BASF Case Study

profileladiekat
basf.pdf

Page 31

Page 32

PRINTED BY: [email protected] Printing is for personal, private use only. No part of this book may

be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

SUPPLY CHAIN MANAGEMENT PROFILE

BASF: INCREASING FARM YIELDS THROUGH

INNOVATIONS IN CHEMISTRY

A few weeks before harvest time, unusually heavy rains have drenched wheat fields all over Germany,

making a devastating fungal infestation likely. A protective fungicide is needed right away. The best

solution is Adexar®, BASF’s innovative control agent. However, the timing is extremely tight. Farmers,

who can’t keep a supply of the agent on hand because they lack adequate storage facilities for housing

this kind of material, need to be able to get Adexar from the nearby dealer with little advance notice.

Moreover, they have little time to administer the fungicide before harvest.

Meanwhile, in Brazil, millions of acres are now being prepared for soybean planting. Farmers there

can count on Opera®, another protective fungicide in BASF’s portfolio. After inspecting the fields,

locally stationed BASF representatives provide guidance on how to use this high-tech product to ensure

that it’s applied correctly and efficiently.

In both scenarios, BASF, the world’s largest chemical company, must make sure that the product is

delivered from the warehouse to the distributor in the next 24 hours, and there’s no margin for delay.

Complicating matters, the total lead time required to produce these fungicides is well over a year.

MASTERING A MULTI-INDUSTRY CHAIN

The timing of Adexar’s and Opera’s production and delivery would pose a challenge for any supply

chain. It’s even more daunting in this case because these are just two of thousands of products that

BASF sells. The company’s portfolio covers a wide range of areas, including chemicals, plastics,

performance products, crop protection, and oil and gas. Products include chemicals for semiconductors,

polyurethanes for packaging and car parts, pigments for inks, technology for the production of liquefied

natural gas, thermal insulation used in construction, super-plasticizers to improve the flow of wet

concrete, coating for automobiles, super-absorber for baby diapers, and made-to-measure molecules for

pharmaceuticals. Not to mention several crop-protection agents.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=31...

1 of 2 5/24/2016 8:56 PM

Page 33

THE VALUE OF VERBUND

Producing and delivering so many different kinds of products requires an unusually versatile supply

chain. For decades, BASF’s secret recipe for success has been a novel production approach called

Verbund, or “linked to the ultimate degree.” At each Verbund site—there are six in all, located around

the globe—the Verbund system creates efficient value chains that extend from basic chemicals right

through to high value-added products such as coatings and crop protection agents. In addition, the

by-products of one plant can be used as the starting materials of another.

In the Verbund system, chemical processes consume less in the way of raw materials and energy

while producing higher product yields. As a result, Verbund helps conserve resources, minimize

emissions, and reduce transport distances. For these reasons, Verbund provides benefits that are

ecological as well as economical.

The Verbund model continues to provide a substantial source of competitive advantage. Recent

changes in the business environment, however, have required BASF to take additional steps to maintain

its edge. As the number of competitors increased worldwide and offerings that once commanded a

premium became commodities, several BASF business units recalibrated their overall strategies. In an

effort to focus more strongly on the customer, they expanded the proportion of specialized higher-value

products in the portfolio.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=31...

2 of 2 5/24/2016 8:56 PM

Page 33

Page 34

PRINTED BY: [email protected] Printing is for personal, private use only. No part of this book may

be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

The new offerings included higher-technology products, such as Adexar. They also included

solutions—that is, products with services wrapped around them. For example, instead of selling just

paint to the automotive industry, BASF’s coatings experts work on the original equipment

manuafucturer’s (OEM’s) production line, providing support during the car-body-painting process. Both

products and solutions create greater value for the customer while generating higher margins and return

on capital for BASF.

These offerings, however, posed a new challenge for the supply chain. Since the customer segments

across the different business units had widely varying needs, the higher service levels spawned an

enormous variety of planning and sourcing processes, as well as IT systems. The supply chain of

BASF’s Crop Protection Division, for example, had to be able to meet demands for fungicide within a

day’s notice in different parts of the world without creating unacceptable levels of inventory.

HARMONIZED PROCESSES

Clearly, a one-size-fits-all approach was infeasible. BASF experts looked instead to streamline supply

chain processes without sacrificing responsiveness. To get the best of both worlds, they established a

central supply chain organization whose mission was to integrate supply chain operations enough to

allow each business unit to execute its own business strategy without sacrificing the economies that

were possible with BASF’s global scale. This meant providing the business units with sufficient

flexibility to maximize revenues while at the same time managing costs across the enterprise.

The solution was harmonization, which BASF defined as a standardization of processes with some

room left for variations. Key to the effort were “global process experts,” who were tasked with

formulating a number of standard supply chain processes, each of which featured a menu of options. The

idea is for each business unit to use the basic process as it was defined, with a choice of various options

for the parts of the process that involve direct interaction with the customer.

“We have a backbone of the order-to-cash process, which is more or less the same for everybody,”

explains Andreas Backhaus, senior vice president of global supply chain and process innovation. “You

get an order in, you allocate it and you transport it to the customer.” The order, however, could be

received in a variety of ways—telephone, fax, or e-commerce channels. Correspondingly, there might be

several different ways of providing order dates and managing the scheduling of deliveries, thus allowing

each unit to deploy the process that is best suited to its business.

As a result of these changes, processes taking place on the back end are highly standardized, with

filling, warehousing, and logistics carried out for all the business units. By contrast, the parts of the

supply on the front end—that is, the processes where BASF directly interacts with the customer—are

more customized. Those are the processes in which BASF invests the most because they help

differentiate BASF’s offerings from those of competitors.

“The supply chain is critical to our goal of moving closer to our customers,” says Robert

Blackburn, president of BASF Group’s information services and supply chain. “We are developing

differentiated supply chain models that will allow BASF to leverage our economies of scale and

extensive knowledge of our customers’ industries.”

DEALING WITH UNPREDICTABLE DEMAND A YEAR IN ADVANCE

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=33...

1 of 2 5/24/2016 8:56 PM

Page 35

BASF’s harmonized supply chain processes provide a starting point for the Crop Protection Division

supply chain in its effort to produce and deliver its fungicides to farmers. The unit uses the same

processes for filling, warehousing, and logistics as other business units, while tailoring distribution and

the supporting planning processes to meet the needs of its distinctive business model.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=33...

2 of 2 5/24/2016 8:56 PM

Page 35

Page 36

PRINTED BY: [email protected] Printing is for personal, private use only. No part of this book may

be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

The crop protection business is unique among BASF businesses in a number of respects. For one

thing, it produces goods for the end customer, in this case the professional farmer. These products have

to earn the money to cover very high R&D investments, much like pharmaceuticals. Additionally, in

most cases BASF does not sell its products directly to farmers. Rather, it sells to distributors, which

store the fungicides in warehouses and sell them to farmers on a per-need basis.

PLANNING CHALLENGES These factors in combination present some unique planning challenges. Basically, the agricultural supply

chain organization needs to predict demand for its many products accurately enough that distributors

have sufficient quantities on hand to meet farmers’ last-minute orders without building up excess

inventory. Owing to unpredictable factors like disease and weather, however, that’s not easy to do. The

average accuracy of demand forecasting for agricultural products rarely surpasses 70 percent.

What makes planning so important—but also so difficult—is the lead time involved. It takes a long

time to produce the high-tech chemicals that go into the fungicides—in some cases as long as 18

months. That needs to be balanced with the customer’s need to receive delivery within a day of placing

an order. Products are formulated with an eye to always having sufficient levels of active ingredients in

stock, but those ingredients are expensive and perishable. Moreover, some products can become

obsolete if laws or registration requirements change. As a result, keeping extra stock on hand is not an

option.

In addition, fungicides must be registered in the country where they are to be sold. A fungicide

that’s registered in one country cannot just be sold in another without having a registration there.

Product formulations also vary according to the regulations of the particular market. So both product

formulations and labels must be customized. This means BASF generates a great many end products that

are produced in relatively small batches, each with a different formulation and label. To take one

example: BASF has some 1,500 agricultural-product references for the region of Europe, Africa, and the

Middle East, which encompasses several thousand customers. When all the customized formulations and

labels are tallied, there are more than 10,000 unique saleable items to deal with.

Taken together, these different issues make demand planning an arduous task, requiring the Crop

Protection Division supply chain organization to continuously weigh working-capital costs against lost

sales. And it’s not just a matter of the current year’s sales that are at stake: lost revenue can lead to

long-term loss of customers to competitors as well.

The Agrochemical Supply Chain

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=35...

1 of 2 5/24/2016 8:56 PM

Page 37

Source: BASF

DEMAND PLANNING AT WORK The typical agricultural-products consumer is a farmer who contacts the local wholesaler or distributor

to place an order. The wholesaler places an order with the distributor, who ships the fungicide to the

wholesaler or directly to the farm. Thanks to real-time visibility on these inventory levels, BASF can

replenish inventory within 48 hours.

BASF’s demand-planning process ensures the fungicide is available for replenishment. For most

products (that is, those for which demand is fairly stable), the agricultural supply chain has a process for

aligning demand and supply that occurs twice per year, six months or so before the beginning of the

spring and autumn growing seasons. In this process, demand by country is aligned with supply, and

volumes of supply are allocated to each country. The final plan is then used to develop a production plan

for the formulation plants. On the eve of the growing season, as farmers prepare to plant their first seeds,

BASF conducts price negotiations with its distributor customers. The supply chain organization uses this

information to further refine the plan for the products in the case of short supply.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=35...

2 of 2 5/24/2016 8:56 PM

Page 37

Page 38

PRINTED BY: [email protected] Printing is for personal, private use only. No part of this book may

be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

In addition to this basic process, the agricultural supply chain organization has a sales and

operations planning process that focuses on high-margin products with a significant degree of demand

volatility. Regional teams meet once a month with the global team to update the demand forecast and to

determine the needed quantity of supply.

The real test of supply chain excellence is reliability. “Our daily work is about fulfilling our

customer’s expectations on what they get by when,” notes Henry Comolet, head of sales excellence for

Europe, Africa, and the Middle East. “This is our daily mission.” The goal of the overall planning

process is to ensure BASF can keep those commitments.

PRODUCTS IN THE FIELD

Although BASF’s agricultural supply chain focuses much attention on getting demand planning right, it

also goes to great effort to ensure the correct and most efficient use of its products in the field. Several

years ago, some BASF agronomists deployed an initiative with farmers in India called Samruddhi,

Sanskrit for prosperity. Through town hall education, on-field trials, and visits to individual farms, sales

representatives provide advice on crop yields, price setting, and profitability. The initiative has proved

quite successful, resulting in higher yields and net income for the farmers. Since that time, the strategy

has been rolled out to other countries in Asia as well as a number in Africa.

MEASURES OF SUCCESS

BASF has a strong focus on business performance management and is known for constantly evaluating

and optimizing its portfolio. From a supply chain perspective, performance measurement and

management are priorities. The central supply chain performance measurement team produces monthly

reports for senior management and for supply chain operations; the team also helps managers across the

company in understanding supply chain performance data. These reports are provided to each of BASF’s

global businesses and cover key supply chain measures such as inventory figures, logistics costs, and

customer delivery performance.

Managers across the company use these data to create real value for BASF. They use logistics costs

and customer service data to optimize the physical network as well as to negotiate with service

providers. Inventory data are a key input in product portfolio decisions as well as in the monthly

planning process.

Data are particularly important for understanding customer delivery performance. For agriculture,

this means collecting data from more than 400 shipping points around the globe. “BASF looks at

customer delivery from both perspectives—whether deliveries reach the customer on the date requested

by the customer as well as the date BASF committed to,” explains Senior Manager for Supply Chain

Performance Measurement Traci May. “Because customer service is a top priority, performance data are

updated on a daily basis and made available online to people across the business.”

The supply chain performance measurement team works closely with what BASF calls a

“community network.” Consisting of representatives from each of the businesses, the community

network sees to it that measurement standards are applied across the company. It also ensures the

ongoing evolution of the system by defining solutions that meet the specific requirements of each

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=37...

1 of 2 5/24/2016 8:57 PM

Page 39

business.

Once again, harmonization, not standardization, is the rule. The supply chain performance team

works with the community to take into account business-specific measurement needs so that each unit

can monitor its supply chain operationally, while maintaining globally consistent key performance

indicators for management reporting and benchmarking purposes. By measures both objective and

subjective, BASF’s supply chain transformation is achieving success and contributing value to the

enterprise.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=37...

2 of 2 5/24/2016 8:57 PM

Page 39

Page 40

PRINTED BY: [email protected] Printing is for personal, private use only. No part of this book may

be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted.

But responsive agricultural supply chains are more than just a business objective at BASF—they

are a social imperative. It’s estimated that without crop protection products, nearly half of the worldwide

harvest would be lost each year.1 As the world population continues to grow, the need for greater

agricultural yields will grow as well.

BASF’s global supply chains will need to keep evolving to meet this need. Since getting innovative

products from the lab to the fields isn’t likely to get easier anytime soon, mastering this challenge will

be essential to ensuring that the world’s food supply keeps pace with demand.

https://jigsaw.vitalsource.com/api/v0/books/0071846646/print?from=39...

1 of 1 5/24/2016 8:57 PM