Chain Reaction

Dec. 21, 2004
As electronic marketplaces and other e-business initiatives gain momentum, e-commerce in the chemical industry starts to roll.

On June 11, 2001, Dow Chemical Co. sold glycerin to BASF Corp. and purchased soda ash from Solvay Minerals Inc. Nothing new there -- Dow has been buying and selling like that for decades. What made these transactions unique, however, was that they occurred electronically, across an e-marketplace operated by Elemica Inc., Wayne, Pa. Elemica was created by a consortium of some of the largest chemical companies in the world to automate their contract business, which represents 80% of the transactions within the chemical industry. Via a single connection to the Elemica hub, trading partners link their ERP and other back-office software systems and business processes so that buy/sell trans-actions are accomplished machine-to-machine without human intervention. Consortium marketplaces such as Elemica, as well as a host of other e-business initiatives in the chemicals business, promise to bring new efficiencies to the industry's fragmented supply chain, cutting costs and strengthening ties with customers and suppliers. "Elemica will deliver value through reduced transaction costs and streamlined business processes both on the buy side and the sell side of our business, and we have aggressive goals in both areas," says Andrew Liveris, group president, performance chemicals, Dow Chemical Co., Midland, Mich., and cochairman of the Elemica board of directors. "Dow intends to move a majority of its strategic procurement of chemical raw materials through the e-marketplace within the next 18 months." With its 22 industry-giant members -- including Dow, Du Pont & Co., BASF AG, Bayer AG, Rohm & Haas Co., DSM NV, Mitsui Chemicals Inc., Mitsubishi Chemical Corp., and Shell Chemicals Ltd. -- Elemica up and running sends another strong signal that e-marketplaces in the chemical industry are well under way. These transactions supplement other e-business initiatives, including Web site storefronts and portals, direct point-to-point ERP system integrations with trading partners, and electronic vendor-managed inventory, as well as other independent industry exchanges. All told these programs are the basis for some heady forecasts for e-commerce in the chemical industry, both in trading volume and potential cost savings. A survey by the American Chemistry Council Inc. (ACC), Arlington, Va., shows e-commerce accounted for 1.6% of industry sales in the U.S. in 2000, or $7.2 billion, up from $700 million in 1998. However, those figures are expected to jump to 25% and $150 billion by 2006, a number some suggest could be reached as early as 2003. Worldwide adoption of e-commerce in the chemical industry should exceed 17% of total global sales, or over $380 billion by 2006, according to the ACC survey. Adoption of e-business is expected to lag the U.S. by about one year in Canada and Western Europe, and more than a year in Japan and the rest of the world. How much of this e-commerce will occur over e-marketplaces and independent exchanges is the subject of some debate. Estimates range from 25% to 50%, with the remainder running on private exchanges and via Web sites. Regardless, the cost-savings potential for online trading in the industry is substantial. According to Charles Gruber, vice president of Elemica, the supply-chain costs to support $600 billion in sales volume in Europe and North America is estimated at $120 billion, including transportation. In developing its business plan, Elemica determined there was a potential savings of $15 billion to $20 billion in transaction efficiencies, connection efficiencies, and supply-chain and transportation-cost efficiencies for all e-business tools and marketplaces. The opportunity available to Elemica itself is pegged at some fraction of $6 billion, according to Joseph Steed, DuPont's development manager, e-business ventures, Wilmington, Del. Reducing Inefficiencies Unlike the automotive industry with its Big Three and a handful of other manufacturers, the chemical industry is highly fragmented. The ACC counts 76,000 companies worldwide in basic chemicals, specialties, and life sciences. Many of the transactions among companies occur within the industry as products move among manufacturers, from hydrocarbon raw material to polymer, for example, each adding value via some process or reaction, until the final product surfaces as part of a car, detergent, or television set. "There are a lot of inefficiencies in this fragmented supply chain, and the first order of business for Elemica [and other e-marketplaces and e-business mechanisms] is to streamline and automate processes and get those costs and inefficiencies out," says Liveris. Dow's potential savings using Elemica could reach $10 million annually, he figures. In addition to savings on transaction costs, marketplaces provide reductions in working capital, logistics bundling for negotiation leverage with freight forwarders, and reduced customer service, technical service, and sales costs. DuPont suggests overall savings of 1% to 4% of sales volume for low-complexity trading and 15% to 20% of sales volume for complex supply-chain transactions using the marketplace. Dow's Liveris pegs these ancillary savings at two to three times those realized from order handling, but notes that additional effort is required to take advantage of them. "This is a warning bell for all the Elemica members," cautions Liveris. "You'd better start working inside your company to take out costs that are now being replicated by Elemica at a lower price. So that means a lot of the back-room functions and work processes will have to be reengineered. Logistics is another big piece of it. You have to actively remove costs from your own systems." Elemica's success is one of several harbingers of e-commerce's growth in the chemical industry. While it is the biggest e-marketplace, Elemica is not the only or even the first effort in the industry to establish electronic connectivity among members via an integration hub. Envera LLC, Richmond, Va. (now a division of ChemConnect Inc., San Francisco), a second consortium of 11 slightly smaller companies (including Ethyl Corp., Borden Chemical Inc., Lyondell Chemical Co., Solutia Inc., Occidental Chemical Corp.), began running electronic transactions across its hub late last year. Lubrizol Corp., a $5 billion chemical and lubricant-components manufacturer in Wickliffe, Ohio, and one of Envera's founding members, plans to conduct nearly $50 million in e-procurement annually across the hub by yearend. Both Elemica and Envera are increasing their hubs' functionality. Envera currently passes nine messages electronically that deal with order-to-cash, fulfillment, order status, shipping notice, and order change and confirmation. This will increase to 19 by the end of the third quarter. Elemica will bring its logistics capability on-board in the third quarter as well, and will increase its message capability to support scheduling, demand planning, and forecasting. Both also offer Web-based interfaces so that companies without ERP systems can integrate to the hub with a browser, and thus connect to the ERP systems of their larger customers for order placement and status. The two most prominent independent exchanges in the industry -- funded by chemical companies, technology vendors, and venture capital firms -- are showing record transaction volumes. The role of these exchanges differs from consortium e-marketplaces. While the latter are set up to support contract business, the independent exchanges offer Nasdaq-like commodity trading and price/supplier/customer discovery via other buy/sell mechanisms, including auctions. (Chemical companies using the independent exchanges report savings of up to 30% using online auctions.) Independent exchange, operated by Inc., Houston, for instance, quintupled activity in this year's second quarter from the same period last year, to 1.1 million metric tons traded. The company now has offices in Brussels, Hong Kong, the UK, So Paulo, Singapore, and Tokyo, and has established a strategic alliance with Inc. With headquarters in Houston and an operating base in Seoul, supports the e-commerce efforts of 60 chemical companies in Asia, and traded over $100 million in volume in May 2001, just six months after opening shop. The other key independent exchange is the World Chemical Exchange, operated by ChemConnect. It has doubled its activity in the last six months from an annualized volume of $1.8 billion in the fourth quarter of 2000 to about $3.2 billion in this year's second quarter. In addition, the company pulled off the industry shocker of the year (so far) by merging with Envera in June. For its part, Elemica is in the process of entering a strategic alliance with ElastomerSolutions, operated by ElastomerSolutions LLC, Horsham, Pa., a vertical e-marketplace serving the elastomers industry. The question for all of the consortium marketplaces and independent exchanges has been whether they can attract enough action at their sites to be profitable. In fact, Elemica, CheMatch, and ChemConnect with its Envera division all expect to have a positive cash flow in 2002. Many more exchanges have folded, sold their software, or changed their business models from transaction exchanges to technology providers, helping companies set up private marketplaces. Industry observers and participants anticipated, and in fact welcomed, consolidation in the e-marketplace. A number of the exchanges attracted venture capital at a time when it was readily available, but was supported with questionable business and revenue models. "When this initial rush of dot.coms occurred in 1998-99, the brick-and-mortar companies were sort of frozen in place, concerned about relationships with customers if they migrated to these exchanges," says James Alampi, president, Alampi & Associates LLC, a chemical-industry consulting firm located in Novi, Mich. "That gave birth to the consortium marketplaces." Once estimated at upward of 100, the number of exchanges and marketplaces is rapidly dwindling to a much more manageable dozen or so, with more consolidation likely to come. "A lot of the noise from a year ago is gone," says Bill Gaughan, vice president, e-business and information technology, polymers and chemicals, Bayer Corp., Pittsburgh. "We are no longer trying to figure out if these companies have a good value proposition or not. In that respect it has made it easier to focus our efforts." E-Smorgasbord Marketplaces are not the only e-business initiatives gaining traction in the chemical industry. Companies have a growing portfolio of e-commerce mechanisms, offering multiple opportunities for customers and suppliers to connect. Industry-leading companies have Web sites and portals for transactions and other customer services, direct point-to-point connections with customers and suppliers' ERP and other software applications, and electronic vendor-managed inventory. "Most everyone else talks about e-business as a way to reduce costs and build efficiencies," says Fred Beuhler, vice president, e-business, Eastman Chemical Co., Kingsport, Tenn. "Certainly that is part of it, but what we want to do is build a capability and leverage technology to be able to serve our customers the way they want to be served." At Eastman Chemical, for instance, 15% of sales were enabled through e-channels in 2000; 30% is the target for 2001. Annual sales activity at the Eastman storefront Web site, where 800 users are active, reached $400 million in June. The company expects a yearend total of $750 million in Web sales. Often the cornerstone of the e-commerce platform, these portals allow customers to collect information, interface with key contacts, and transact business, as well as peer into certain sections of the company's ERP system to check order status and customize their own reports. Web sites also provide a window into electronic vendor-managed inventory. A program offered by Occidental Chemical Corp., Dallas, utilizes remote sensors to measure volumes of its products in customers' storage tanks and silos. Through secure Internet connections, sensor data flows back to the Occidental ERP system, where it is visible to the customer on a personalized Web page at the Occidental Web portal. Customers can get data on tank volumes at multiple plant locations via the Occidental Web site. When volumes fall below an agreed-upon point, a purchase order is generated automatically. The order flows into the Occidental SAP system, initiating shipment and appropriate documents. "We have taken all the people out of the process of managing and replenishing inventory," says Stacy Palmatary, Occidental's vice president, e-business. More companies also are building direct ERP-to-ERP system links with customers. Eastman Chemical, for instance, now has 15 such connections and expects to double that number this year. "We look for the hidden assets in the company we can leverage and bundle together to get closer to our customer," says Beuhler. "The ability to do that is much richer through a direct relationship. It allows us to deliver value in a unique way." New e-commerce challenges face the industry as it begins to connect to partners outside chemicals. Elemica, for instance, is discussing a linkup with Covisint in the automotive industry and Transora in consumer products. The goal is to establish a network of marketplaces for seamless transactions across industries.

Chemical-Industry Marketplaces E-Marketplaces Independent e-commerce exchange for bulk-commodity chemicals, plastics, and fuel products. Industry-consortium marketplace for major Asian chemical companies. Strategically aligned with Inc. Industry-consortium exchange for the elastomers industry. Joining Elemica Inc. via a strategic alliance. Industry-consortium e-marketplace providing ERP-to-ERP system connections. Electronic market-maker for chemicals, petrochemicals, and plastics. Takes title to goods and lists its own best bid-and-offer prices. Industry-consortium e-marketplace providing ERP-to-ERP system connections. Now a division of ChemConnect Inc. E-marketplace for fine and specialty chemicals. Applications service provider for private marketplaces. Industry-consortium marketplace for thermoplastics, processing equipment, and other supplies for downstream plastics processors. Independent exchange for the paint and coatings industry. E-marketplace and information source for buyers and sellers in the plastics industry. Industry-consortium global exchange for petrochemical and energy industries. World Chemical Independent exchange for chemicals and plastics, recently merged with Envera LLC. Marketplace Software, Technology VendorsAspen Technology Applies technology acquired from e-Chemicals to build private electronic marketplaces for chemical companies. OneChem Applications service provider that builds front-end applications and point-to-point/point-to-many private connections for chemical companies. SciQuest Provides software to create private marketplaces for small to midsized pharmaceutical and biotech companies.

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