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Information Technology

Chemical producers weigh targeted system upgrades in a new, Internet-driven world of choices

by Rick Mullin, C&EN Northeast News Bureau
May 9, 2005 | A version of this story appeared in Volume 83, Issue 19


Operations at Dow Corning's Shanghai paper-coatings lab will be tied into its core financial management system via a new Web portal-based network.
Operations at Dow Corning's Shanghai paper-coatings lab will be tied into its core financial management system via a new Web portal-based network.



When chemical companies first started replacing their computer hodgepodges with corporatewide transactional networks called enterprise resource planning (ERP) systems, most industry employees had no access to the Internet at their desks. By the time these Goliath networks were in place, workers everywhere--practically unable to function off-line--were surfing the net on PCs and mobile phones. If the industry took a great leap forward in establishing an infrastructure for global computing with ERP systems, information technology (IT) in the meantime has been bounding in every direction.

Few people today would dispute the wisdom of having taken the time and spent the money to install ERP systems, perhaps the most significant effect of which was a thorough standardization of IT across the chemical industry. In fact, nearly every major chemical company now uses the same ERP software: SAP's R/3. The consistency within and between companies has made possible internal and external support systems for Internet-enabled business processes and e-business.

But that is just the groundwork. The rapid development of both software and new uses of the Web in business has brought the industry to the point of a generational change in IT, where the next investment is likely to be of more strategic importance than yet another upgrading to the latest release of R/3. At the same time, the chemical industry has returned to profitability. New directions in business, driven by a shift from bottom-line cost cutting to top-line pricing and customer management initiatives, will create new requirements and options in software.

Last year, SAP introduced a next-generation, Internet-based architecture called Netweaver as a basic component of its mySAP ERP 2004. This latest version of R/3 is a fundamental reworking of SAP's ERP product that allows customers to add business-process software by purchasing discrete modules.

By nature, the Internet gives chief information officers (CIOs) a range of options for accessing software applications that were not available just a few years ago. Industry watchers say chemical companies may not be as likely as they have been in the past to simply step up and incorporate the latest version of SAP's ERP software. There are a lot more choices this time around.

And a lot of pressure, according to Colin Masson, an analyst with IT consultancy AMR Research. Masson says CIOs are anxious to enhance their ERP systems before the return of lean years in the cyclical chemical industry. The problem, Masson says, is that chemical companies are not finding enough sector-specific functionality in mySAP ERP 2004. He says SAP's licensing model adds costs that CIOs will have a hard time justifying to financial managers, who want any investment in IT to lower the ongoing cost of maintaining IT systems.

In fact, Masson says, "CIOs in the chemical industry are struggling to convince their businesses that they've realized the value from current R/3 investments."

All things considered, Masson says, some CIOs will elect to "harvest" their current R/3 systems, extracting as much value as possible out of what is already installed by adding best-of-breed software packages to enhance performance rather than paying to switch to the next generation of ERP software.

According to Marty Etzel, chemical-sector marketing director at SAP, mySAP ERP 2004 is not a new release of R/3 software. Instead, it is an Internet-enabled ERP architecture that obviates the need for broad new releases of the product. It also marks a significant break from SAP's approach of dealing in comprehensive, centralized software suites. Now, he says, users will configure systems by adding modules for specific functions.

Some of the modules will be supplied by other software companies, Etzel says. SAP has partnerships with firms such as Vendavo, a pricing management software vendor, whereby partner companies incorporate programming in their products, allowing them to snap onto the central ERP system via Netweaver.

OBSERVERS AGREE that the incorporation of third-party software into its ERP architecture is a big change for SAP, which has pushed for over a decade to supply a comprehensive business computing suite for chemicals. In the case of Vendavo, Etzel notes, a partner's specialized expertise will help SAP address a new area of concern among chemical industry users.

Despite the pervasive use of R/3 in the industry, strategies for implementing the software vary widely. Some companies have already done major upgrades, switching from the mainframe-based SAP R/2 to the client-server-based R/3. Others took up ERP software later, installing R/3 the first time around. Some claim they are going into harvest mode. Others are anxious to be among the first to invest in SAP's latest offering.

Celanese falls roughly into the first group. "We cleaned house and redid everything," CIO Karl Wachs says. The firm completed an upgrade from an early version of R/3 to version 4.7 in 2004--a two-year project that cost about 30% of the total initial SAP software implementation, he says.

In fact, according to Wachs, longtime SAP users have had to make a lot of painful adjustments over the years. "Senior management was dissatisfied with the responsiveness of IT in the early 1990s," he says.

System vendors, including SAP, failed to deliver on their promise of enterprise computing systems "where you flip a switch and it makes everything easier," Wachs says. "It turned out to be more difficult than everyone said it would be." He says, however, that SAP's ERP products have adapted well to the chemical industry over the years and that the new capabilities essentially deliver on the original promise of turnkey IT.

Part of this results from SAP's decision to focus on providing an Internet-based backbone for ERP that is open to best-of-breed software from third-party specialists, Wachs says.


Air Products & Chemicals is among the holdouts--companies that pushed their mix of old systems and software up to or into the 21st century before installing an ERP system. CIO Glenn E. Beck says the firm, which is completing its implementation of R/3, had finally reached the point where the constant patches and extensions to old computers and software were no longer feasible. "Our rallying cry now," Beck says, "is 'Take advantage of being a late adopter.' "


THE GREATEST ADVANTAGE, other than having a tome of industry best practices for a guidebook, is that Air Products' initial system will incorporate Internet-based business functions and modular configuration. Beck says this approach allows him to monitor emerging technology with an eye on what is needed to fill specific gaps in the company's IT infrastructure. And implementation of an ERP system will significantly reduce the cost of maintaining the system as obsolete software is taken out of use.


John Wheeler, CIO of Nova Chemicals, emphasizes the importance of bringing manufacturing, engineering, and business IT together into a single architecture. This is done by tying it all into the ERP system, he says. His ERP-centric vision of corporate-wide computing prompted the company to be among the first to invest in mySAP ERP 2004 with Netweaver.

Wheeler says he is opposed to the idea of squeezing value out of existing systems rather than keeping pace with key software vendors' releases, as long as the vendor has a proven track record of adding significant functional improvements with software upgrades. "The beauty of the ERP system is that it provides a business-process support foundation for your company," Wheeler says. "You must keep that refreshed."

He adds, however, that he does not proceed with upgrades unless business managers at Nova also recognize the benefit of the improved software. Nova's logistics, customer service, and human resources departments were among those interested in the new e-commerce and Internet tools available with the latest SAP offerings.

Wheeler, who has managed two conversions to new releases of R/3, says the current upgrade will be the least expensive to date, and it will be the first in which Nova will accomplish everything in-house.

Wheeler, like Wachs, sees mySAP ERP 2004 as a sea change in SAP's approach to the market. At first, he says, "SAP wanted to be not only the foundation, but the entire house. Over time, they realized that they can't do that, especially when it comes to process automation."

Among the third-party software that Nova is tying into its SAP system is Aspen Technology's AspenOne supply-chain management system, Vendavo's pricing software, and a TechniData emissions management and environment, health, and safety product. With Web-based ERP, Wheeler says future investment in IT infrastructure will be targeted and low cost. "I am not looking for major reinstalls," he says.

Dow Corning is also moving ahead with an upgrade to mySAP ERP 2004 with Netweaver, according to CIO Abbe Mulders. A major goal, she says, is tying the company's global manufacturing into the core financial IT system. Here, she looks to capitalize on SAP's partnership with Lighthammer, a supplier of Internet portal systems that translate manufacturing plant data for use in financial IT.

Mulders says the upgrade will cost less than Dow Corning's previous upgrade of the R/3 system, which was first installed in 1994. The company is also leapfrogging four versions of R/3 that have been released since Dow Corning's last overhaul in 2000, she says.

Eastman Chemical plans to spend at least the next year harvesting value from an infrastructure that groups SAP R/3 with separate commercial software for manufacturing data management and document management. The company has also developed its own e-commerce infrastructure, data warehouse, and Internet portal. CIO Jerry Hale says Eastman is currently evaluating what will need to be done to "refresh the architecture" sometime in 2006. This may include an investment in SAP's new Internet products.

It is possible, therefore, that Eastman may end up with three Internet portals--it plans to use a Microsoft portal for its intranet in addition to its homegrown e-business portal. "We may need to go with a combo until we see if a clear winner emerges," he says.


Hale says he wants to do targeted overhauls of Eastman's IT architecture every three to five years. This would contrast with what he says is an industry norm of eight to 10 years between major IT renovations.

The incremental nature of developing software with Web-based applications will allow frequent revamps, Hale says, but such a strategy is currently impeded by SAP's licensing policy, which is based on long-term investments in comprehensive software packages. He argues that SAP's licensing policy needs to be revamped in order to support the type of modular application development that the software vendor is already committed to.

THE IDEA of the Internet tying together disparate software applications suggests a kind of IT architecture that is nearly antithetical to the SAP systems that were implemented in the 1990s. And the company still faces competition from software firms that focus entirely on particular markets. Ross Systems, for example, has developed a line of ERP and other software for customer relationship management and supply-chain management specifically for the process industry.

Modular approaches to configuring IT networks will foster some competitive pressure in the market. Ross, for example, has sold software to several SAP users in the chemical industry, according to Scot McLeod, the company's vice president of marketing.

Also, many small process manufacturers serve or buy from chemical companies that have yet to install ERP systems. Celanese's Wachs says linking such companies into IT-based supply-chain management regimes is a challenge. Firms such as Capital Resin, which just installed a $350,000 Ross system, may constitute a growth market as chemical companies with multi-million-dollar SAP systems reach out to business partners over the net.

Industry CIOs agree that SAP is on a fundamentally new path in system development that will likely translate into improved service. There is also every indication that the new moves at SAP are covering the business needs of the chemical industry. The question for SAP in this sector is whether customers will make regular investments in new applications. "Our primary competition," Etzel claims, "is customer indecision."


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