Top 3 Cost Management Tips for Chemical Companies

Since a decade, the chemical manufacturers in India have progressed from non-differentiated simple manufacturing of chemicals to an advanced version of the manufacturer of R&D concentrated chemicals. The Indian chemical industry primarily began with the basic manufacturing of chemicals from petrochemicals, fertilizers etc. which were of low differentiation, more volume and high barriers.

Then the next version of chemical that was introduced was the manufacturing of the chemical by adding some speciality for instance resins and adhesives. This chemical was totally different from the simple one and had an addition of quality and alteration. This industry has now become competent to manufacture knowledge chemicals such as biotechnology and pharmaceutical products. These chemicals have outstanding R&D and are significantly differentiated chemicals.

Improvement of margins

In order to upgrade the margins of the cost management of chemical industries such as chemical manufacturing, the industry can mainly create emphasis on strategic and operational levels.

The cost management operation would involve the reduction of

  1. Improvisation of the manufacturing process, cost of direct materials, improvement of procurement efficiency, and many more.
  2. Reduction in the price of travel, facilities, information technology etc.
  3. Subtraction in the cost of chain supply via optimization of transportation and network.
  4. Reduction in the cost of repair and maintenance and conversion of cost via efficient management of energy.

Following operations can be helpful in reducing the addressable cost by 8%. This would also boost the competitiveness of the company level for a time period, but it may not be stable for the long term to increase competitiveness.

In contrast, the strategic cost management includes certain conclusions that create an impact on the company level competitiveness for a long period of time which involved the analysis and identifying the resolution of strategic cost. It also involves the impact on the level and structure of the cost.

Manufacturing footprint

The major key factor for the location of manufacturing is the accessibility of the feedstock. Due to this factor, there are several leading Indian manufactures that have internationally set up their facility of manufacturing.

The next major factor is the ease and the distribution of the cost of the manufacturing location. One clear example is basically the formation of formaldehyde is near to the consumption area which generally sold 30 percent of the solution. The process of manufacturing formaldehyde is trouble free, therefore transportation for long distances becomes expensive.

Inflexible regulations of the environment, as well as its compliance, gives a result on the future outcomes of the companies. So, environment flexibility is an important factor while choosing a location for manufacturing.

Scale of operations

The scale of operations for the chemical industries in India is relatively low as compared to the global chemical industries. For instance, the Indian chemical industries can manufacture 40-kilo metric tons, whereas international manufacturers can produce 8 to 15 times more than Indian chemical industries. The reason for this is the lack of scale which results in reducing the competitiveness of the industry and also the manufacture of natural chemicals has reduced.

A scale of operations is a strategic level which creates an impact on the industry competitiveness for a long term including the conclusion for the pertaining forward and the backward combination of the companies.

 Conclusion

With the advancement of time, the chemical industries of India are growing rapidly. The domestic manufacturing companies are facing lags in terms of demand in various sectors along with operational margins being under pressure. Due to this, most of the companies are depending on exports to overcome the demand issue. However, a focus on operating margins for managing the cost can greatly enhance the addressable cost base of the company. Other than this, one of the factors that the Indian chemical industries need to have a focus on is strategic levers which can have a great impact on the profit and production rate of the organization. Companies may go for following options depending on the sub-segments business dynamics:

1.     Evaluate their strategic and operational capability in terms of market value and competition.

2.     Evaluate and readjust the manufacturing footprint and if required, adopt the global connectivity.

3.     To enhance the scope and reliability of operation, identify and adopt suitable strategies.

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