Digitalization in Chemical Distribution – a Reality Check!?
Survey: Current Focus for Many Companies is on Laying a Proper Groundwork for Digitalization
Particularly the developers and financial backers of dedicated online e-commerce platforms and marketplaces have promoted their ideas and concepts wherever they found an audience of chemical producers and chemical distributors willing to listen to their point-of-view about the ultimate fate of intermediaries from the real world.
Within the chemical distribution community this has led to a lot of discussions about how best to tackle the topic of “digitalization”. What needs to be done in order to survive in an increasingly competitive environment and how to cope with the threat of a possible disruption caused by new and innovative digital developments, either initiated by suppliers, other distributors or disruptors from outside the industry itself, are questions that await practical answers.
Collecting Robust Data
As nobody is really sure about the best way forward and also to address the lack of data available on what initiatives companies really take in this context, DistriConsult in cooperation with CEO and value creator Phil Allen at Customer Value Management (CVM€) conducted a survey amongst more than 200 chemical distribution companies in Europe. The web-based survey, which was open during the month of March 2019, was answered by 57 respondents, equivalent to a response rate of more than 25%.
Answers came from all kinds of chemicals distribution companies, ranging in scope and size from privately held enterprises with a few million euros in sales to listed multinationals with hundreds of millions and even billions of euros in sales. Also, the geographic spread was quite broad. Overall our sample was quite likely a bit skewed towards specialty chemicals, as a lot more distributors are active there than in industrial chemicals where a few large groups tend to play a more prominent role. The individuals who answered the questionnaire were typically owners, CEOs, COOs, IT directors or business unit heads. The survey yielded some interesting results, the most salient parts of which are summarized here.
We also conducted qualitative interviews with a select number of producers to elicit their views and approaches to digitalization within their own companies and with their distributors.
Relevance and Drivers of Digitalization
Digitalization is clearly a relevant topic for the companies covered in the survey. On a five-point scale ranging from -2 (not relevant at all), over -1 (not relevant) to 0 (neutral) on to +1 (relevant) and +2 (very relevant) the compound score was +1.27. Digitalization is certainly a relevant topic to the respondents in our sample.
Drivers behind the digitalization efforts are in essence two-fold: market penetration and growth and internal efficiencies (cf. fig. 1). Two thirds (66.7%) of respondents said they want “to generate new business opportunities and grow sales”. Second and third were “to enhance operational efficiency” (63.2%) and “to simplify structures and to reduce cost” (61.4%). Other drivers were “to enable value pricing/enhance value creation” (29.8%), “to gain a deeper understanding of customer/market needs (e.g. “data mining”)” (28.1%), and “to increase internal transparency” (24.6%). All other answer options provided, including “to pre-empt principals” gained only significantly lower scores, at or below 15%. The overall objectives of digitalization are mixed. Some are outward-looking, market and growth related. Others are inward-looking and hence cost/performance-related.
Getting the Basics Right
When asked what has been done so far and/or what projects were in the pipeline, it became clear that the current focus for many companies is on laying proper groundwork for digitalization.
Re-engineering internal processes (63.2%), a re-design of the company website to enhance find-ability and search-ability (61.4%) and an upgrade of the Customer Relationship Management (CRM) system (57.9%) were the three most frequently mentioned initiatives. Joining an e-commerce platform (or marketplace) was mentioned by 17.4% of the respondents, yielding position no. 9 amongst the 14 answer options. The total number of answers given would suggest that the average number of sub-projects is around 4.3 per responding company (multiple answers to this question allowed).
To Join or Not to Join, that’s the Question
When we specifically asked a question about online platforms/marketplaces, it turned out that proponents and detractors are almost evenly split. 46.4% of respondents saw “joining a platform/marketplace and doing business on it as a viable way forward” for their company. 53.6% thought that for their company it was not. The “yes” answers gave “addition to the existing marketing approach” (28.5%) and “addition to existing procurement/purchasing approach” (30.8%) as the main reasons for their positive view. Only one in five respondents saw this step as a “question of survival” or had the opinion that “all (distribution) business will go that way in the future”.
Of the respondents that did not consider platforms/marketplaces worth joining, 60% said it was simply “not part of my company’s strategy”. Some said a lack of resources prevented them from doing more in this direction.
Those that had joined a platform (10 out of 57) said they wanted to sell products on it (90%). The second driver was the desire to buy products (60%), followed by advertising/promotion (40%) and the intention to use it for market research (30%) (multiple answers to this question allowed).
Distributors are well aware of the platforms/marketplaces and other digital offerings that exist in the chemical industry space like specialist search engines or meta crawlers. The most “known” website was 1688.com (operated by Alibaba), followed by GoBuyChem, Pinpools, Kemgo, Kemix (so far only a project) and Kemiex. Many respondents were also familiar with the search engine ChemBid and material selection platform SpecialChem. Actual business has been done on 1688.com, GoBuyChem, Kemiex and Pinpools (cf. fig. 2).
Companies that have registered on a platform/marketplace have done this on average with 6 providers. This would suggest it is relatively quick and easy to take such a step. Generating actual business seems to be a bit more of a challenge or may take more time. 40% of the registered companies had not yet done any business on a platform, 40% less than 9 transactions and 20% between 10 and 49 transactions so far. The average time that had elapsed between registration and the first transaction was almost 6 weeks on average.
Interaction with Suppliers
Distributors are unlikely to digitalize their business in a sort of commercial vacuum. So, we asked about the relationship with their principals when it comes to digitalization. Almost half of the respondents described this as “we are learning and following” (45.1%). Some are jointly working on developing a “digital channel” (10%). And 17.6% think they are ahead of (many of) their principals, when it comes to digitalization.
Activities and Views of Chemical Producers
In parallel to the web-based survey of distributors, our cooperation partner CVM€ conducted several structured interviews with a select group of chemicals and/or polymers producers regarding their views on digitalization. To the companies interviewed, digitalization is a highly relevant topic. These companies have identified as the main driver the opportunity to grow [direct] sales, improve the customer experience with the development of new business models, and also to achieve internal operational effectiveness improvements. In that sense the answers were very similar to the findings for distributors.
The updating and improvement of the CRM system is seen as a fast way to address internal issues. Website re-design and advanced analytics (using data from a web-interface, tracking leads etc.), and also the implementation of “web-shops” (including on-line payment) are high on the priority list. Another focus area is an easy-to-attain enhanced “social media” visibility.
Joining a platform was mentioned as a viable option “in general” by most of the interviewees. But there were also some reservations mentioned, also in the sense of “we are not there yet”. Only if a direct addition to existing business can be expected, does it become an attractive proposition. Suppliers are “observing and studying” this possibility, but limited standardization and a lack of track record have hampered a decision for some of them so far. If there would be a low-cost opportunity to have an own platform (e.g. through a global initiative on a larger scale), this would be the favored approach.
The suppliers interviewed typically expect to have an extensive and effective dialogue with their distributors regarding new channels and approaches through digital means. While they recognize that distributors will have to determine their own strategies, ideally these should be in-line with the suppliers’ approach in terms of customer interactions that have an impact on the relationship between supplier and distributor. The attitude was that those distributors, who can keep the pace and are in-line with expectations, will have enhanced opportunities.
Besides all the initiatives on digitalization there still is a need for the “personal touch” in certain sales interfaces, as technical and face-to-face discussions for many products are considered to be very important for mutual value creation, even in today’s digital world.
One of the biggest challenges to producers appears to be the logistics part of the sales transaction, where distribution will continue play a key role for the foreseeable future. Any alternative or additional channel needs to have equal or better performance or enable a new and better customer experience.
What to Make of it?
When it comes to digitalization, distributors currently are mostly active in laying the groundwork within their own organizations. Re-engineering processes and upgrading the IT infrastructure, in part or sometimes in total, are key project activities here. Developments outside of their companies, such as platforms, marketplaces and search engines are closely monitored and analyzed. Various distributors have taken the step to register on platforms/marketplaces and, of these, some have already done business on them.
Overall the rate of adoption seems to be slower than some pundits expected and developers of digital solutions and platforms would like to see. Also, the distributors that have taken the effort to register their companies and products might be rather disappointed. Maybe it’s just a question of elapsed time before this takes off. However, it could also be that specialty chemicals after all take more technical expertise (and time) to sell indeed. Hence it might be more difficult to market such products through a “digital channel”. Also, the number of sales transactions for each product/customer combination is often low for a typical distributor anyway. Hence economies of scale are more difficult to obtain than in a B2C setting, where most of the success stories in digitalization are rooted. So far, the end-to-end ‘digital distribution model’ still seems to be more of a theoretical option, yet to be proven reliably in practice.
On the other hand, the slow pick-up could also be a sign that companies are afraid of cannibalizing their existing business model and making (commercial) infrastructure investments obsolete. The incumbents have just not been consequent enough in their efforts to-date.
However, the good news is that initiatives regarding digitalization today are less costly than they were in the past. Initial subscriptions are free or carry only a low fee, and IT infrastructure can often be bought in ‘as a service’ on very short notice. It is no longer required to make extensive investments in hardware like servers or data storage. In that sense, experimentation is possible and the associated risks can be managed even by small and medium size firms. So, stay tuned, it continues to be interesting.
The authors wish to thank Phil Allen, CEO and value creator at Customer Value Management, Zug (Switzerland) for his valuable contributions in setting up the survey and sharing insights from the interviews with a select group of chemicals and polymers producers he conducted.
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