June 06, 2023 | Procurement Strategy
Most chemical companies heavily stockpiled commodities and materials last year out of fear they would be unable to secure their key ingredients.
However, as a direct result of hoarding, today they face increased costs, higher complexity in inventory management and the inability to take advantage of lower prices and transportation costs.
In the first quarter of 2023, the output of basic chemicals and synthetic items such as ethylene, propylene, several solvents and derivatives increased by over 10% in the U.S. as compared to the same period in 2022.
Capacity utilization across the chemical industry was around 70%. This means that despite companies running at a relatively lower capacity, most markets/materials are still abundant as a result of waning demand in key segments.
Despite this, inventories of key chemicals across ports remain high historically. Bulk petrochemicals, solvents and several downstream derivative inventories were recorded higher in Q1 2023 than Q4 2022, and are expected to stay high for a major portion of 2023.
The mismatch between demand and excess inventories is increasing storage costs, potential safety risks and quality issues as chemicals deteriorating over time and tying up working capital.
Chemical companies now need to carefully reassess the risks and benefits of stockpiling to minimize risks and optimize operations, beginning by:
Work with either a vendor managed inventory (VMI) or lean system internally to take advantage of what the market has to offer right now. Just-in-case over just-in-time should be avoided as much as possible.
Analyze historical data and have a data-driven model for assessing demand more accurately and planning out the next purchases.
This will help you effectively manage your key raw materials from your suppliers as well as the finished product with your customers to ensure there is no obsolescent stock.
Continue working with just-in-case for single-sourced/higher lead-time and critical materials. This could be a specialty solvent or even a simple specialized polymer such as ABS that can be a critical material for several industries. Also, set safety stock levels and follow the model with business inputs for restocking to ensure there are minimum stockouts and over supplies.
Inventory audits provide accurate and up-to-date insights into inventory levels, identify discrepancies and implement corrective actions.
Author: Virat Venkataraman
For more information about inventory management for chemicals, visit GEP’s page on inventory management.