Strategy & Management

Emerging Business Models in the Chemical Industry

IIoT, Artificial Intelligence and Blockchain are the Game Changers

30.08.2018 -

With the rapid growth of the Industrial Internet of Things and recent advances in Industry 4.0 technologies like cloud computing, machine learning and remote sensing, there’s been a lot of debate about the impact that digitalization will have on the process industries over the next few years. CHEManager editor Volker Oestreich sat down with Stefan Guertzgen, senior director – Global Industry Marketing Chemicals at SAP in Walldorf, Germany, to discuss relevant trends.

CHEManager: What are today´s major trends for the Chemical Industry?

Stefan Guertzgen: First of all, I see an accelerated globalization. Supply centers are shifting due to the advent of shale gas in the U.S. or coal to olefins in China. Also, demand centers are shifting thanks to a rapidly growing middle class in the emerging countries. In addition, new market entrants challenge incumbents with innovative products and services, hence contributing to shortened lifecycles and rapid commoditization of products.

Next comes the circular economy. Key raw materials are getting scarce. Regulatory requirements exponentially increase as the environmental impact of emissions and waste becomes more and more evident. Chemical companies are seen to be in the driver’s seat to respond to this, and some are already extending their ecosystems with the purpose to establish end-to-end recycling concepts.

Which changes are caused by the rapid developments in IIoT, cloud computing, machine learning and other digital technologies?

S. Guertzgen: Digitalization will drive a tremendous wave of innovation. Recent advancements in digital technology offer unprecedented levels of connectivity, granularity, and speed in accessing, processing, and analyzing huge amounts of data. Besides mobility, cloud and in-memory computing, the Industrial Internet of Things, machine learning and blockchain will start acting as game-changers in the chemical industry.

All three trends are coming together to challenge existing strategies and create a perfect storm for the chemical industry. Customer and feedstock proximity, intellectual property, and technology know-how may no longer secure a sustainable competitive advantage. Early adopters of innovative business models have the unique opportunity to act as digital disruptors.

What innovative business models and processes are emerging for companies in the chemical industry?

S. Guertzgen: I see four major developments. First, companies will start to adopt strategic agility. The need to rapidly transform product and service portfolios in response to dynamically changing market and stakeholder needs will continue unabated. Preparing for ongoing mergers, acquisitions, and divestitures will be a critical success factor.

Second, we’ll see more companies going beyond their traditional value chains and start competing as entire ecosystems. Such ecosystems are presently built around hot topics like for example precision farming or the “circular economy.”

Third, we’ll see companies become more customer-centric and focus on selling business outcomes instead of products. In that context, think about delivering first-pass quality products or semi-finished goods instead of paints, coatings, or reactive resin components.

Fourth, companies will get another push towards operational excellence and business process automation. With digital technologies becoming scalable and commercially feasible, companies can now realize concepts like “lights-out manufacturing” and “touchless order fulfillment”.

How can big data and artificial intelligence boost chemical companies to a new level of performance?

S. Guertzgen: As chemicals is quite an asset intensive industry, let’s take Manufacturing and Maintenance as first example. With today’s advanced capabilities in capturing, storing, processing, and analyzing data, a vast amount of plant, asset, and operational data can be used in conjunction with advanced algorithms to simulate, predict, and prescribe maintenance to increase assets’ availability, optimize uptime, improve operational performance, and extend their life.

Also, there is a lot of untapped potential for new IIoT and machine learning technologies in supply chain. Think about using advanced analytics to increase forecast accuracy leading to improvements along the entire sales and operations planning process and related KPIs. Advanced analytics and machine learning could also be used for mitigating risks of supply chain disruptions. For example, in case of natural disasters shipments could be automatically re-routed to meet on-time delivery goals and customer commitments at minimum costs.

What about the area of innovation?

S. Guertzgen: Significant opportunities exist in R&D to create higher value and higher margin products at a faster pace, particularly in specialty and crop protection chemicals. Advanced analytics and machine learning enable high-throughput optimization of molecules as well as simulation of lab tests and experiments for systematic optimization of formulations for performance and costs – we call this “from test tube to tablet”.

Furthermore, machine learning and big data enable screening of internal knowledge and patent databases to maximize use of intellectual property and fill gaps. In addition, Machine learning can also help chemical manufacturers run simulations on sustainability and environmental impact across a product’s lifecycle.

You mentioned blockchain as a game changer. How will blockchain impact today´s businesses?

S. Guertzgen: Let’s first look into some general benefits Blockchain brings to the table. First of all, it raises the level of trust and security among collaborating stakeholders in a network. Second, it allows to disintermediate non-value adding parties in a value chain, like brokers, authorities etc. Third, it creates a fully auditable trail of product, document or financial flows through capturing all transactions, changes in ownership etc. as immutable records along the entire value chain. This provides big opportunities for simplification and innovation in a global and more and more complex world.

How does this affect the chemical industry?

S. Guertzgen: Blockchain could have an impact on almost any line of business in a chemical company. Just think about collaborating in an open or closed community in R&D (permissioned private or public blockchain), tracking and tracing engineering changes and maintenance activities on a manufacturing asset, ensuring full integrity of a multi-modal product shipment to a customer, or trading derivatives of a physical product and set the foundation for clear ownership, once the critical mass for building a physical plant has been reached.

What are the business divisions which are mostly influenced by blockchain?

S. Guertzgen: I could foresee the biggest initial impact in the area of Manufacturing and Supply Chain. Consider for example validating asset history and employee qualification. Blockchain can be used to prove ownership when procuring or disposing of an asset. It can also help to track the history of an assets and related maintenance activities - this not only helps to ensure safe operations but also increases book value accuracy and supports warranty or insurance claims. Furthermore, it can serve to validate qualification of employees and certifications of contractors in chemical plants. The latter is particularly important since with new technologies and millennials entering the plant floor completely new skill sets are required. Those skill sets need to be certified to ensure safe operation of plants and assets.

From a supply chain perspective, some segments in chemicals (e.g., pesticides) are threatened by counterfeiting. Blockchains single ledger verifies the integrity of a product as the record can be traced back to the product manufacturer and even the manufacturer of its precursor agents. Also, in terms of ensuring the physical integrity of a product, Blockchain can help. BASF last year ran a pilot on “smart pallets," (pallets embedded with active, battery-powered, wireless transponders). Those can record and transmit into the cloud all pallet positions and movements, as well as physical conditions to seamlessly track possible “incidents” the pallet and its products have been exposed to on their journey to their final destination.

According to Accenture, blockchain’s salient features make it even suitable and relevant for disaster recovery and business continuity planning in emergency scenarios from natural disasters affecting a large region.

Are there other new avenues for manufacturing – and are there also new risks?

S. Guertzgen: 3D printing, also called distributed manufacturing, is proving to be a revolutionary technology that is moving manufacturing closer to mass customization. In particular, the chemical industry can benefit from developing tailor-made proprietary formulations and systems.

However, a much-discussed but unresolved issue is intellectual property protection. Similar to the way digital music is shared, 3D printable digital blueprints could be shared illegally and e.g. print molds from a scanned object which is protected by copyright, trademark, and patent laws can be replicated in large volumes. With blockchain, data and rights holders could store metadata about any substance, from human cells to powdered aluminum, on the blockchain, in turn opening up the limits of corporate manufacturing while also protecting intellectual property. New markets could enable buyers and sellers to contract more easily in an open market.

How can chemical companies best capitalize on all technologies you mentioned before?

S. Guertzgen: To leverage and scale aforementioned technologies across all of their business functions, chemical companies need to turn into “intelligent enterprises”. Intelligent enterprises operate with visibility, focus, and agility to achieve game-changing outcomes. They do more with less and empower employees through process automation. They deliver a best-in-class customer experience by proactively responding to customer expectations. They invent new business models and revenue streams.

What are the foundational elements or building blocks of an “Intelligent Enterprise”?

S. Guertzgen: For companies to become intelligent enterprises, they must invest in three key platform areas:

  • An intelligent suite bringing intelligence into the applications used to manage customers, supply chains, networks, employees, and core business processes
  • A digital platform to manage data from any source (first or third party) in any format (structured or unstructured), and support the development, integration, and extension of business applications
  • Intelligent technologies to apply intelligence to data and processes through innovations such as machine learning, blockchain, advanced analytics, and IIoT

Besides those foundational elements, are there any other critical prerequisites to become an “Intelligent Enterprise”?

S. Guertzgen: First it is all about data. Prior to applying technologies like e.g. Machine Learning you should first think about which data are relevant in context with the intelligence and decision support you need and then run a Master Data Management and Governance project to ensure that your models are supplied with the right data in high quality.

Second, to build, apply and maintain the right models in support of your business needs you need to build up the right level of data science skills in your organization and pair those skills with end to end business process expertise. At the end of the day only bringing those two worlds together guarantees the highest business impact and value.

Lastly digitally transforming your business and turning your company into an intelligent enterprise requires a clear strategy in terms of business, stakeholder communications, and change management as it goes along with a significant change in company culture, employee skills and behavioral patterns. This aspect should never be underestimated.

Where can chemical companies learn more about how to become an Intelligent Enterprise?

S. Guertzgen: Come and visit us at the International SAP Conference for Chemicals, Oct 16-17 in Prague, Czech Republic.