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Shell Chemicals

A shifting business landscape - introduced by the Internet - puts the chemical industry in a position to leave boom and bust cycles behind.

The Business Situation

How can we increase our competitiveness in an industry that is experiencing a shifting landscape? This is the question that challenged Shell Chemicals executives in the late 1990s. In addition to significant consolidation, the chemical industry is "poised to be able to break free from the cycle of 'boom and bust' and move into a new era," according to the September 1999 Financial Times Management Report on the changing structure of the global chemicals industry.

What did moving into a new era mean for this $16 billion global manufacturer of petrochemicals? Shell Chemicals is one of four major Royal Dutch/Shell companies and comprises 21 business units that produce chemicals ranging from ethylene to high-performance polymers. Executives leading this enterprise once believed that its fragmented business approach, due to a large number of business units and country-based organizations, inhibited its ability to reap the benefits of global reach and scale. Through a peer benchmarking report, Shell determined that its operating cost structure was fairly high relative to that of the competition.

In response to the competitive challenge, Shell Chemicals set forth a bold course of action - to become the leader in the global petrochemicals industry, significantly increase value to shareholders, and achieve a 50% improvement in return on average capital employed (ROACE) in the near term. Shell determined that there were two ways to achieve the goal of market leadership: 1) restructure the portfolio and lower costs, and 2) create operating discipline. Restructuring meant more sharply focusing Shell's operations and shedding the number of business units by 40%, from 21 to 13. This reduction would enable the organization to concentrate on producing chemicals that are close to the cracker , that is, more fundamental and basic, and realize $300 million in near-term cost reductions.

The second response - the creation of operational discipline - meant the globalization of business operations and the development of significant competence in procurement, manufacturing, and demand chain. Shell had largely run its chemical operations on a regional basis; the European sales and operations group had its own set of policies and procedures, as did the United States, Canada, and others. The globalization effort would establish consistency across regions and enable Shell to leverage its scale on a worldwide basis. To create operational competence in distinct areas, Shell assigned an executive with global responsibility to each of these three areas. The purpose of these new groups is to build leading-edge practices through centers of excellence. The processes are implemented and executed by the business units, manufacturing, sales, and fulfillment organizations. Supply Chain Management was to become a focal point.

Focus on Demand Chain and Channel Management

One of the key changes involved in migrating from a supply/push operating discipline to a demand/pull customer strategy. With a mandate to dramatically improve operations and become more market-focused, Shell began to explore an approach to increase its effectiveness with its customers by understanding their needs, their buyer values. Buyer values include items such as delivery accuracy/speed, technical service expertise, research and development, quality specifications, order management, and more. Historically, Shell had not developed a clear perspective on the differentiated needs of its customer base; instead it focused only on volume and profitability. While customer contribution (volume, profit, strategic importance) are certainly important components of value to Shell Chemicals, these items must be evaluated against the lens of customer needs to be interpreted correctly. Put another way, Shell determined that it was critical to look simultaneously at overall customer value as well as customer needs. The central idea is to match the products and service offerings desired to Shell's offering to each customer segment.

Figure 1.0
Partnering versus transactioning

To better understand its customers' buyer values, Shell conducted numerous customer satisfaction surveys and other instruments aimed at obtaining a measure of customer feedback/opinion. Through a workshop-driven process of discovery, the Channel Strategy team determined the relative importance of different buyer values to Shell's customer base across all business units. Then, the team mapped representative customers on two continuums: perceived level of integration desired by the customer versus value to Shell (strategic, financial). Four fairly distinct clusters, or segments, emerged: partners, optimizers, differentiators, and transactors.

With customer segments defined at the 80/20 level, the next step was to understand how best to serve customers according to their needs as well as understand Shell Chemicals' ability to deliver products and services. Several of Shell's businesses traditionally have approached the market via two distinct channels: direct to the customer and indirect to the customer, through a distributor. The former channel typically is used for higher volume customers for whom there is significant economy of scale. The distributor channel generally is used for customers who are specialty chemical users or who simply have a lower usage rate that necessitates the use of expensive less-than truckload freight. A distributor often is able to service these customers more cost-effectively by being able to deliver a full truckload of product to multiple customers, similar to the way soft drink manufacturers deliver soft drinks on a dedicated route.

The team worked to change its model of sales channels from the two-prong concept to something that is more focused on how best to reach the different customer segments. In this new model, instead of thinking of a distributor as a channel, a distributor is now considered a trading partner that can add value through delivering the product/service bundle in the most effective and efficient manner to the end customer.

Similarly, other customer-centric activities - from making the purchase decision through placing the order to settlement and technical support - might all be better handled by different channel partners. These channel partners could be supply chain specialists, such as third-party logistics providers that arrange freight and own storage terminals; back-end operations specialists, such as outside payment processors; virtual, such as an Internet chemical broker/sales agent, or even an insourced function or service like electronic marketing. By exploring various options, the Channel Strategy team became aware that there were many different options to deliver goods and services to its segmented customer base in a differentiated fashion.

Figure 2.0 Customer Segments

Making Channel Strategy Happen

The challenge for Shell was to translate the implications of channel strategy into a specific set of initiatives that was actionable and clear in terms of scope. The Demand Chain Management group maintained ownership of the project and determined that it would focus on a single business unit to begin the process of change. The Base Chemicals business unit, which had been very involved with the Channel Strategy effort, volunteered to participate as the lead project business unit.

The next question was to determine the appropriate scope. The project team quickly decided that it was crucial to focus on a limited set of key areas to get the maximum benefit with as little complexity as possible. The Channel Strategy team determined the following fundamental workstreams:

• Determine the best logistics network to serve the customer base
• Create specific service packages for the different customer segments
• Segment the distributor base and recast the distributor as a channel partner

Each of the workstreams is connected to the other two. For instance, the service level (that is, delivery time requirements) has a direct impact on the design of the logistics network in terms of where to deploy product relative to the customers. Or, for example, shifting certain customers to distributors affects choices around the core distributor group as well as the volumes and flows through the supply network. While the channel strategy problem had been simplified at Shell, balancing customer service, growth, and cost remained a complex proposition.

The Shell Chemicals/Accenture team used sophisticated supply chain optimization software. The tools enabled the team to perform analysis that captured the critical trade-offs, quantifying the impact of different network and service scenarios on a case-by-case basis. Through the optimization technology and the art of supply chain modeling, the Channel Strategy group contemplated various what-if scenarios, including different sourcing strategies, delivery service changes, and transportation mode changes - all in the context of delivering the products and services to different customer segments with unique needs.

Going Forward at Shell Chemicals

Shell reasoned that there existed a multi-million-dollar value proposition associated with implementing channel strategy at one business unit, and, while channel strategy is not right for all business units, there is significant additional value to be gained from this approach with other business units. Currently, Shell is looking at other dimensions of the channel strategy proposition, like developing a Web site to sell chemicals to certain customers. The key learning at Shell was to break the strategy into digestible units and execute in a manner that makes sense and creates value at a reasonable rate, while being extremely sensitive to the customers' ability to deal with change. Tying into the overall business strategy is absolutely essential. The supply/demand chain organization plays a pivotal role in making it come to life.

Far from being a myopic cost-cutting exercise, channel strategy at Shell Chemicals is all about adopting the customer's vantage point and looking back toward its operations to guide strategic decisions to build value.

About the Author

Title: 

Vice President of Customer Fulfillment, Americas

Shell Chemicals

Mark Hurley is the Vice President of Customer Fulfillment, Americas, for Shell Chemicals. Mark focuses much of his time on creatively leveraging demand chain management against customer needs. He has been with Shell for 19 years and is based in Houston.