About Chemical Innovation - Subscription Information
July 2001
Vol. 31, No. 7, pp 18–20.
Starting the Process

Table of Contents

Rajat Agrawal

E-commerce: New opportunities for the chemical industry

EDI, ERP, and extranets are all tools that chemical companies must use if they are to be competitive in the electronic world of the future.

Opening art by Curtis Parker
Curtis Parker
Although chemical companies operate in a mature and conservative environment, the industry is positioning itself to take advantage of the Internet economy. Recent publications estimate that the $500 billion chemical industry is expected to be one of the biggest contributors to the business-to-business (B2B) e-commerce boom (1, 2).

The majority of chemical companies made their debut in the new economy by putting a page on the Internet to establish a Web presence. These companies soon realized the potential beyond a “brochureware” site and shifted their focus rapidly to e-commerce. The chemical industry has adopted a two-pronged strategy. First, chemical companies have started their own initiatives, mainly in the B2B area, by using extranet- and Internet-based electronic data interchange (EDI) systems for their larger customers and suppliers. The major advantages are automated order processing and billing and better customer service. A few companies have also built enterprise resources planning (ERP) connections between themselves and their biggest customers and suppliers.

Second, many chemical companies have joined a third-party online marketplace to gain access to the new markets. A third-party marketplace offers dynamic pricing, access to more suppliers and customers, and the ability to dispose of excess inventory and exchange information. Now, electronic exchanges are shifting their focus to address the supply chain inefficiencies among the business partners.

Opportunities for chemical companies
The Internet provides many opportunities for chemical companies; these can be divided broadly into two categories. First, most chemical companies have a corporate Web site that offers the basic information about the company such as product and service offerings, contact information, locations, corporate news, financial information, and job openings. In addition, a Web site can also be used to provide technical information such as detailed product specifications, material safety data sheets, product literature, technical papers, and drawings. The corporate Web site offers speed and convenience: Instead of receiving the information by mail, a customer can download it directly. Because changes are relatively easy to make, the Web site can be used to provide the most up-to-date information.

Second, besides providing information, chemical companies can use the Internet for business purposes. Online exchanges, also called vertical portals, industry exchanges, or e-marketplaces, were among the first to offer this capability. Designed primarily to serve the spot market by matching sellers with buyers, electronic exchanges add value by offering access to more suppliers and customers than they could reach otherwise and by providing information. CheMatch (3) and ChemConnect (4) are two examples of nearly three dozen chemical third-party online exchanges. The revenue for these exchanges is based on a transaction fee and ranges from 2 to 5% of the value of the transaction.

Recently, the chemical exchanges have moved toward a slightly different model. Exchanges such as Elemica (5) and Envera (6) have created electronic hubs with support from major chemical companies. Instead of connecting buyers and sellers, their focus has shifted to become an application service provider (ASP). The main focus of this new breed of exchanges is to link chemical companies’ back-end systems with those of their partners, which in turn helps to maintain the established relationship among the business partners. The hub typically uses a translator to exchange data among various platforms such as ERP and EDI, and allows seamless transaction among the parties.

Most large chemical companies are participating in electronic hubs. For example, Envera is backed by a consortium of companies that includes Enron, Lyondell, Occidental, and Solutia, among others, whereas Elemica’s members include BASF, Dow, DuPont, BP, Bayer, and Shell. The revenue for these exchanges is based on an annual subscription fee, which depends on the size of the company.

As chemical companies move forward, two major activities, customer relations and procurement, will benefit from e-commerce. To improve business functions, many companies have implemented or are in the process of implementing ERP systems. The main focus of such a system is to control business processes, such as product delivery systems, keep track of sales and revenue, and perform human resources functions. Although very useful to control business, one of the main limitations of an ERP system has been that normally it does not extend outside the boundaries of the company.

E-commerce has addressed this limitation successfully and has made it possible to extend the organization’s reach to its customers and suppliers. In some instances, companies have connected their ERP systems directly to the ERP systems of their largest customers and suppliers. For example, OxyChem has linked its ERP system to that of PolyOne—one of its biggest customers. Since each ERP system is unique, connecting two of them is not easy. A private company-to-company connection makes sense for the largest suppliers and customers; it would be too costly and time-consuming for a company to join its back-end system directly to those of all of its suppliers and customers.

Customer-related opportunities
Depending on the sizes of their suppliers and customers, their technological maturities, and the industry environment, chemical companies can use extranets, EDI, the Web, e-marketplaces, or a combination of them to transact business. Figure 1 contains an overview of how suppliers and customers might be integrated along the supply chain of the company. The methods used to conduct transactions with customers and suppliers are similar, although implementation strategies may differ.

Linking directly to customers using EDI or an extranet is a cost-effective and fast way to share information and data. Before the advent of the Internet, a value-added, network-based EDI was the most popular way for companies to connect to their major customers and suppliers. EDI helps in automating and creating electronic documents that are sent over a private network platform. Because of lower costs and common standards, Internet-based EDI and extranets are now becoming the preferred way of conducting business over the Internet. Web-based applications support the delivery of the online purchase orders, shipping notices, and invoices to virtually any business with a PC and Internet access. In addition to the lower cost compared with traditional EDI, Internet EDI offers broad connectivity and a platform-independent means to exchange information.

Extranets, in addition to their EDI capabilities, provide additional benefits such as real-time information exchange and inventory management. Because users can customize extranet user interfaces, it is easy for the customers to find information and conduct business. Once on the extranet site, customers can check product availability, order products, track the status of their orders, and receive invoices. Customer data from an extranet site can be sent directly to the company’s ERP or the billing system, eliminating the need to process invoices manually. It is possible to automate the whole process from ordering a product to receiving the payment.

There are other benefits, too. For example, many industrial gas companies use telemetry systems to monitor the liquid level of tanks at their customers’ sites. This information can be displayed in real time on the extranet site along with the usage pattern and a reminder to schedule the next delivery if the level goes below a predetermined limit. The biggest advantage of an extranet site is the single-point contact for all of a customer’s needs, which helps in forming an alliance between the customer and the company. MyAccount@Dow, an extranet site for Dow Chemical’s customers, provides registered customers with secure online access to transactions such as account information, order status, repeat orders, and payment history, resulting in a one-to-one collaboration.

Supplier-related opportunities
Switching from the selling to the buying side, e-commerce offers opportunities for cost containment. Chemical companies mainly buy two kinds of products: production-related items such as raw materials, process equipment, and energy, and nonproduction goods such as office and MRO (maintenance, repair, and operations) supplies. It is anticipated that it costs $75–200 to process each nonproduction order by the time costs for purchase order (PO) approval, ordering, and invoice processing are added. The benefits of using electronic channels such as EDI and extranets have already been stated for customers; these benefits can very well be extended for conducting business with suppliers.

The greatest opportunity is in the procurement of non production items because current ordering processes are cumbersome, and maverick buying is common. Current processes involve finding items in catalogs, obtaining authorizations and PO numbers, ordering the items, notifying the accounting department when the items are received, and arranging for payments.

The whole process can be simplified greatly. Chemical companies can use their own intranet sites to list items, along with company-negotiated discounts, or use the vendors’ extranet sites customized for the purchasing companies’ employees. An employee needing to order a product can go to the company intranet, order the product, enter the department number (or any other form of identification), and receive the product. If required, an automatic e-mail can be sent to the employee’s supervisor, providing purchase notification. The invoice can be sent directly using EDI or other means, eliminating the need for paper-based orders and invoices.

Intranet vs extranet
An intranet is a network of computers behind a company’s firewall that uses Internet protocols for communication. Because of the firewall, outsiders usually cannot access the intranet. An intranet is a convenient way for employees to share information and data using Internet browsers.

An extranet allows limited, controlled, and secure access to a company’s intranet from remote locations for sharing proprietary information and data with the company’s vendors, suppliers, and business partners. By combining the security and performance of the intranet with the access and reach of the Internet, an extranet helps to conduct safe and cost-effective business transactions with any industry partner located anywhere, at any time.

There are other areas in which a chemical company can access new markets by forming a partnership with an electronic exchange. A few exchanges offer buying and selling of commodity chemicals and can be used to dispose of excess inventory or provide specialty, high-value products to a broad customer base. Alternatively, for small-quantity orders of production or nonproduction items, an exchange can bring several small buyers together to take advantage of volume discounts. As mentioned before, some exchanges have started to offer back-end integration to the ERP or billing system, making it easier and cheaper to conduct business.

Companies can also use Internet-based technologies for internal communications. The company intranet is a valuable tool for providing information ranging from price lists to details of employee benefits. The intranet can be used for discussions, joint product development, e-mail, and announcements—the list is long. One of the biggest advantages of intranets is that information can be updated instantaneously, which is especially useful for time-sensitive materials such as price lists and product brochures. Employees can access the company’s intranet site from anywhere in the world using the Internet.

What the future will bring
The Internet and e-commerce are changing the way business is conducted in the chemical industry. Customers already expect, and in some cases have begun to demand, electronic transaction capabilities. Many large companies are eliminating paper-based ordering and invoicing systems, and if chemical companies want to do business with them, they will have to adapt to the new methods. As companies are exposed to the electronic way of doing business, they will expect it from all of their suppliers and customers. Chemical companies that want to do business the old-fashioned way may find it hard to compete in the Internet economy.

References

  1. Roberts, M. Focus 2000, July 26, 2000, pp S5–S7.
  2. Roberts, M. Internet Focus, Aug 18, 1999, pp S4–S5.
  3. www.chematch.com/home.asp.
  4. http://chemconnect.com.
  5. http://elemica.com.
  6. www.envera.com.


Rajat Agrawal is a development associate with Praxair Inc. (7000 High Grove Blvd., Burr Ridge, IL 60521; 630-320-4218; rajat_agrawal@praxair.com). He joined Praxair in 1993 in the Applications Research and Development department. He received his B.Tech. from the Harcourt Butler Technological Institute, Kanpur, India, Kanpur, and his M.E.Sc. from the University of Western Ontario, London, both in chemical engineering. He recently received an M.B.A. with an e-business concentration from DePaul University, Chicago. Since 1999, he has been attracted to e-commerce and the opportunity it provides for the chemical industry.


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