chemical supply chain

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Procurement and Supply Chain

Key drivers for delivering sustainable

added value

Nando Galazzo – Former VP Procurement Borealis

Managing Director – Transitive Management

Logichem 2010

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Reference

Credentials

• Board Member of the Supply Chain

Council ( SCC inc. )

• Vice-Chairman SCC ELT

• Former VP Procurement Borealis

• Managing Director Transitive

Management

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Outline

Presenting Borealis Borouge

Macro Factors: Changing Markets & Volatility

Classical “Must-be” Response

Rethinking strategies

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Reference

28 April 2010

Presenting Borealis

4

Borealis at a Glance

• Leading provider of innovative, value creating

plastic solutions

• Developing Base Chemicals business

• More than 40 years of experience

• Unique Borstar® technology to develop polyolefin

solutions that are tailored to customers’ needs

• About 5,400 employees in 20 countries

• Ownership 64% IPIC / 36% OMV

• Joint venture in Middle East and Asia: Borouge

(Abu Dhabi)

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Reference

28 April 2010

Presenting Borealis

5

Borealis and Borouge Locations

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Reference

‘Commodity’ path

Feedstock Olefins Polyolefins Converters End users ConsumersReduceRecycleRecover

Commitment to Value Creation through

Innovation Secures Future Growth

‘Value Creation’ path

Feedstock Olefins Polyolefins Converters End users ConsumersReduceRecycleRecover

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Macro Factors

Changing Markets and Volatility

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Reference

Demographics

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Reference

... Crowded indeedbut not equally around the Globe ...

World Demographics: It is getting crowded !

YearPopulation

Millions

Years

to double

-81000 0.2 20000

-10000 10 19000

0 200 1200

1700 800 500

1900 1500 200

1960 3000 60

2000 6000 40

2009 6800

2040 9000

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Population … who is biggest in 2050 ??

And we are getting OLDER, Europe is leading, median from 39 years to 47 years in 2050.

�China 1.4 billion (+0%)

�India 1.6 billion (+30%)

�N.America 600 million (+40%)

�Europe 750 million

(helped by massive integration from East)

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Reference

GDP & Unemployment

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Reference

Percentage of World GDP

4 %7 %12 %Japan

10 %21 %20 %Other

26 %27 % 28 % US

15 %25 %34 %EU

2050 est.2025 est.2004

Source: Business Week Aug 2005

17 % 5 %2 %India

28 %15 %4 %China

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Reference

Outlook 2007 – GDP % Growth

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1995 2000 2005 2010 2015

An

nu

al

ch

an

ge

, %

WE USA EE China India

?

Where do we go now ?

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Reference

Unemployment gap widens

How fast will employment and consumption rise

after the financial crisis ?

March 06 March 07 March 08 March 09 Jul-09

EU 26 8.4 7.3 6.7 8.3 9.5

Germany 8.7 8.6 7.4 7.6 8.9

UK 5.0 5.5 5.2 6.6 7.7

France 9.1 8.6 7.6 8.8 9.9

Spain 8.7 8.1 9.5 17.4 18.7

US 4.7 4.4 5.1 8.5 9.1

Japan 4.1 4.0 3.9 4.4 5.4

China (1) 4.3

Taiwan 6.0

Hong Kong 5.4

Australia 5.8

(1) Urban Economy Official Stats - 9.4 % July 09 according to other sources

Source OECD

Unemployment Statistics 2006 - July 2009

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Reference

Cost Drivers Volatility

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Reference

New Perspectives for Cost Drivers

2007- 2008 2009

... and next years ?

?

Expected Scenario Reality

• Short Markets

• Maintained Margins

• (Self) Sustainable Growth

• Long Markets

• 20-40 % Margins Squeezes

• High Volatility

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Reference

Overheating Commodity Markets

2007 perspective .... and now ?

"The possibility of $150-$200 per barrel seems

increasingly likely over the next 6-24 months,

though predicting the ultimate peak in oil prices

as well as the remaining duration of the up cycle

remains a major uncertainty.” (Goldman Sachs,

May 2008)

Can you Forecast

your Markets ?

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Reference

Cost drivers…. Are they driving you?

• How much do you know about the real picture?

• Can you mitigate some of the cost escalation scenario?

• Is there any value to include cost drivers into contracts?

• Will price revision clauses work for your contract ?

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Reference

Beyond and over the Downturn

Market Swap: EU �� M-East / AsiaThe real “Storm” still to come

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Reference

The financial crisis ...

... a storm which only comes on top

• Banking Crisis

• Cash Flow Management

• Investments / CAPEX stopped

• Governance

• Risk aversion

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Reference

28 April 2010

Presenting Borealis

21

LD LLD HD PP

22.826.9

31.135.9

2005 2010 2015 2020

25.230.0

33.739.0

2005 2010 2015 2020

18.6

25.3

34.7

48.0

2005 2010 2015 2020

5.5 6.8 8.2 10.0

2005 2010 2015 2020

3.6 5.3 7.410.3

2005 2010 2015 2020

4.2 5.8 7.3 9.1

2005 2010 2015 2020

External challenges

Polyolefin Demand Growth 2005-2020

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Reference

External challenges on top of Downturn

15

20

-15

Europe M East ISCSAMUSA Asia

0

10

-10

-5

5

Ethylene Equivalent trade 2006

(million tonnes)

�� 2011

MEG

HD

LLD

LD

• Demand shift to Asia

• Simultaneous capacity expansions in Middle East

2009-2012

• Major Global Demand/Supply unbalances by 2010

• Tight Supplier Markets

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Reference

The Classical Response of Companies

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Reference

Adding Supply Chain Value in Procurement

Arm’s length...... a la Lopez ?

Sustainable Value Creation through Innovative,Collaborative Partnerships

OR

COMPETE OR COLLABORATE

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Most companies developed collaboration, ...

... Yes But

• Focus on CASH flow (DPO, DSO, DOI)

• Mitigate Supply Risk (Monitoring Suppliers)

• Squeeze Fixed Costs + Variable Costs

• Shorter Contract Terms

• No Firm Commitment / Liabilities

10-20%

reduction

boost to 3 times

normal Productivity

But is that enough beyond the downturn ?

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Reference

Optimizing cash-to-cash cycle time

Getting DPO, DSO, DIO in Balance

Working Capital Days

Reducing the DSO / DPO

gap, but challenging to bring all 3 to balanced level sustainably

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Reference

Critical supplier monitoring

Risk AND Mitigation plan

27

Sourcing

Area Supplier

Current

Risk

status

Current

Risk

Level

Mitigation

status Comment Action

Date of

last

update

Packed ZZZZZ GMBH High

Follow closely and work out back-up

solution. Business is being moved away

May 29,

2009

Bulk XXX Ltd High

1. Put automatic financial tracker via D&B

for early warnings on new fiancial

info/downgrades etc...

2. Design plan B; for each XXX route, who

could take over immediately

3. Discuss with MH plan B for container

terminals

4. Update from XXX through Proc

Manager and evaluated by Credit:

Company's financials described as stable. CEO/CFO meeting held. Plan B being developed

April 29,

2009

RM YYYYY GMBH High

Prod A supply to Plant X: due to the high

level of fines contained in the RM batches

catalyst supply only secured until mid of

May, major concern to lose xx kt of

business volume in May, impact on

subsequent months not yet known

Crisis team established, official request sent to

YYYY to 1) get approvel to conduct audit at US

production plant,2) strictly operate according to

the decision flow diagram to find the roote cause,

3) continue the production of Prod A until agreed

safety stock level has been reached

June 9th,

2009

RM ABC ABC Ltd High

High risk of business failure. Followed

closely together with credit department Working on own product substitution

June 9th,

2009

Tech ZZZZZ, UK High

Represents a high risk of business failure.

The financial strength is not discclosed to

D&B. In direct contact with ZZZZZ

Sep 9th,

2009

Tech XXX & Brothers, NL Medium

Private company publishing no results.

D&B score improved from 61 in March'08

to 75 in Dec 08, down to 72 in Feb 09. In direct contact. on going

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Rethinking Sourcing Strategies

Preparing for Post-Downturn Conditions

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Rethinking Mid Term Sourcing Strategies

Cash GenerationPriority 1

Value CreationPriority 2

Relationship MGT:

• Rebuilding

• Retaining

• Resilience

Next

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Creating New Value

NewValue

ELIMINATE

What factors shouldbe eliminated that the industry has taken for granted ?

REDUCE

What factors shouldbe reduced well below industry standard ?

CREATE

What factors shouldbe created that the industry has never offered ?

RAISE

What factors shouldbe raised well beyondthe industry standard ?

Source: Harvard Business Review - Insead

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Value Creation Directions

INTERNAL

• Reinforce Procurement into S&OP and Supply Chain Processes

• Receive view on business requirements, volatility, priorities

• Provide view on critical resources capabilities & risks

• Faster, prioritized, purposeful response

• Articulate, Activate and Share Relevant Metrics end-to-end

EXTERNAL

• Implement New Supplier Relationships Management

consistent with company strategy and tactical plans

• Sustain supply capacities, capabilities

• Mitigate risks

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Reference

Stronger Involvement of

Procurement in S&OP

Implementing Relevant Metrics

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Reference

33

Procurement in S&OP

2007

No PermanentInvolvement

2008

Procurement inAsset MGT Meeting

2009

Improved visibilityInteractivity

Faster Response

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Reference

S&OP Critical resources risk mgt

Types of Supply Risks

1 Availability

2 Cost

3 Regulatory/legal

4 Contractual - what happens if Borealis demand falls dramatically in the storm

5 Financial/Currency

6 Quality

7 Health & Safety

8 Others

1 2 3 4 5

5 5 10 15 20 25

4 4 8 12 16 20

3 3 6 9 12 15

2 2 4 6 8 101 1 2 3 4 5

RISK SCORE MITIGATION

High risk 20-25 Immediate action to be implemented together with Asset Team

Medium risk 10-19 Define action and execute in agreed timeframe

Low risk 1-9 Acceptable risk

Pro

ba

bil

ity Severity

Define Business Risks

Identify key factors onSupply Market side

Classify, PrioritizeRisk Classes

Apply to CriticalResources

ManageInteractively

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Reference

Alignment, Articulation, Sharing in SC

Align

&Share

► Company Performance Metrics & Scorecard

► Supply Chain Operational Metrics & Scorecard

► Procurement Metrics and Scorecard

► Share among key SC Partners

Perfect OrderFulfillment

ResponsivenessFlexibility

COGS

Total SC MGT Cost

Cash to Cash

• Value Creation

• Cost Containment

• TCO

• Logistics Sourcing

• Execution Efficiency

• DIO

• DPO

• Supplier Reliability

• Source Cycle Times

• Source Flexibility

Value at Risk • Supply Risk Mgt

Customer Facing: Top Line Internal Facing: Bottom Line

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SC Metrics impacting Top and Bottom LinesProcurement impactDirect / Indirect

EVA: Economic

Value Added

ROIC-NOPAT

Cost of Capital

EBIT

Tax Rate

SALES

Total costs

WACC: weighted

avge cost of cap

Net invested

Capital

Fixed

Capital/assets

Working capital

Inventory

A/R

A/P

Other credits &

Debts

-

x

x

-

+

Perfect Order FulfillmentOrder Fulfillment Cycle TimeFlexibility

Total SC Mgt costs (TSCM)COGS

DOI

DSO

DPOCost AttackMaverick Compliance

Cash-to-cash cycle timeReturn on working capital

Return on SC fixed AssetsTCO

+

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Reference

Developing Winning Collaboration

with

Suppliers and Service Providers

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Reference

CLASSICAL PROCUREMENT

• Best Country sourcing

• Total Cost of Ownership

NEW PARADIGM

• Supply Chain Integration

• Fully Collaborative Relationships

• Value-sharing

+

This calls for new concepts for value creation:

Articulating

Ingredientsfor new

Procurement

Vision

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Reference

Collaboration in Innovation

The Innovation CompetitiveMatrix

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Reference

Relative Importance of the Innovation

low high

low

high

Co

mp

eti

tive A

dv

an

tag

e

TheFocus

Quadrant

Mapping and Understanding Opportunities

The Innovation

Pool

Customer�

�

☺�

Co

mp

eti

tio

n ��

☺�

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Reference

Applying the Innovation Competitive Matrix

Borealis

Competitive Index

Inn

ovati

on

In

dex

Borealis Maps Innovation

Opportunities in Matrix

Competitive Index

Inn

ov

ati

on

In

de

x

Supplier

Supplier Maps Innovation

Opportunities in Matrix

KEY IP

Initiative 1 A

Initiative 2 B

Initiative 3 C

Initiative 4 D

Initiative 5 E

Initiative 6 F

Initiative 7 G

Initiative 8 H

Mutually benefiting Innovation Pool

Projects resourced by joint C-level Steering

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Reference

The BOB Supply Management Network

Borouge

Supply

Network

OMV-Petrom

Supply

Network

Borealis

Supply

Network

• Virtual Organization

• Started 2006 from joint 3 VP Proc initiative

• Objective: Leverage Across Supply Networks

• Spend, Opportunities, Visibility

• Resources, Tools, Knowledge

• Capacities, Working Capital

• Provide Strategic Opportunities to Suppliers

Compared to previous model

�Procurement Savings boosted by 500 %

�Teams Productivity increased by > 30 %

� Shared Lead Buyer Resources

�Suppliers’ Awareness and Reach simplified

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Reference

SC Operational Collaboration

Business Case

Borealis – DegussaUsing SCOR across enterprises

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Supply Chain Operational Collaboration

• We create Supply Chain visibility

• Use of the SCOR roadmap and analysis tool kit

• Experts talk to Experts

• Customer Service to Planner

• Project leader to project leader

• Account manager to buyer

• We share performance targets (common SCORcard)

• Reliability: Delivery performance & Forecast accuracy

• Responsiveness: lead-time

• Cost: Deliver cost

• Cash-to-Cash: Supply Chain Inventory

• We extract value and share

Total Business Volume: > 10.000 tons and > 30 Mio. € revenue24 Products, 8 Countries, 21 Production sites, 30 Shipping points

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Reference

Borealis

Burghausen

Borealis Schwechat (AT)

Borealis Beringen (BE)

Borealis Stathelle, Ronningen (NO)

Borealis Porvoo (FI)

Borealis Stenungsund (SE)

Borealis Schwechat (AT)

7

2

6

2

5

4

Pullach

M1/M2 D1/D2

Production Warehouse Pullach

S1/S2 D1/D2

Warehouse Göteborg, ANT

S1 D1

S1

Borealis Kallo (BE)

S1M1

BLK

M1

PCKD1

S1M1

BLK

M1

PCKD1

S1/S2M1

BLK

M1

BLKD1

S1M1

BLK

M1

PCKD1

S1M1

BLK

M1

PCKD1

S1M1

BLK

M1

BLKD1

11424

10868/19

S1

S1

M1

BLKD1

S1 M1 D1

S1 M1 D1

S1

M1

BLK

M1

BLK D1

OMF - Polycomp

Peroxide

OMF - Polymerchemie

M1 D1S1

S1 M1 D1

Eylria

M2 D2

Import Hafen

S D

S1 D1

D1

Japan

Indonesien Rotterdam

S1 D1

Overview Supply Chain PeroxidesSCOR Level 2 – bottlenecks and opportunities

Forecasts sent to Malmö & info sent to Pullach

Why not to send straight to Pullach ?

Empty packaging --> opportunity to value

waste ?

Standard LT could be reduced from 15 days to

8 days

SC today --> Degussa US (6 weeks LT)--> Pullach --> Bamble

Why not : Degussa US --> Bamble. Elements to be considered :

Why not relocate product from US to

Pullach plant

LT reduction opp Got --> Sten, in Got. Degussa keeps

sales + Buffer some containers, in Sten, Borealis kepts

some tons of safety stock. Do we really need GOT

storage location ?

Combine shipments to optimize container fill-rate :

use of planning calendar ?

Improved purch. Req. processing (collective by vendor)

Quit COA and promote SQC

ERS or invoicing plan --> potential ?

Realize strategic Vision PP%:

Strategic Vision

OMF growing volume potential for

consolidation transportation, for

Polycom and Polymere

Bottlenecksidentified, measured,

and prioritized for solutions

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Reference

One set of SCOR performance metrics

Continuous improvement monitoring

Overview Metrics SCOR Level 1 Metrics Total BU PE PP

Median

Process

Industry

Best in class

Process Industry

(02/05)

Delivery Performance (Commit date)

BOREALIS 95,5% n.c. n.c. 92% 99%DEGUSSA (per) 72,7%

Order Fulfillment Lead Time 18,5 [days]SOURCE (peroxides - MTF) 15 [days]

MAKE (MTF) 1 [days] 1 [days] 1 [days]DELIVER 3 [days] 3 [days] 3 [days]

Supply-Chain Flexibility 95 [days] 5 [days]SOURCE (per) ? [days]

MAKE 240 [days] 240 [days] 240 [days]DELIVER 0[days] 0 [days] 0 [days]

Total Supply Chain Management Cost 9% 11% 7% 10% 2%

Cost of Goods Sold 91% 86% 94% 78% n.c.

Value-Added Productivity per payroll € 2,7 [€] 3,7 [€] 3,2 [€] 2,3 [€] n.c.

Days of coverage (per) 32,7 [days]

Inventory Days Of Supply (RM) 3,8 [days] 7,4 [days] 1,8 [days]

Inventory Days Of Supply (all) 29,5 [days] 45,9 [days] 19,9 [days] 51,3 [days] 40 [days]

Days of Sales Outstanding 47,7 [days] 70 [days] 33,5 [days] n.c. n.c.

Days of Payables 28,8 [days] 51,3 [days] 17,1 [days] n.c. n.c.

Cash-To-Cash Cycle Time 48,4 [days] 64,6 [days] 36,3 [days] 55,1 [days] 40 [days]Assets Asset Turns 3,6 turns 2,4 turns 5,3 turns 1,4 turns 4,5 turns

Supply Chain SCOR-Card (Level 1)

EX

TE

RN

AL

INT

ER

NA

L

Supply Chain

Reliability

Responsiveness

Flexibility

Cost

Cash Cycle

DEGUSSA BOREALIS

Overview Metrics SCOR Level 1 Metrics Total BU PE PP

Median

Process

Industry

Best in class

Process Industry

(02/05)

Delivery Performance (Commit date)

BOREALIS 95,5% n.c. n.c. 92% 99%DEGUSSA (per) 72,7%

Order Fulfillment Lead Time 18,5 [days]SOURCE (peroxides - MTF) 15 [days]

MAKE (MTF) 1 [days] 1 [days] 1 [days]DELIVER 3 [days] 3 [days] 3 [days]

Supply-Chain Flexibility 95 [days] 5 [days]SOURCE (per) ? [days]

MAKE 240 [days] 240 [days] 240 [days]

DELIVER 0[days] 0 [days] 0 [days]

Total Supply Chain Management Cost 9% 11% 7% 10% 2%

Cost of Goods Sold 91% 86% 94% 78% n.c.

Value-Added Productivity per payroll € 2,7 [€] 3,7 [€] 3,2 [€] 2,3 [€] n.c.

Days of coverage (per) 32,7 [days]

Inventory Days Of Supply (RM) 3,8 [days] 7,4 [days] 1,8 [days]

Inventory Days Of Supply (all) 29,5 [days] 45,9 [days] 19,9 [days] 51,3 [days] 40 [days]

Days of Sales Outstanding 47,7 [days] 70 [days] 33,5 [days] n.c. n.c.

Days of Payables 28,8 [days] 51,3 [days] 17,1 [days] n.c. n.c.

Cash-To-Cash Cycle Time 48,4 [days] 64,6 [days] 36,3 [days] 55,1 [days] 40 [days]Assets Asset Turns 3,6 turns 2,4 turns 5,3 turns 1,4 turns 4,5 turns

Supply Chain SCOR-Card (Level 1)

EX

TE

RN

AL

INT

ER

NA

L

Supply Chain

Reliability

Responsiveness

Flexibility

Cost

Cash Cycle

COMBINED

Overview Metrics Shared SCOR Level 1 MetricsActual

"As-is"

"To-be"

(progress)

"To-be"

(success)Competition

Median

Process

Industry

Best in class

Process

Industry

(02/05)

Delivery Performance (Requested Del.

date)

73% 85% 95% 92% 90% 95%

Forecast accuracy

65% 80% 90% 75% n.c n.c

Order Fulfillment Lead Time

SOURCE (peroxides - MTF) 15 [days] 8 [days] 10 [days] n.c

SC Avg 2005 Inventory qty (Tons) -

Peroxides332

10%

reduction

20%

reduction

SC Avg 2005 Consumption qty

(Tons/Month) - Peroxides202

SC Inv days of supply (days) -

Peroxides50 [days]

INT

ER

NA

L

Cash Cycle

Degussa - Borealis Supply Chain SCOR-Card (Level 1 & 2)

EX

TE

RN

AL

Responsiveness

Supply Chain

Reliability

Co

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Reference

Degussa – Borealis collaborative work

SC Performance Attribute Metric Results

ReliabilityOTIF

Forecast accuracy

From 85 to 93%

From 60 to 76%

Responsiveness Avg Lead-time 40% reduction

SC cost Transportation cost 40% reduction

Working capital SC Inventory 18%-60% reduction

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Reference

Conclusion:

“The best way to predict

the future is to invent it…”

chemical supply chain

Education

markets volatilityclassical

forecastyour markets

supply chainkey drivers

presenting borealis5borealis

presenting borealis4borealis

polyolefin solutions

referencethe financial

cost drivers2007