been developed in recent years. Known as water pinch analysis, this method allows the plant engineer to look at various options to optimise water usage in plant operations.
New tools have been developed to design processes with low pollution load. Among such tools, ‘process simulation tools’ are gaining importance. Development of computer-aided chemical design software which incorporate environmental considerations in their design logic has advanced significantly in recent years.
Earlier software used for synthetic design did not cover environment, health and safety criteria. However, most software under current development incorporate existing chemical and functional group properties, toxicity data, structure/activity relationships and molecular composition, to generate retroactive and proactive analyses.
Commercial simulators like Aspen Plus, Pro II and Chemcad III are all effective in providing optimal solutions to pollution problems. Recently in USA, EPA and AIChE came up with key needs for preventing pollution in manufacturing processes. These relate to modules for pollution assessment and modules for pollution prevention to be used in combination with process stimulators, to handle pollution prevention aspects in many chemical manufacturing processes. Cost savings through such techniques have been enormous in process plants.
The syngen programme is a synthesis design programme which generates the shortest and lowest cost synthetic pathway for a given target molecule from a catalogue of commercially available organic feed-stocks. The inherent benefit of this software is its ability to prioritise alternative chemical pathways in terms of both cost and environmental impacts.
‘Aspen plus’ estimates the molecular composition of reaction outputs (residuals, products and co-products) when provided with the composition of process inputs and approximate knowledge of reaction conditions (temperature and pressure) and use of catalysts.
IT and ERP systems are also being increasingly used by the chemical industry enabling firms to rationalise their resource structures and cut on costs.
Cost Management in the Chemical Process Industries:
The chemical industry in India was used to a protected environment, and a cost-plus-pricing system did not have to manage cost structures so stringently in the past. With liberalisation of the economy, customers became the key determinant as quality goods and services were available from a large number of competing players. For companies not used to balancing cost structures in tune with lower sales, the future has become uncertain.
Amidst all the uncertainties, there are companies that are benchmarking their operations against the best in the world. One such case is of Gujarat Ambuja, which focused on TCM, to emerge as a low cost cement producer in the country today. By concentrating on coal and energy-the main cost drivers in cement manufacture—the company changed its fuel feed from coal to crushed sugarcane and also redesigned the operations to fit in with the new feed. The company also brought about technological changes in its mechanical transport systems and mining activities.
Normally, cost management frameworks rise out of structural and executional functions. On the executional front, factors such as capacity utilisation, optimal layout of plant and utilities, product slate mix and value addition along the chain, have become important features within the industry. In the chemical chain, optimal utilisation of capacity is determined by demand pushes from the market. Optimal use of market research, better shop floor practices, rationalising inventories build-up, and enabling R&D to develop low cost options, have remained key issues.
In the pharmaceutical industry in India, companies such as Ranbaxy and Dr. Reddy’s have exhibited ingenuity in process development and manufacturing process to emerge as low cost generics manufacturers. These companies are now moving into new molecules development and teaming up with global partners to put new products in the marketplace. Outsourcing also has become a key cost cutting trend in the industry with firms paying more attention on core areas and farming out the non-core areas to outside parties.
On the petrochemical front, companies like Reliance are backward integrating into upstream hydrocarbon and refining to enable cost optimisation. On the other hand, oil and gas majors such as Indian oil corporation and gas authority of India are busy looking at addition along the value chain by forward integrating into petrochemical and downstream products and also moving upstream into exploration and production. Whatever be the mode of integration, the stress is on achieving lowest cost per unit of product.
Other success stories of cost management is the backward integration of Nirma, Ltd. into linear alkyl benzene (LAB) and soda ash, leading to considerable savings in procurement costs that helped the firm to attain competitive positioning in the detergent industry in the late 80s. In the commodity chemical markets where the prime raw material is traded internationally, a key issue is, when to import and when to produce?
The decision is always linked to prices in international markets. Here, utilising supply chain cost techniques can be of immense help in reducing costs. When the global prices are low, the companies should stop production and should import; when the prices pick up, they could start producing. To attain a balance between the import and export decision it is critical to have effective price monitoring and forecasting techniques.
Methodology for Cost Control in the Chemical Process Industries:
Managing the supply chain has now emerged as the key factor in the chemical industry’s quest for cost control. In a multi-step industry such as the chemical industry there are far too many processes and structures which need to be looked at. In an industry where raw materials and production costs are the highest as compared to other areas of business, the scope for improvement is considerable. Most companies are actively looking at the links in the production chain to differentiate performing and non-performing areas.
I. Focus Areas Requiring Cost Control:
1. Product identification.
2. Technology selection.
3. Evaluation of alternatives.
4. Product development.
5. Commercial scale-ups.
6. Optimising production processes.
7. Utility management.
8. Waste management.
9. Business development.
10. Customer services.
II. Steps for a Typical Cost Management Exercise:
1. Benchmarking costs.
2. Process analysis through the value chain of the business.
3. Identifying critical cost influencers.
4. Differentiating between value creators and dead wood.
5. Setting targets for cost determinants.
6. Identifying methods for adoption.
7. Cross-functional teams.
8. Consensus management.
Globally integrated companies have successfully adopted techniques such as just-in-time, total quality management, statistical quality control, lean manufacturing, strategic outsourcing, supply chain management and integration in their operations to identify cost control niches.
In recent years the chemical industry globally has resorted to many functional areas to look for cost cutting initiatives. Manufacturing and purchasing were at the top of the chart. These were followed by recruitment and consulting. Many companies outsourced functions such as research, manufacturing, advertising and market research as well as data processing, to keep low costs. This was true in speciality and other high performance chemical sectors.
The industry also looked at change management practices such as BPR and six sigma to enable cost control along its value chain. Six sigma has brought about radical changes in the way management of various companies have begun to look at their traditional practices. The statistical bias of the process enables a more quantitative assessment of the corrective steps to be taken. In chemical manufacturing, ABC has assumed prime importance.
On the manufacturing front, companies are looking at flexible manufacturing systems, integrated manufacturing planning systems and customer oriented systems.
Elements of Supply Chain Management in the Chemical Process Industries:
1. Designing products based on vendor involvement.
2. Forecasting based on feedback from sales.
3. Strategic sourcing to identify common suppliers.
4. Vendor development to enable process modification.
5. Inventory management tools.
The sequential process helps to lower costs related to sourcing, inventories, supplies, procurement and carrying. The growth of the chemical industry and the need for just-in-time supplies across the world have led to chemical companies focusing on new initiatives in lowering costs of supplying a product to its customers.
In recent years the concept of regional hub distribution has come about enabling chemical companies to reach the product to its customers when needed. For global companies or regional companies seeking to reach their products across different terrain, keeping logistics costs low is critical. Lowering distribution hub costs by setting up management information control systems is emerging as a new trend.
In future, logistics will prove to be a major challenge for companies as they strive to reduce marketing costs and customer service costs. In a geographical spread like India, maintaining control over product movement and ensuring deliveries on time will prove to be a major issue for the chemical industry.
The chemical industry in the early 21st century is all set to usher in new business and market shifts in Asia; till a revival sets in, the chemical industry in the region will continue to seek new ways of keeping costs low while serving its customers and retaining its market share.