C&EN Houston Bureau

Chemical producers are discovering that electronic means of conducting business are more about business and less about technology. As the focus on setting up enterprise resource planning (ERP) systems, such as SAP, and concerns about Y2K problems appear finally to be waning, companies are tackling the next business and information technology (IT) challenge. Andersen Consulting reports that 48 of the top 50 chemical firms are devising Internet presences and appointing directors of e-commerce.

"The industry is beginning to figure out that e-commerce has some strategic implications," says Fred Buehler, director for e-business at Eastman Chemical. Much of the industry, he adds, is just now understanding that there are some "real competitive business-design implications" and is giving it attention at a higher or more corporate level than in the past. Business interests, rather than IT initiatives, are starting to drive thinking and change.

Depending on whom you listen to, chemical companies are either lagging or leading in e-commerce. Their level of involvement, development, and actual implementation varies widely. Despite a combination of hype about the Internet, uncertainty about what to do or what the results will be, and even a few companies that are far enough along that they don't want to reveal too much, there is consensus that e-commerce will significantly affect how business is conducted.

Table: Business-to-business interface to lead chemical electronic commerce

However, there isn't yet a compelling case for needing to use the web to do business, Buehler and others admit. "In other words, nobody has really stepped out there yet and provided something that has a compelling value proposition to the buyer, although there are some that are clearly starting down that path," Buehler adds. Most chemical company forays on the Internet have been to publish company and product information, derisively referred to as "brochureware."

"As the buyer begins to recognize the value in doing business on the Internet and there is a compelling case for getting Internet-enabled--and it doesn't take much to get enabled--I think things will change pretty quickly," Buehler says. Many companies are looking outside the chemical industry for demonstration of successful and creative e-commerce models. Yet, unlike other industries, chemical companies are often each other's customers and competitors.

A recent survey by Chemical Industry Data Exchange (CIDX)--a group of chemical firms and trading partners working to support electronic data interchange (EDI) and foster e-commerce--found that e-commerce has replaced Y2K as the most important topic for IT managers. Nevertheless, CIDX learned, it is not obvious how to use Internet-based capabilities effectively for business-to-business applications. Plans are to expand customer support and create applications for order processing, transactions, inventory control, planning, and forecasting.

On the transactional side, chemical companies have already made significant investments in EDI. A consortium that includes chemical producers BASF, BOC Gases, DuPont, and Rohm and Haas is developing a new standards-based process called Open Buying on the Internet or OBI.

Chemical company spending on e-commerce has been minimal--less than 3% of IT budgets, reported William Oliver, a principal at Gemini Consulting, at a conference on electronic commerce for chemicals held June 22 and 23 in Philadelphia. However, he emphasized that technology, though important, should be the "smallest piece of the e-commerce pie." Other elements for success include the processes for doing business; strategy and market analysis; organizational considerations; and partnerships with customers and suppliers.

Oliver listed Dow Chemical, BASF, Air Products & Chemicals, and Akzo Nobel as the chemical producers taking e-commerce most seriously. Air Products already has a system in which customers can place and track orders. The company believes it has made substantial gains, with thousands of catalog and hundreds of subscriber visits per day. And BASF lets suppliers check inventory, analyze usage, and calculate forecasts.

Shell Chemicals leads in creating Internet-enabled supplier-managed inventory systems that have internal planning capabilities or can link customer and supplier ERP systems. Through its system and software tools, Shell handles purchasing, ordering, delivery, and inventory control for 38 customers and four suppliers. This year, Shell will introduce an updated version that is en tirely browser based with the look of a desktop application.

Table: Customers most want information on orders

Shell says the result has been increased revenues, decreased idle inventory, a cut in the number of emergency shipments, and reduced costs for customers. The contribution to Shell's earnings has been a combined $60 million with an estimated return on investment of 30 to 1.

Most companies have public web sites that include general company, product, and financial information. Access to customer-oriented sites typically requires registration and logging in. Through a registration link on its public site, Amoco Chemicals, now part of BP Amoco, provides contact information, feedback, question-and-answer postings, and discussions for customers.

A feature of Dow Chemical's current interface is that customers can customize their own Dow web page with relevant service and technical support information, personalized messages and e-mail, and product and contact listings. Dow is expected to expand this to include secure sites for order tracking, payment records, contract terms, and, possibly, vendor-managed inventory and electronic transactions.

Dow is being very guarded about its e-commerce plans, apparently from its desire to protect any competitive advantage gained as an early mover. "Although this may not be rocket science, it's very complex and it's difficult to do it well," commented Richard Payne, Dow's director of e-commerce, at last month's conference. "But those who execute it well will probably gain an advantage."

Eastman expects to launch e-commerce offerings this fall after months of testing. The company recently shifted its e-commerce efforts from its IT group into a corporatewide initiative with, Buehler notes, "a very focused, business-by-business view of our customers layered over top." He will only say that the focus is on customer service and on creating capabilities to transact business online, seven days a week, 24 hours a day.

Chemical companies initially are thinking about e-commerce largely for improving customer service, rather than making radical changes in their business models or processes. The desire to cut costs, to improve supply-chain management, and to use and integrate ERP systems is helping drive e-commerce plans. Eventually, Oliver noted, "shifts in customer expectations will force chemical companies to move more quickly into e-commerce."

The Internet clearly offers speed, flexibility, and accessibility. Whereas some efforts are corporatewide, specific business needs for growth or competition drive many more. Chemical companies say that as they complete their implementation of ERP systems they would like to take advantage of and integrate these into their Internet-enabled supply-chain activities. However, most believe this will prove a difficult, time-consuming, and expensive task.

"Critical for success in e-commerce and transacting with external trading partners is having an ERP," Buehler says. "To a large extent, the degree to which chemical companies can really be aggressive is dependent upon how they have implemented an ERP strategy. There are some significant issues around integration with back-end systems, and the more fragmented that is the more complicated it's going to be."

Cost reductions are obvious benefits and an initial incentive for developing e-commerce schemes. Andersen Consulting estimates that e-commerce can reduce the costs of sales, marketing, and order processing by 25 to 30%. Technical support costs can be cut by more than 50%. On the revenue side, sales increases of up to 10% are expected from locking in customers and gaining market share. Although cost savings may help justify an investment in e-commerce, they are minor compared with the real opportunities and innovations e-commerce makes possible.

"We cannot force e-commerce on customers," Dow's Payne said at the conference. "We must create a preferred way of doing business if e-commerce is to have substantial impact." To have even a chance for success, he said that e-commerce offerings must include security, attractiveness to the target audience, the ability to deal with market conflicts, reductions in the cost to serve, and they must be global. And he pointed out that one design will not fit all businesses or customers.

E-commerce has two fundamental offerings--enhanced customer service and increased productivity, Payne believes. "There's no question that we can reduce costs of serving customers in many ways. The challenge as we move ahead is to end up with a service level that meets their expectations," he explained. "Customers will decide who is providing the desired product and service."

Marcus Rabil, corporate e-commerce manager at DuPont, proposed a simple test: "If your e-commerce strategy does not give your customers anything more than you can give them with a fax machine and an 800 number, you're probably not thinking about it right." Technology is merely an enabler, he and others believe.

"DuPont's strategy is to use e-commerce to enable our business strategy," Rabil stated simply. This, he said, includes improving the company's current business model or "doing the stuff that just helps you do what you're already doing better. Generally, this is cost driven, but it can also involve reaching new customers." The other approach is to develop new business models. In other words, Rabil said, "How can we make money in ways that we never made money before?

"These two approaches will probably require different management processes and very different ways of thinking" Rabil cautioned. Companies like DuPont, he said, must bring both physical assets and "knowledge assets" to the new business environment.

Much of the thinking today focuses on business improvement. "Business improvement isn't bad," asserted Stephen Phillips, vice president with Computer Sciences Corp., El Segundo, Calif., at the meeting. "However, these are necessary, but insufficient, moves." The basic economics of marketing, sales, and distribution is being fundamentally altered, he noted, and "economic discontinuities do much more than take 10% out of the supply chain, they transform industries."

This transformation, which includes opening new channels to old and new customers, is presenting some major challenges. Most chemical e-commerce is expected to be between producers and their strategic or key customers. A few producers, such as GE Plastics with its Polymerland site, are creating lower cost channels to serve multiple, smaller customers.

Table: Internet trading sites aim to link buyers and sellers

Companies are finding that they can reach "down the value chain," directly communicating with their distributors', brokers', or even customers' customers. Although one result may be new customers and added business, another is "channel conflict," which arises when a supplier does an end-run around its customers and partners. "Disintermediation" has been coined to describe the displacement of intermediaries in the value chain.

Sidebar: Chemicals available at trading and auction web sites

Solutia, a producer of nylon for carpet fibers, is "cybermarketing" carpeting, appealing directly to consumers. According to the company, this supports, not opposes, its corporate customers. In contrast, DuPont, another nylon producer, avoids possible conflicts by providing links to retailers and uses the Internet to market a Teflon-based carpet cleaner that complements its customers' offerings.

Monsanto's Farmsource site is gaining praise. Largely an informational site--with news, crop reports, weather updates, classified ads, directories, and product information--it establishes links to farmers and others in agriculture. Without stepping on the toes of its distributors or necessarily conducting much real commerce on the site, Monsanto still builds electronic traffic, possible goodwill, and name and brand recognition with end-users.

The ability to reach down the value chain "virtually" is leading many companies to reassess the value contributed by different links in the chain. Transactions, in any industry, have three main components, Eastman's Buehler explains: product that moves from seller to buyer; dollars that move from buyer back to seller; and information that flows both ways.

"Unless the Internet entirely replaces everything that [a link in the chain does] in some way--for example, if they only deliver information up and down the value chain--then there is some significant potential for disintermediation," Buehler surmises. "But if a player recognizes what its competency really is, and focuses on and leverages that, then I think the channel conflict issue becomes less important."

Similarly, DuPont's Rabil said: "In the old world, the intermediaries were closely aligned with those in production. In the new economy, that's going to shift, the intermediaries are going to be related to the people in the consumption role." He believes, however, that concerns about disintermediation are just a "big distraction" and not part of strategic thinking. "Over time, water will find its level--if players add value, they'll stay. If they don't add value, guess what?"

Sidebar: Virtual markets offer research chemicals and supplies

At the conference, David Quapp, system analyst at Nova Chemicals, described the company's new automated system for evaluating, pricing, and informing brokers about the availability and characteristics of off-spec polymer products. The process ties together information from the company's lab analysis and ERP systems with software that creates Internet postings. Brokers get customized e-mail notifications and can order directly over the Internet.

This new approach, Quapp said, has speeded up the entire process, improved communication, reduced inventory in the less valuable product, and streamlined pricing. Nova accomplished most of the change with readily available and easily implemented technology. Quapp warned, however, that "technology doesn't replace the process. It's simply a tool--don't let someone sell you a tool as a process."

Despite his admonishment, many are uncomfortable with such technology achievements. For example, electronic product listings could just as easily be sent to buyers rather than through brokers who may not handle any actual products. Internally, employees in customer service and sales and marketing are increasingly concerned about being displaced or, at the very least, uncertain about how their roles will be redefined.

Like their employees, companies are facing competition from entirely new sources. Many industry consultants and participants suggest that the traditional and staid chemical industry--historically slow to adopt new technologies--will not make radical business changes. Meanwhile, new entrants, with revolutionary ideas, are rapidly gaining ground.

Chemicals can now be bought and sold through Internet trading and auction sites where the company helping to create the transaction does not actually handle any products. Virtual marketplaces and distributors are emerging, easily aggregating and offering product listings electronically. By 2003, Andersen Consulting's Kevin Wenta estimates, e-commerce distributors and aggregators will double in size, while the trading and auction market will increase five to 10 times.

One of the newest such marketplaces is e-Chemicals, created in late 1998 and headquartered in Ann Arbor, Mich. Its partners--IBM, Yellow Freight, and SunTrust Banks--give e-Chemicals e-commerce software, product logistics, and credit and banking capabilities.

The company sells branded industrial chemicals to small- and medium-sized customers and has signed up suppliers that include DuPont, Elf Atochem North America, Cytec Industries, and Witco. As an intermediary, it can help large producers reach new or different customers and handle smaller, less strategic purchasers. e-Chemicals says it offers convenience, efficiency, reliability, and cost-savings from its low overhead operations.

As a virtual distributor, e-Chemicals competes with traditional, now Internet-enabled, distributors such as Ashland Distribution Co., Chemcentral, and Van Waters & Rogers with its Chempoint web site. In March, e-Chemicals was accepted as the first e-commerce candidate member of the National Association of Chemical Distributors (NACD). Full membership hinges on third-party confirmation of its adherence to NACD's responsible distribution process.

Barriers to entry for new Internet-enabled businesses are very low, especially since the companies are unencumbered by physical assets and inventories, past investments, existing customer relationships, and old business practices. Chemical company IT managers question whether these new distribution channels will serve customers well. Consultants suggest that these channels may serve the companies, especially as they help broaden the customer base with little investment.

In contrast, what scares chemical producers most, Wenta told attendees, are new "reverse" markets. These third-party sites--such as FreeMarkets and XSChem --give all the power to buyers who initiate bidding for specific products and let producers compete for the sale. FreeMarkets, based in Pittsburgh, runs real-time, interactive, and competitive auctions for specialty chemicals and food and cosmetic ingredients. XSChem offers reverse auctions for crop protection materials.

"Customers will migrate to channels that meet their needs and dictate which business model will win," Wenta said. E-commerce, most agree, is "buyer-centric," not "seller-centric." As they dive into e-commerce, companies are advised to be flexible, move fast, think big, focus on customers, and have adequate resources and leadership support.

Many chemical companies--still early in the process and trying to find value in e-commerce--are having difficulty calculating a potential return on investment. This is particularly true when the measurements are softer--as in customer relations and service. Cost savings, many say, are only short-term returns and don't reflect the long-term impact of e-commerce. Although they expect that the costs will be less than for ERP systems, there are struggles to convince management to invest in what on the surface looks like yet another IT initiative.

Payne said that although the return on investment calculation is challenging, knowing there is a return is essential, particularly at Dow. He suggested that there may be a host of reasons to make the change: "The global nature of our business, the need for increased productivity, changes in customers' expectations, new channel options, the desire to reach down the channel, the desire to be more preferred by a given set of customers, and so on.

"Can e-commerce allow you to deliver your value proposition to the marketplace more effectively?" Payne asked. "Does e-commerce allow a competitor or a new entrant to offer a better value proposition? We don't know all the answers, but we believe we know some."

Chemical & Engineering News
Copyright © 1999 American Chemical Society