Chemistry & Life Sciences

Triggering Change in Chemical Manufacturing

The Need for New Processes Often Comes from Outside

14.04.2011 -

Outside Influences - The decision for process change in chemical manufacturing can have many different reasons, but in any case, they are based on the observation that that the existing devolution is no longer in line with the need to reach manufacturing excellence. Circumstances caused by externally triggered developments may show the evidence of necessity of change. Key account customers or major changes in customer structure are able to create such circumstances in a very short period of time, making it crucial for an organization to have the right tools to deal with such a situation in the short term.

Key Account Customers - Opportunity or Threat?

Beside commonly used definitions, nearly each organization has its own interpretation what a key account customer is and what it means to its business. The impact of a single key account on the development of any supplier depends mainly on the percentage of suppliers total sales with this key account and the rest of the customer structure of the considered supplier.

Particularly large multinationals tend to form purchasing platforms that cover and conduct the supplies for continental and even global regions. Through their networks and information management, they create transparency on raw materials and product price levels in different regions and markets. With their cross-linked knowledge, they are able to put enormous pressure on a supplier and on margins.
In some market areas, mergers and acquisitions between large multinationals led to the formation of oligopolistic acting purchasing platforms from where regional and middle size company are unable to escape. This development tends to result in jeopardizing economical situations for this kind of companies, especially in markets with over capacities

However, it remains the homework of each supplier to drive its strategy and processes in order to overcome these obstacles and earn the fruits of the opportunities offered by key account customers.

Company Strategy vs. Customer Needs

In general, the relationship between key account customers and their suppliers implies considerable potential for friction. In most fields of cooperation, the supplier's company strategy shows to be adverse to customer needs.

It starts with payment terms and the tendency of big groups to use their suppliers as credit institutions, calling for long payment targets or consignment stock on their sites. This often-used practice works against suppliers' credit policy and working capital issues.

Especially in the commodity industry, the necessity of special services, modifications on product and delivered blends and just -in-time delivery are also criteria that ask for flexibility and additional efforts on suppliers side. Depending on the market situation, it is sometimes very difficult for a supplier to charge for these services. In the above described oligopolistic purchasing structures of big key account groups, these kinds of services and flexibility are very often the only way for a middle-sized supplier to differentiate itself from its competitors.

However, the more a supplier is able to fit into all the mentioned requirements - including commercial terms - the more the customers will recognize such services as strength.

Focusing On Strength

When doing a SWOT analysis, one may very soon discover that opportunities and even more a lot of factors concerning threats are mostly external driven and mainly impossible to be influenced. Focusing on weaknesses will not necessarily improve the strengths. Whereas focusing on strengths - and the opportunities to enforce them - will very often identify those weaknesses that have to be eliminated to reach further goals.

As a consequence, the ability of adapting the processes to the mentioned various needs of key account customers become more and more important as strength - even more so for mid-sized companies that don't have the cost structure of their bigger competitors. The evaluation of possible steps to improve strengths is mostly a slow-moving process, but it can be accelerated by externally driven uncontrollable circumstances - as for example decisions taken by key account customers.

Short Case Study

In this case study, we looked at a producer of a commodity product that is used in two totally different applications and markets. Whereas the removal of impurities is very critical in the market A, it is unimportant for the application in market B.
Our producer is specialized in production of product with less impurities (market A) and delivers nearly 80% of the product to four key account customers, the rest is delivered to market B.

The product is made up of two main raw materials, whereas the second raw material is responsible for the impurities and therefore cost sensitive for the total production. Due to aggressive competitors coming to market A, our producer loses two of its main key accounts and has to compensate this loss of quantity by increasing the sales to market B. As the process is designed for market A, the company produces and delivers now more than 70% of the high quality product to a market that neither needs nor is willing to pay for the quality.
The decision of only two key account customers turns the structure of our producer upside down and triggers the need for an urgent process change.

Our producer identifies the necessity of the introduction of a second process to focus on replacement of the cost intensive raw material two by a cheaper sort 2b without losing the other customers in market A. The new process is designed to produce alternating for market B with higher impurities but less cost on raw material two and by the former process for market A with less impurity.
Beside higher efforts in forecasting of sales, purchasing of raw materials and stock logistic for both markets, the new process offers higher flexibility to switch between both markets in case of further changes in customer structure.

Implementation of Company Strategy into Process Change

The question may rise as to why our producer did not prevent this potential threat in advance. Sometimes well-established customer relationships - processes that worked perfectly over the years - or strategies as a niche player or specialist have to be balanced against considerable cost of process change or necessary investments. So this kind of decisions can be triggered by externally driven factors, such as decisions made by key account customers.

However, once a process change is successfully established, it offers a lager spectrum for future strategies and opportunities to reach new customers - and may be new key account customers that one day may trigger new processes. 


Donau Chemie AG

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