Issue Date: October 26, 2009
Enterprise Software In The Annus Horribilis
SAP, the German firm that dominates the market for enterprise resource planning (ERP) software in nearly every industry, got its start in chemicals. The ex-IBM programmers who launched the company in 1972 did so by designing a finance and business management system for ICI, the British chemicals conglomerate. Since then, SAP has signed nearly every other big chemical company in the world.
Most of these firms have spent steadily on their ERP systems, upgrading to new releases of the basic SAP software or, in recent years, adding specialized software for functions such as customer relationship management. While other vendors, such as Oracle, market ERP software, too, SAP far and away dominates the chemicals sector, where its software now constitutes the information technology (IT) underpinning nearly all business activity.
Given that supply-chain management is a basic function of ERP systems, it is fair to view the economic downturn that hit late last year as a kind of moment of truth for the massive investment in ERP software. So, how did IT hold up?
Quite well, according to chemical industry IT managers contacted by C&EN. IT, in fact, played a critical role in their companies’ responses to the crisis, they say. If anything, the recession forced chemical firms to put IT to work on developing business strategies that will be in place long after the recovery. Although IT budgets are being cut by 5–15% across the chemical industry this year, spending continues on projects aimed at making supply-chain management a more predictive science.
“I can’t point out where IT hasn’t done the job,” says Michael Stoko, a global IT director at DuPont. According to Stoko, the severe purchasing cutbacks among customers in industries such as construction and auto manufacturing forced DuPont to make fuller use of its ERP system.
“ERP has traditionally been viewed as a transactional accounting system,” Stoko says. “Now we see it as a strategic asset for meeting our objectives.” Foremost of these goals, he notes, is the company’s commitment, announced in December 2008, to removing $1 billion from working capital—money tied up in inventory or uncollected bills—in 2009.
Darrell Zavitz, vice president of supply chain at Dow Chemical, awards similar kudos to his company’s ERP system, which, he says, gave Dow a window on “the impact of a macroeconomic meltdown. By having immediate global visibility of our supply-demand situation, we were able to respond quickly.” Zavitz notes that Dow’s chief executive officer, Andrew N. Liveris, was able by mid-December to outline a program of rationalization and cost cutting, including the closure of 20 plants, targeting $700 million in annual costs. “We were able to respond early,” Zavitz says. “We had transparency.”
Not that state-of-the-art IT brought any finesse to dealing with an economic collapse. Dow announced 5,000 job cuts and DuPont, 2,500. Stoko and Zavitz claim, however, that having a centralized global IT system gave their companies the information they needed to target cuts at operations most severely affected by the downturn.
Paul Lord, a chemical industry specialist at IT analysis firm AMR Research, says the chemical industry is maturing in its use of IT. Many firms weathered the past 12 months thanks in large part to their improved use of data. “They are starting to see IT as more of an investment than a cost,” Lord says. Rather than using ERP software as a transactional accounting system, users are beginning to deploy it as an analytical tool that supports the decision-making needed to react to swings in business.
ERP software has also evolved. SAP, for example, no longer releases versions of its software that require users to undergo regular top-to-bottom revamps. The company’s latest ERP product is an adaptation of its workhorse R/3 software called Enterprise Core Components, or ECC Core. It takes a modular approach, incorporating a suite of applications such as customer relationship management and product life-cycle management that can be configured on the ERP backbone as needed. SAP is also partnering with software vendors whose products, covering a range of business functions, can be added to ECC Core.
These add-on capabilities are key to making ERP systems more effective in managing supply chains, according to Lord. The recession, he says, has focused chemical companies on regulating their output to meet fluctuations in demand. The flexibility afforded by mixing and matching targeted software will help make their ERP systems more predictive. “But it will also pose a dilemma,” Lord says. “Some companies will make good choices, and some won’t.”
Chuck Deise, vice president for chemicals at CSC, a consulting firm that has maintained DuPont’s IT system for more than a decade, agrees that add-on software is playing an increasingly important role in ERP system development. And the economic downturn will accelerate the deployment of specialized products, he says. “Most companies have the foundation of an SAP system installed. Now they are adding enhancements such as advanced planning and optimization, regulatory reporting, and logistics modules,” Deise says.
Given the severity of the economic slump, however, IT systems are being deployed differently today, according to Deise. “The chemical industry is in a whole different place in the world as a result of the economy,” he says. “Companies used to look at historical demand to fulfill historical inventory levels. Now, while they aren’t clueless, they are fairly blind as to when things will pick up in different businesses in different parts of the world.” ERP systems will need to incorporate better and more dynamic input from the market, he says.
According to Stefan Gürtzgen, chemical industry marketing director for SAP, the company’s software has been engineered to support new supply-chain management tools with minimum user investment. In converting R/3 to ECC Core, SAP adapted its ERP offering to conform to an enterprise service architecture, an IT industry standard that facilitates connections between the basic ERP software and add-on programs for supply-chain management, customer relationship management, and the like. Such harmonization, he says, will be required to improve supply-chain predictability.
Since 2007, Gürtzgen says, many large chemical companies have converted their R/3 software to ECC Core, which offers a suite of SAP applications that can be added to the ERP backbone.
Several of the software suppliers with which SAP has formed partnerships have applications of interest to chemical producers. Gürtzgen points to Vendavo, a price management software firm, and SmartOps, which offers an add-on for inventory optimization, as key partners serving the chemical sector.
Formed 10 years ago, SmartOps began working with SAP in 2005, when the German firm established what it called its partnership ecosystem. “We began light dating,” quips Sridhar R. Tayur, SmartOps’ CEO. “Later, we got engaged.” SAP eventually began selling SmartOps’ Multistage Inventory Planning & Optimization product. Sales grew more than 40% last year, Tayur says, and are on track to double in 2009, an upswing that began with last year’s credit crunch.
Tayur, a professor at the Tepper School of Business at Carnegie Mellon University, says SmartOps was launched to address what he saw as a deficiency in the ability of ERP and other enterprise software systems to manage working capital via centralized control of global inventory. “We wanted to replace the ‘million spreadsheet march’ with something that would look at inventories across the supply chain,” he says. By the time SAP decided to develop its own inventory optimization application, SmartOps already held significant ground in the chemical industry and other manufacturing sectors. A partnership made more sense, Tayur says.
Other vendors are filling gaps in SAP’s coverage, especially in plant automation. AspenTech, a production scheduling software firm, has built a large chemical industry customer base. Alison Smith, vice president of marketing strategies, notes that plant operations are solidly on the radar screen as chemical makers adjust to severe economic conditions.
Many companies were caught off guard, Smith says. “I don’t think anyone could have foreseen what was going to happen,” she says. “There had been a boom period in which everyone was deploying IT with a focus on how to scale up to meet demand. Over the past year, folks have been looking at how to use technology to help scale down operations and keep making money.” Chemical companies, she says, are deploying IT to establish real-time visibility of plant and business operations while they convert to a more demand-driven approach to managing their supply chains.
At DuPont, R/3, enhanced by advanced planning and optimization applications and SmartOps software, is geared toward driving down working capital, Stoko says. “Our supply-chain managers are able to look at the systems globally, check inventories, set safety stock points, and drive all of that information into the system,” he adds.
DuPont is seeing greater IT use on the part of top managers, Stoko says. “The ERP practitioner used to be at the operations level,” he adds. “Now, IT has moved up into the executive suite, where inventory is managed.” Moreover, because of the recession, Stoko says, assessment of supply and demand that in years past was biweekly or monthly is now “dynamic.”
Today, about 80% of DuPont’s IT operation is outsourced, largely to CSC, Stoko notes. DuPont’s in-house IT organization still has full responsibility for system and strategy development.
The company trimmed its IT budget by 15% this year as part of an overall cost-cutting regimen, Stoko says. That, according to AMR’s Lord, is at the high end of the average in a survey of chemical industry chief information officers (CIOs) his firm is conducting. But Stoko contends that much of the reduced spending will result from efficiencies generated by IT itself. “We have a policy whereby everything we do in IT makes our businesses faster, better, and cheaper,” he says. “This forces you to look in detail at how IT is being run. Improved utilization of IT assets frees cash to do other things.”
The recession has driven DuPont to look all the more closely at deploying IT efficiently, Stoko says, and has challenged the firm’s chemical businesses to better manage their supply chains. “We need more real-time signals from customers,” he says, noting that the industry is looking to the retail sector as a model for supply-chain IT.
Dow’s focus is also on monitoring the supply chain. Zavitz comes to his job of overseeing supply-chain management at Dow with 17 years of experience working on IT implementation and strategy on the operations boards of several of the company’s business units. “What is most meaningful to me,” he says, “is how well IT enables your business, and specifically your supply chain, to be competitive—in normal times, which we used to have, as well as during significant disruptions such as we are having now.”
Zavitz says Dow’s IT architecture has fared well, largely because it is centralized. “We have the luxury of having had a global enterprise system since 1995,” he says. “This includes management reporting that has weathered economic cycles on a routine basis.” The catastrophic fourth quarter of 2008 was not fundamentally different from other downturns, he claims, “only highly accelerated.”
The global system paid dividends in supporting Dow’s response to the crisis last year, Zavitz says. Dow, however, stands out among major chemical companies in that it continues to operate on SAP’s R/2 system, which, counting ECC Core, is two iterations of the basic SAP software behind what many other companies are using. Dow launched an effort to convert to R/3—and now ECC Core—several years ago, and it will take a few more years to complete the upgrade. “We’re a $60 billion company. We don’t get to take pit stops,” Zavitz explains.
The conversion won’t bring significant changes in IT network operation, Zavitz promises. “It will mostly impact user interface and experience,” he says. “It’s like the difference between talking to someone on a landline or a cell phone. They both work.”
Dow is also adding applications for supply-chain simulation, optimization, and analytics. In turn, Zavitz says, the company is transitioning IT system development from managing day-to-day operations to matching internal data with external information to improve predictability. The shift, he says, parallels the chemical industry’s shift from supply- to demand-driven marketing strategies—from a “push” to a “pull” approach to the market.
Like DuPont, Dow has cut its budget and dropped some IT projects. “Nothing meaningful has been delayed on supply-chain management,” Zavitz says. If anything, he adds, funding is shifting toward improvements in that area.
Richard Boocock, CIO at Air Products & Chemicals, is enthusiastic about the changes under way in supply-chain management. “We are moving from a mode of looking backward to a more forward-looking approach, leveraging our data analytics capabilities,” he says. In the process, IT is being deployed differently. “We are shifting from focusing on the system itself to focusing on how the system is used,” he adds.
Boocock spent four years leading Air Products’ conversion to SAP before a stint managing its tonnage gases business in Europe and the Middle East. He took charge of global IT in 2007. Given his business experience, he sees an important human element to IT. Boocock points to the “decision sciences” group at the company, a coterie of operations research and mathematical analysis specialists who harness ERP to identify patterns in operations data that can be used to gauge supply and demand.
He has also seen ERP technology evolve at Air Products from a “cocktail of in-house and purchased applications” to a central SAP-based system that handles businesses representing about 96% of the company’s revenue. In May, the company completed a six-month effort to bring its Brazilian operations into the system, and it is currently upgrading its user dashboard. “This will take data from the SAP system and present it on managers’ desktops, allowing them to see it on something close to a real-time basis,” Boocock promises.
Air Products continues to operate homegrown ERP systems for transportation management and its liquid gases business. Future investments will be directed at IT integration, which can be accomplished without replacing the liquid gases system. “We will look to leverage the SAP capability because it forms the significant platform,” Boocock says. “We are in the buying and configuring software business now, rather than the writing software business.”
Whatever employee resistance there had been to converting the company’s operations to a single vendor’s software has dissipated, Boocock reports. “I’m not exactly neutral in this regard in that I led the march,” he says. “But I can say that attitudes are changing. Our businesses and supply chains are fundamentally enabled by IT, and we are starting to build on our successes.”
Boocock won’t specify the extent to which Air Products’ IT budget has been reduced this year, but he acknowledges that “we have had to take our share of the pain in headcount reduction and cost cutting.” He says the Brazilian project was expedited, eventually taking half the time it was allotted. “While we are cutting back, we are also fast-tracking projects,” Boocock says.
Dow Corning has also converted its IT infrastructure to SAP, notably replacing a Siebel CRM system in 2005. The company has gone through five significant upgrades over the past 15 years, according to CIO Abbe Mulders. Most recently, it has moved to ECC Core. “We choose to stay current in order to get the new functionality,” Mulders says. “That makes sense as we improve our processes. Right now, our core ERP system is good until 2013.”
Dow Corning’s IT budget this year is down by nearly 10%, Mulders says, but funding for important projects has actually increased. Most of the cuts were achieved through early retirement and renegotiated service contracts. One project going forward is the implementation of a transportation management product under development at SAP. Dow Corning is one of seven pilot users of the software. The company is also installing SAP’s latest suite of add-on applications, called version 7.0, which includes new software for customer relationship management and data warehousing.
And Dow Corning is working to connect its manufacturing operations to higher level computing at its headquarters. “Since 2007, we have been working toward a more automated manufacturing environment,” Mulders says. Amazon, the Internet retailer, is an ideal model for online operations, she observes, but selling chemicals is far more complicated than selling books, CDs, and other consumer items.
“Still, we are moving toward a vision of employing as much automation as possible, through to delivery to customers,” Mulders says. Dow Corning’s Xiameter silicones business is recognized as a pioneer in Web-based marketing in the chemical industry. The Xiameter division’s Web sales and distribution platform was recently upgraded to ECC Core with SAP Web services applications.
The goal in standardizing IT, Mulders says, is improved supply-chain management and market response. Like DuPont and Dow, Dow Corning has evolved toward the centralized monitoring of supply and demand, a capability that was needed late last year to give guidance on how to respond to tanking markets. “By the end of October, things were in place to monitor weekly what was going on at each manufacturing site,” she says. And the company is ready for demand to pick up.
IT managers agree that this kind of responsiveness hinges on integrating software that runs everything from sales to transportation to manufacturing. More spending may be needed, even as IT budgets are being cut, but CIOs are confident that the efficiencies gained by better deployment of systems already in place will cover the cost of the most important IT development projects.
“We have been relatively fortunate, given the severity of the economic downturn,” Air Products’ Boocock says. “It has illustrated that there is no substitute for robust business processes, a complete obsession with data quality, and well-trained users.”
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