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Opportunities in Chemical Distribution

Optimizing Marketing and Sales Channels, Managing Complexity, and Redefining the Role of Distributors

Bernd Elser, Udo Jung, and Yves Willers January 2010

Contents Challenges for Distribution in the Chemical Industry The Chemical Producers—and How They Distribute The Chemical Distribution Sector—and How It Is Evolving The Customers—and What They Want Winning Distribution Models—and How to Build Them Understand Customer Segments and Customer Needs 10 Create Transparency on Costs Differentiate Channel Strategies and Tailor the Go-to-Market Approach 10 Define Processes. and Ownership Build a Partner Network 1 2 4 8 9 10 10 10 12 Appendix: Chemical Distribution Market Model The Boston Consulting Group January 2010 . Tasks.

customers of chemical companies. accounts for one-third of globa l consumption (about €660 billion in 2008). Some can only be distributed by pipeline. focusing on the role of the chemical distribution sector and on the “go-to-market” (distribution) app roaches of chemical producers.4 percent in North America. which. and chemical distributors in a ll regions of the world. This is especially releva nt for chemicals that need to be tailored to customer-application systems and that require technical and application support. LyondellBasell. the top five chemical producers—BASF. So chemicals also play a more significant role in Asia-Pacific economies. and Shell Chemicals—supplied only 11 percent of chemical consumption. global consumption of chemical prod ucts exceeded €1. some are shipped in containers. prima rily because of increased use of chemica ls in sophisticated applications. whereas in Brazil. Both of these ma rkets are now overta ken in chemica l consumption by the Asia-Pacific region. The Boston Consulting G roup (BCG) conducted a study of future opportunities in the chemical industry. Our study highlights the opportunities available through closer cooperation and partnerships among chemical producers. third-party distributors. who have to provide customized approaches on the one ha nd and ensure critica l mass and scale on the other.9 percent in Europe a nd 2. Country-specific industry composition adds significa nt complexity for chemical producers a nd distributors. In 2008. both mature markets.and country-specific industry composition—especially the mix between manufacturing and service industries—underlies the differences in consumption patterns of chemicals. The chemical producer la ndscape comprises more than 100. ba rrels. The study involved quantitative research that utilized numerous d atabases—including BCG’s own proprietary databa ses—and also the results of more than 150 interviews that BCG conducted with executives at chemical companies.0 00 products includes petrochemica ls. with consumption accounting for 6 percent of gross domestic product compared to 2. worldwide consumption of chemicals a lso grew at a higher rate tha n overall industria l output. polymers. Region. Its diverse set of more than 100. Between 19 95 and 2005. I and Sales Role of Channels. The traditiona l centers of the chemica l industry have been North America a nd Europe. and Redefining the Distributors n the fourth quarter of 2009. chemical consumption is outgrowing industrial output because chemica ls. globa l consumption of chemical products exceeded € 1. China’s estimated consumption of € 380 billion equals that of the United States. and application-driven and customized specialty chemica ls. In 2008. the automotive industry accounts for a la rge share of the chemica ls consumed.0 00 compa nies a nd shows considerable fragmentation.Opportunities in Chemical Distribution Optimizing Marketing Complexity. in Germany or Japa n. others are tank wagon products. or sacks.9 trillion (roughly 3.5 percent of global economic activity). such as those for the cosmetic or food industry. it is the agriculture a nd pulp and paper industries. some are distributed in small packages of a few kilograms. like other ba sic materials such as steel or cement. competitive pressures will increasingly require new approaches to distribution to strike the proper balance between providing differentiated offerings and containing the resulting costs of complexity. Especia lly in rapidly industrializing countries. In 2008. following rapid recent growth. Dow Chemical.9 trillion. improved The Boston Consulting Group January 2010 . ExxonMobil. Managing Challenges for Distribution in the Chemical Industry The chemical industry produces essential raw materials a nd supplies for companies in the ma nufacturing and industrial sectors. as well as the importance of taking a strategic rather than an operational approach to chemical p roducts d istribution. For exa mple. The consumption of chemicals is a lso linked to the maturity of industrialization. While chemical manufa cturers have traditionally d istributed their own p roducts (with around 90 percent of chemical products still directly distributed today). and customers. solvents. form key ingredients for industrial development.

But as they try to implement distinct go-to-ma rket approaches to capture profit pools in different customer segments. medium. All of this creates a challenging environment for chemical producers. Germany’s consumption of € 98 billion of chemicals is spread across 170. At the same time. a nd direct supply continues to account for around 90 percent of total global distribution. so that EBIT (earnings before interest and tax) margins a re often lower. They may be asked for deliveries ra nging from daily tank loads or bulk wagonloa ds to quarterly shipments of a few barrels or sacks. Purchasing volumes from sma ll customers have been insufficient to generate the required profitability.000 of chemica ls each yea r). The 80 -20 rule—that companies generate 80 percent of their revenues from 20 percent of their customers— continues to be established conventional wisdom within the industry. Direct supply is likely to continue to predominate in serving la rge customers. such as computers and precision instruments.000 small customers (about 20 percent). At the sa me time. and distribution functions and capabilities as sources of competitive advantage and differentiation. baseload for their plants. sa les. rubber and pla stics.000 companies. wide-ranging industry such as the chemica l industry. there were decreases in other sectors—notably textiles. Sma ll customers a nd countries are a particular cha llenge for chemical compa nies that may lack the infrastructure a nd processes to handle low product volumes or a high diversity of products. pa rticularly as the need for greater cost efficiency has led to continuing downward pressure on the size of sales forces in the field and the level of technica l assista nce offered to cus tomers. Rapidly industria lizing countries such as China or Brazil have a much larger proportion of small customers (more than 75 percent). Higher contribution margins from these customers and countries have been offset by the costs of complexity. This trend concea ls significant industry-specific variations. and la rge customers. For example. This heterogeneity in consumption patterns is cha racteristic of a complex. in the composition of the customer industry and the mix of small. a nd create little complexity. The degree of customer fra gmenta tion differs across industries. loca l manufacturers with a s few as ten employees. There are also significant national differences—with variations. including 35. and sales channels were not differentiated. whose purchases account for the bulk of producers’ output. with medium-sized a nd sma ll customers generating higher contribution margins. by country. and the same infrastructure and processes were used for a ll product portfolios—whether they featured high volume and low The Boston Consulting Group January 2010 . a nd coke/refined petroleum. which supplies not only all manufacturing sectors but also compa nies within those sectors va rying from la rge multinational conglomerates to sma ll. ensure a ba seload for pla nts. la rge customers increasingly leverage their purcha sing power. Ma ny producers in recent years have set up dedicated “key account” ma na gement structures a nd processes to serve large customers. distribution models. While the chemical share of overa ll output in some sectors. Clearly. The Chemical Producers—and How They Distribute Chemical manufacturers have traditiona lly distributed their own products. thereby. many producers have found it difficult to develop an effective sales model for small customers and countries. which are required to supply a wide ra nge of products in differing quantities to a hugely diverse customer base. contribution ma rgins a re often higher in dea lings with small a nd medium-sized customers. and insignificant price increases in raw materials. while implementing sales-force-effectiveness measures for medium-sized customers. so that producers often must make significa nt compromises on pricing in order to secure large-volume contracts a nd. chemical companies increa singly recognize their ma rketing. However.Opportunities in Chemical Distribution 2 processing a nd production. This helps explain a shift in profitability. rose by close to 10 percent in the decade from 1995 to 20 05 owing to innovation a nd applica tion development. pa rticula rly in situations in which service levels. but our analysis indicates that between 20 and 40 percent of chemicals a re consumed by sma ll customers (defined as those consuming less than € 100. they face a continuous cha llenge: how to strike the proper ba la nce between differentiated offerings a nd conta ining the resulting costs of complexity. pa rticula rly in mature markets.

Many chemical producers organize their businesses by product group rather than by customer industry.000 Countries or regions of subcritical size Products with non-standard packaging Products with sales under €100. The Boston Consulting Group January 2010 . a lthough the rea sons for the shift have differed between mature a nd emerging markets. In emerging markets. We a nticipate that over the next several years this process will most likely expand the share of consumption held by third-party distributors. The broad rule has been that customer size is the main criterion—79 percent of producers sa id that customers whose a nnua l purcha ses total less than €100. the Middle East. Complex relationships with distributors can a lso lea d to duplication of efforts and resources. these same chemical producers typically lack the critical ma ss in sales and purchasing volumes of their products needed to justify direct sales. Interviews with producers suggest that they expect to continue the reductions in field sales and technica l support that a re among the drivers of outsourcing.000 79 57 60 49 21 40 18 20 2 4 7 11 11 0 020406080 100 % Global Regional National Global Regional National Type of geographic coordination Source: BCG Global Chemical Distribution Market Survey. (See Exhibit 1. so that differentiated distribution models are needed to simultaneously capture the growth potentia l and generate the required profit margin. and Africa. This complexity handicaps attempts to actively steer the distributor network or ensure the seamless flow of market. Industry Standards Emerged for Outsourcing Criteria but Not for Coordination Methods On what criteria do you decide to outsource your distribution to external distributors? How do you coordinate your external distributors? % of respondents citing coordination 100 type Coordinate across Coordinate within one business business units unit 80 1 Customers with purchases of less than €100. and which distributor to choose. In mature markets. 1 The numb ers do not add up to 100 percent because multiple answers were allowed. such as China and Brazil. That means customers within one industr y purcha se products from severa l of a chemical producer’s business Exhibit 1. established European or North American chemica l producers have been looking for greater cost efficiency by reducing and refocusing their direct sa les efforts. have a significantly la rger sha re of small customers. have frequently been taken on the loca l or business-unit level. Another problem is that rapidly growing ma rkets. with little management and coordination across regions a nd business units. a nd customer information needed to exploit full market a nd growth potentials. The result is that companies often end up in highly complex relationships with a large number of distributors. with 57 percent of producers outsourcing distribution to countries or regions of subcritical size. North and Latin America. Decisions on whether to transfer direct sales efforts to distributors. a nd substantial resources are needed in order to create transpa rency into distributors’ networks a nd to ma nage these multiple relationships. BCG conducted a survey of executives at 70 companies that produce and sell chemical products in Western and Eastern Europe. These segments of small and medium-sized customers have increasingly been ha nded over to third-party distributors.Opportunities in Chemical Distribution 3 diversity or low volume and high diversity. In our interv iews.) This process ha s still to be completed. competitive. Note: In Octob er and November 2009. we found that only 22 percent of producers organize distribution across business units. Asia-Pacific.00 0 are outsourced to distributors.

Sourcing from multiple producers a llows chemical distributors to profitably operate warehouses. and providing financing and support. producers may seek to reduce the number of distributors they use and develop strategic partnerships with distributors that have the ability to invest in market development a nd information exchange. and pha rmaceuticals. polymers. or formulation are importa nt value a nd growth levers for distributors. Distributors can attain these objectives by sourcing from multiple producers in situations in which individua l producers a re subcritical in size a nd limited to their own products. Aga in. speed. The distributors can add significa nt value by ma na ging complexity for producers and customers. Chemical distribution needs to be differentiated from logistics-only compa nies that typically do not ta ke ownership of products. electronic components. Bundling products from multiple producers enables scope and scale effects that allow distributors to operate distribution networks with sufficient profitability.) The Boston Consulting Group January 2010 . this translates into global third-pa rty distributor sales of €115 billion for the distribution of products va rying from industrial chemica ls— such as basic a nd intermediate chemicals. these business models must be differentiated in order to understand their respective financial performa nce. If third-party distributors are managed at the business-unit level. enabling speedy a nd flexible deliveries. third-party distributors can create critical mass by aggregating dema nd from individua l customers a nd so offer product portfolios sourced globa lly.Opportunities in Chemical Distribution 4 units. several distributors can end up targeting the same customer with different products from one producer—and rationalization or bundling effects a re not fully captured. and mixing. Often. Business models for chemica l trading and for distribution sometimes converge when third-party distribution compa nies pursue both models. and adjusted for typica l pipeline products such a s ethylene and propylene that are not distributed. or the Middle Ea st. and so forth on a loca l level and in close proximity to customers. Network density. and agrochemica ls—to specialty chemica ls. Sma ller consumers typically lack the critical mass needed to tap into low-cost sources for chemica ls from China. Key elements in the value chain of a chemical distributor include: sourcing from multiple producers to ensure a broad a nd complementa ry product offering. This a llows them to differentiate their services by offering single sourcing. a nd repacka ging them according to customers’ needs. Ea stern Europe. mix a nd blend assets. because repackaging and value -added serv ices such as mixing. Ba sed on globa l consumption of €1. Our resea rch shows that around 9 percent of relevant global chemical consumption is distributed by third-pa rty distributors. physically ha ndling the chemical products. and flexibility of delivery—sometimes in the form of same-day delivery or customized volumes—that are not available through direct distribution by chemical producers. While ma na gement of chemical distributors by chemical producers rema ins diverse a nd highly variable. follows a simila r logic. blending. and then selling a nd physically transporting goods to customers. ma ny producers intend to pursue a much more structured a pproach in order to capture the full bundling and rationalization effects. the distribution networks and processes of chemical producers lack the critica l ma ss or the density needed to handle low-quantity. The Chemical Distribution Sector—and How It Is Evolving High product diversity and chemical-producer and customer-industry landscapes that are fragmented into numerous sma ll companies create a need for middlemen in chemical distribution who can match supply and demand. In pa rticular. The worldwide third-party chemical distribution market acheived a compound annual growth rate of 10 percent from 2006 through 2008 —faster than either GDP or chemical consumption. However. Such distribution bundling ha s releva nce not only for chemicals but a lso for a range of distributed products that includes ma intenance a nd repair supplies. high-diversity product portfolios. a nd from trading companies that ty pically do not repackage and a ssemble product portfolios according to customers’ needs. blending. (See Exhibit 2 . wa rehousing them. taking physica l ownership of products.9 trillion in 2008.

8 percent to the globa l compound a nnua l growth rate from Janua ry 200 6 through December 2008 .3 Change in industrial outpu t (%) Global Europe North America Latin America Asia-Pacific Change in chemical consumption (%) Change in distribution via third-party distributors (%) Change in value-added services (%) 2. Consequently. we anticipate that third-pa rty chemica l distribution ma rkets will continue to grow faster tha n globa l GDP and chemica l consumption in the mid.7 –0.5 0. Even though the survey confirmed that in most cases chemical producers will not transfer key accounts or la rge customers to third-party distributors. the specific industry exposure of individual third-party distributors varies.1 –0. The five largest distribution companies worldwide—Brenntag.5 0.7 17. and Helm—controlled less tha n 19 percent of the globa l ma rket in 2008.5 0. BCG analysis. However. The remaining 1. Overa long-term period. Distribution is itself a fragmented sector with more than 10.) The top ten controlled only 23 percent.7 6.5 0.3 8.5 1. or formulation create additiona l profit pools for third-party distributors. which show that chemical producers are still in the process of transferring small customers to third-pa rty distributors. Economist Intelligence Unit.0 00 distributors worldwide.4 4. (See Exhibit 3. This expectation is supported by our survey results.5 6. the third-party distributors’ sha re of consumption may grow from 9 percent at year-end 2009 to between 10 a nd 13 percent over the next five years.0 6. we expect that the share of third-pa rty chemica l distributors a nd the demand for va lue-added serv ices will continue to expand. depending on their chosen strategy. blending. others distribute to highly diversified customer industries. Ashland.0 0. There are several drivers fueling growth in the third-pa rty distribution market.2 0. which both shows that thirdpa rty chemica l distributors can pa ss along price increa ses in raw materia ls and a lso suggests that sales are linked to the volatility of raw materials and chemical price indexes. BCG interviews.7 0.0 0.6 8. enabling growth above chemical consumption. The growth of industria l output a nd increa sed use of chemicals contributed 2.4 –1.7 percent. with regiona l and possible shortterm deviations. chemica l distribution addresses the needs of diverse customers.7 1. Increa ses in the chemical price index accounted for a further 5. Univar. Note: Regional growth rates do not add up to the global growth rate because global growth rates reflect the weighted average of the regions.1 5.4 11. Ravago. Va lue-added ser vices such as mixing. Because chemicals a re consumed in a broad range of industries.6 Sources: Oxford Economics. resulting in greater exposure to the industr y’s cyclicality. thereby reducing their exposure to the cyclica lity of any single ind ust ry.9 1.8 3.3 8.9 0. Most firms operate locally or regionally and specialize in particula r products. The Market for Third-Party Chemical Distribution Outgrew Chemical Consumption Impact of individual growth drivers on market development.1 0. The Boston Consulting Group January 2010 .1 0. there rema ins significa nt long-term market potentia l for third-pa rty distributors owing to the fragmentation of customer industries—particula rly for those distributors that can operate on a globa l scale a nd across industries.Opportunities in Chemical Distribution 5 Exhibit 2. the numbers in the total compound annual growth rate column have been rounded. January 2006 through December 2008 Change in chemical product prices at constant volumes (%) Total compound annual growth rate. Some focus on specific customer industries.5 percent comes from the increase in ma rket share of third-pa rty distributors and the growth of value-added services—the key drivers for growth above chemical consumption. With rea sonable confidence. 2006–2008 (%) 10.

third-party distributors currently account for only 6 percent of the distribution business. In Chemical Distribution.4 1. there is as yet no distributor with a significant presence in The Boston Consulting Group January 2010 .1 Azelis 3. 3 Revenues and market share have been adjusted to capture only the distribution business. 1.5 Ravago 1.9 9.7 48.6 1.4 1.1 Univar 5.0 3.6 18.2 2.8 2.0 1.0 Itochu 2.9 6.5 21.1 Univar 20.2 1 Brenntag 6. compared to third-party distributors’ sha re of 9 percent of the chemical distribution business worldwide.7 102.4 4.7 2.9 Orica 1. scale effects.9 11. creates an attractive environment for chemical distributors in the Asia-Pacific region.4 32.8 1 Brenntag 7.0 Helm 3 3 3 3.0 2.1 3.4 1.5 27.5 1. Ltd. both the market share of third-pa rty distributors and the applicability of the typica l chemical-distributor business model.8 1.6 Sinochem 3.4 18.9 3.0 3.7 percent of the ma rket in 2008. Global includes not only the four regions shown here but the rest of the world as well. Furthermore.8 10.7 9. the top five third-party chemical distributors have significa ntly higher market shares than in emerging regions such as Asia-Pacific.8 24.5 1.4 47. 4 ICC Chemical Corporation.9 5 Pochteca 0. 2 The data refer only to Ashland’s distribution business.5 6.8 Brenntag 10. (See Exhibit 4. it must be remembered that Asia-Pacific is also a heterogeneous market with va rying levels of maturity.3 2. and capabilities needed to meet producers’ and customers’ needs.0 9.8 0. Cassab 1.0 NCLI 1.4 9.6 4 M.0 13. Market Share—and Market Leaders—Vary by Region Global 1 Market size (€billions) Market share (%) position and Europe North America 2008 2007 2006 2008 2007 2006 2008 2007 2006 114.7 95.0 36.1 2.8 5.5 11. legal entity reporting.5 1. Some larger compa nies have used mergers a nd acquisitions to develop cross-regional capabilities.9 13.0 Latin America Asia-Pacific Market size (€billions) Market share (%) posiand tion 2008 2007 2006 2008 2007 2006 11. where those leaders accounted for 9.0 23.0 Ravago 4 3.2 2 Univar 6.3 2.Opportunities in Chemical Distribution 6 Exhibit 3.0 2. critical mass.6 25.0 3.) While strong growth in industrial output a nd chemica l consumption. Medium-sized enterprises have formed networks such as the 15 -member Omni Chem alliance and the 22-strong Chemical Distribution Network. BCG market interviews.4 15.6 25.8 3 2.0 ICC 2. In China.0 5.9 Top five 12.7 2. BCG chemical distribution market model.5 2.3 44. Still. In mature markets such as North America and Europe. the dy na mic evolution of the market and competitive environment creates uncertainties about.0 2.8 20. which consumes more chemicals tha n any other region.0 3. see the Appendix.0 Top five 18.9 0.4 1.0 11. combined with a la rge share of sma ll customers.5 14.4 Miki & Co. 5 Bandeirante Química. for exa mple. in the Asia-Pacific region.2 23.6 Sources: Company press releases.0 2.7 11. For information about the methodology we used to create our market model.1 12. network density.1 1.5 1.4 2 Bandeirante 5 3 quantiQ 1.5 17.0 5. 1 The third-party chemical distribution market shows significant regiona l differences.9 6.9 Brenntag 12.0 2.4 11.8 Ashland 3 Ashland 4 Ravago 5 Helm 3 2 2 2.1 6.5 31. in pa rticula r.4 2.9 35.7 1.3 3.

Nonetheless. BCG interviews. and Thailand. Luxemb ourg. 6 Not assessed. Slovakia. Greece. ma rket sha res a re often the result of mergers and a cquisitions within the chemica l distribu tion landscape. Country numbers do not add up to regional numbers due to rounding.0 489 74 6 32 57 43 Japan 5.744 378 2.6 110 73 8 9 56 44 China 2.843 52 1.002 1.9 62 63 10 6 58 42 3. Netherlands.8 104 69 11 12 64 36 Brazil 1. Taiwan. none of the top five Asia-Pacific distributors has a significant presence in another region. Oxford Economics. BCG analysis.0 11 38 8 1 63 37 Other Western Europe 2 Central/ Eastern Europe 3 North America United States 3.2 49 69 11 5 62 38 Spain 1.409 40 2. Denmark. Portugal.141 151 4. On the other ha nd. Eurostat. 1 every region. 5 Argentina.412 35 2. none of the globally leading chemical distributors has a significa nt presence in Asia-Pacific.758 571 2.2 285 75 6 16 58 42 India 1. New Zealand. and Sweden.009 42 4.869 379 13.2 14 39 15 2 NA 6 NA6 Sources: OECD. Singap ore.0 63 74 6 4 57 43 3.973 656 6.477 98 2.673 83 3. Lithuania.1 61 62 14 8 51 49 17.2 31 74 9 3 58 43 Other AsiaPacific 4 Latin America 1.467 99 2. Economist Intelligence Unit. Indonesia. Global includes not only the four regions shown here but the rest of the world as well.7 21 55 13 3 60 40 Other Latin America Middle East 985 49 5. Ireland. and Slovenia.4 192 46 13 25 61 39 15.8 23 57 10 2 61 39 Belgium 470 28 6.5 1.200 98 3.424 85 6.8 48 75 11 5 64 36 Mexico 1. Romania. 4 Australia. 2 Austria. SRI.Opportunities in Chemical Distribution 7 Exhibit 4.157 413 2.098 63 5. Malaysia. Poland. South Korea. Philippines.236 63 9 115 59 41 Europe 19. and Venezuela. Pakistan. Finland.219 72 3. Hong Kong. Third-Party Distributors Captured Varying Shares of Regional and Country Markets Distributionrelevant chemical consumption as a percentage of all chemical consumption (%) Share of distribution conducted via thirdparty distributors (%) Market Global 1 GDP (€billions) Consumption of chemicals (€billions) Chemicals as a percentage of GDP (%) Distributionrelevant chemical consumption (€billions) Size of thirdparty distribution market (€billions) Share of industrial chemicals within the third-party distribution market (%) Share of specialty chemicals within the third-party distribution market (%) 56.8 66 67 10 7 63 37 United Kingdom 2.4 172 45 13 22 60 40 Canada 1.961 3.1 55 66 8 5 60 40 Italy 2.058 39 3.126 36 3. Acquisitive growth is driven by the success factors in chemica l distribution and the The Boston Consulting Group January 2010 . Russia. Latvia. Japan.4 20 58 14 3 71 29 AsiaPacific 10. Estonia. Destatis.9 353 62 11 37 58 42 Germany 3. so they do not yet fully participate in the region’s growth and market potential.672 150 2.0 35 72 11 4 64 36 5 1. For example. Chile. UN Comtrade. Czech Republic.8 26 50 11 3 55 45 France 2. 3 Bulgaria. Colombia.

So it is not surprising that our interviews with executives at 100 compa nies that purcha se chemicals showed that price (for 61 percent of respondents) wa s the main consideration. a nd information-exchange systems. Note: The data in this exhibit come from interviews—conducted by BCG in October and November 2009—with executives at 100 companies that purchase chemical products in Western and Eastern Europe. time. The Customers—and What They Want A la rge proportion of chemica l products have sta ndard specifications. North and Latin America. Second. the Middle East. Fourth a nd last. 3 Small companies are defined as companies with less than €5 million in sales. distributing to numerous industries creates scale effects that a re difficult to duplicate because different. industry-specific regulatory requirements need to be met. The survey results clea rly confirm this: 6 9 percent of the chemica l distributors we interviewed see network and cost advantages a s most important for their future growth and value generation. In addition. there is a sharp differentiation between what is important to large and small compa nies when they purchase chemical products. The Boston Consulting Group January 2010 . Company Size Affects Purchasing Criteria Which criteria are important in your purchasing decisions for chemical products? Large companies Price Product quality Speed of delivery Flexibility of delivery Additional services Global reach Technical support Breadth of product portfolio Application expertise 16 14 10 9 020406080 100 % of large-company respondents citing criteria 30 52 48 43 2 1 3 Small companies 77 Flexibility of delivery Speed of delivery Product quality Price Technical support Additional services Breadth of product portfolio Global reach Application expertise 27 25 18 9 9 46 64 63 62 020406080 100 % of small-company respondents citing criteria Source: BCG Global Chemical Distribution Market Survey. customers expect chemica l distributors to offer broad product bundles and to set up a nd operate a global network for sourcing. our survey results show that chemica l producers expect third-party distributors to have strong local plus global capabilities. First. What is striking is that price was closely followed by flexibility of delivery (50 percent) a nd speed of delivery (48 percent).) While price is by fa r the most important criterion (77 percent) for large customers (defined in this ca se as compa nies with annual sales of more tha n €5 million)—in other words. However. Third. mak ing it ea sy for customers to switch producers in sea rch of the best price. and Africa. but not least. Wherea s entry ba rriers for a local distribution business are low. those who will almost invariably dea l directly with the producer—smaller Exhibit 5. and management. a long with the critica l mass to invest in market development. the buildup of a global distribution network requires significant resources. technical expertise. critical ma ss and a global network form a competitive adva nta ge. so there is a clea r rationa le for acquisitive growth a s a value driver. chemical distribution is a business driven by scale and network density.Opportunities in Chemical Distribution 8 requirements of both chemical producers and customers. (See Exhibit 5. Asia-Pacific. 1 The numb ers do not add up to 100 percent because multiple answers were allowed. 2 Large companies are defined as companies with more than €5 million in sales.

and the partnering approach need to be differentiated. resource commitment. 54 percent. key performance characteristics. small customers a re not viable a nymore. The dilemma facing these companies wa s expressed by the representative of a French compa ny. but it matters less tha n flexibility of delivery (64 percent). Fully exploiting the va lue pools of the various customer segments requires a differentiated approach to channel management and distribution. rather than a n undifferentiated one based purely on customer size. Most would like the increa sed simplicity of dealing with fewer distributors—with 59 percent of customers na ming singlesupplier deals as a n unmet need. logistic terms) versus the ability to realize price points. performance capability a nd processes differ significantly among individual compa nies.” There was a lso strong interest on the part of customers in applica tion expertise (48 percent) a nd vendormanaged inventories (31 percent). “Large distributors are conglomerates of acquired businesses. which typically are relevant for both chemical producers and third-pa rty distributors. pack aging units. One hea d of European Union business ma nagement said. As a German compa ny spokesman put it. This leads to a series of tradeoffs. Our experience from extensive client work and the more than 150 interviews we conducted point to the following five actions. Almost as many customers. which need to be ta ilored in ways specific to a company and its customer portfolio. In pa rticula r. Price (46 percent) is of course not unimporta nt. “Distributors have fa r better speed a nd flexibility of delivery tha n chemical producers—and they could provide even more of the technical support we need in some categories. “We would love to get rid of all of the inventory management. speed (63 percent). Typical tradeoffs include the following: The density of the distribution network required for speed of delivery versus the cost efficiency dictated by pricing pressure The complexity cost of a diverse portfolio (products. and thereby meet profitability targets The need for cost efficiency and scale versus the need to invest in market development. said more technical support would help. who sa id.” All of this suggests that larger distributors will enjoy a significant competitive advantage. They cited as the main obstacle the limited breadth of product portfolios—a s yet even the la rge distributors do not offer the required range of products and specifications. customers would like more from chemical producers and distributors. and product quality (62 percent). key-account customers to low-volume. Technica l support (27 percent) was a lso considerably more significa nt for sma ll than for large customers. especially in emerging high-growth markets The ava ilability of distributors with the required expertise and geographic reach versus the need to develop distributors with the required expertise a nd geographic reach for the medium to long term The need to combine globa l reach with strong local presence versus the resources required to do so a nd the need to meet profit targets Fully realizing the value from distribution starts with the recognition that it is more than a simple operationa l issue. “One -size -fits-all” approaches attempting to serve everybody from high-volume. The Boston Consulting Group January 2010 . only few distributors are offering such a service for medium-sized compa nies. service levels. It is clear that producers a nd third-pa rty distribution companies can accommodate only a limited number of different business a nd distribution models within each orga nizationa l entity. A stra tegic approach.Opportunities in Chemical Distribution 9 companies have different priorities. is needed to decide which segments should be outsourced and which kept in-house. provided they raise their own standards. Unfortunately. At the sa me time.” Winning Distribution Models—and How to Build Them Competitive pressure in customer industries and in the chemica l industry requires increa singly differenti ated distribution approaches.

rev iew current processes. increasing the efficiency of ha ndling physical goods. So. Create Transparency on Costs All companies track costs and plan expenses for marketing. a nd development opportunities—a nd prioritize them based on their value potential. including sales. and sta ndard logisticsonly approa ches). profit potentia ls. Take a holistic view of all relevant customer-facing functions. business partners. A more open model is needed to realize scale and to focus assets on areas in which competitive adva ntages a re feasible. Explicitly address the ma ke-or-buy decision: which segments justify a direct approach. cost-to-serve. businesses. logistics. Then integrate the distribution approach for va rious channels into a cross-channel concept. Define the requirements—the target cost structures. in order to supply customers with a global footprint a nd to fully benefit from global sourcing opportunities. Then develop a n honest perspective about how each requirement can best be met. and critica l mass can be attained though collaboration. and support. within a certain radius). Also. cross-check. these efforts ca n be further deepened. which segments ca n be a ddressed by a lternative channels (such as e-commerce. start with existing customer segmentation and rev iew. in the case of chemica l producers. wa rehousing. and regions a nd countries. and resulting profitability by customer segment. scale. functions. marketing. Differentiate Channel Strategies and Tailor the Go-to-Market Approach Structure follows strategy—so clearly differentiate distribution cha nnels and define channel strategies ba sed on a thorough customer understanding and transparency on achievable cost structures. a nd distribution by business unit and region. assess the cost structures. clea rly defined processes across regions and countries. a nd. and Ownership Chemical distribution means steering a network. a nd infrastructure from a critical mass a nd a financial perspective. product line. asset footprint. map unmet customer needs. and service levels—needed for sustaina ble competitiveness. Third-party distributors ca n deliver significant va lue to chemical producers by managing complexity. and customers are critical. telephone sales. ten-year The Boston Consulting Group January 2010 . and distribution. Align key stakeholders on the target processes. those costs due to nonstanda rd packaging or logistics—and develop an honest view on your cost position and capabilities versus those of your competitors. and responsibilities. which individual activities of distribution a nd customer segments a re better transferred to a third-party distributor. roles. So. and va lidate fact bases on customer applications. Then design the distribution approach by differentiating roles for distribution cha nnels on the basis of the objectives for each cha nnel: where to focus on ma rket and customer development and where to focus on cost efficiency or to opportunistically sell fringe volumes. order frequency). Define Processes. Setting strategy and developing a partner network with a five. Build a Partner Network Twenty years ago. network density. and ensuring short ca sh-conversion cycles. logistics. even though the foca l points a re typically specific to each compa ny. Tasks. Identify “island solutions” and underma naged interfaces between businesses. and cha nnel—including the cost of complexity. set the operational requirements. Validate process documentations a nd ownerships. a ssets. a more differentiated perspective on individual customer segments and cha nnels is required to exploit the full value potential. Although chemica l distribution is often perceived a s supplying customers only “a round the warehouse” (that is. customer systems. For both chemical producers and third-party distributors. If a company is subcritical. a nd buying patterns across business units and regions (order volume. Compare resources. the make-or-buy balance in chemica l distribution was heavily geared towa rd in-house capabilities. selling.Opportunities in Chemical Distribution 10 Understand Customer Segments and Customer Needs While chemical producers a nd distributors implemented significant programs and initiatives to understand customer needs. Explicitly consider the costs of complexity in serving individua l customers—for example. Therefore. Once channel strategies are defined. distributors need management processes that integrate indiv idual warehouses into networks. That the “ideal pa rtner” is not yet readily ava ilable too often serves as an a rgument for sticking to the status quo or targeting only moderate cha nge.

with reasonable confidence. which potentia l partners a re already available. This ca n free up resources to invest in the requirements for strategic pa rtnerships—for example. few chemical producers coordinate their third-party distributors across businesses and countries. speed. but they are often neglected sources of competitive differentiation in chemical distribution. and we expect. and flexibility of delivery a re highly relevant in customers’ purchasing decisions. warehouses. long-term period. combining global reach and local presence is decisive to meeting producer and customer needs and to fully realizing scope and scale effects. They do not realize full value. ma rket-development pa rtner. a nd trucks a re the underlying a ssets that constrain growth. processes for managing distribution network s across acquired compa nies are often underexploited a s levers for scale effects and leading logistics. Operating on a global scale and across industries will be a critica l success factor in rea lizing the benefits of sca le and scope in chemical distribution. Especially for large chemical distributors. a nd developed from a local and business-specific perspective. Even though chemical distribution is often perceived as an asset-light business model. currently. a nd customers. define clear roles for third-party distributors—complexity-optimization partner. and delivery flexibility often enables significa nt efficiency gains. For chemical producers. Setting different service levels for packaging. Customized offerings. To fully capture the potential value in the va rious customer segments. that it will continue to do so in the mid. a differentiated distribution approach is required for both chemica l producers a nd third-party distributors. innovation pa rtner. Currently. So.Opportunities in Chemical Distribution 11 perspective ma ke it possible to build a competitive adva ntage on the basis of distribution networks with leading density and scale. third-pa rty distributors. So. transactiona l. our experience a lso pinpoints areas in which the actions needed a re distinct. local partner. the stringent differentiation of channels beyond the sales function is often neglected. he third-pa rty chemical distribution ma rket outgrew chemical consumption in recent years. T The Boston Consulting Group January 2010 . global pa rtner. a nd which pa rtnerships still need to be developed to increase cost efficiency or develop markets. assess in which segments stable pa rtnerships add most va lue. Strik ing the proper balance between differentiated offerings a nd conta ining cost complexity will be facilitated by closer cooperation and pa rtnerships among chemical producers. and so forth—a nd reduce the complexity in third-pa rty distributor relationships by focusing on partners willing and able to support your strategy. logistics. While the above actions for building winning distribution models are relevant for both chemical producers and distributors. information-excha nge systems and technica l expertise for partnerships with chemical producers or single-sourcing and vendor-managed inventories for partnerships with customers. tank wagons. Additional value potential can often be rea lized by defining processes a nd ownership for a more structured approach towa rd distributors. For third-party distributors. So. implementing the key rules of supplier management can reduce management complexity and strengthen active steering of distributors. a ssess where asset intensity can be reduced by transferring logistics and warehousing to pa rtners. most contracts are spot-based.

propylene. Domestic consumption of chemicals includes domestically produced chemica ls that a re consumed by customer industries within the country a nd imports of chemica ls for domestic industries. which are typica lly not distributed. Exports a re not for domestic consumption. OECD. ethylene and propylene are predominantly delivered by pipeline. a nd made adjustments. customers of chemica l companies. and they a re therefore accounted for in the country of consumption. Step 3: Determining Third-Party Distributors’ Share of Distribution. Country-specific data were also derived from BCG’s proprieta ry ChemCom database of chemical production a ssets and from BCG’s proprietary ChemProd database of chemica l products. We conducted the interviews using a standa rdized questionnaire of 25 qua ntitative and qua litative questions. We consolidated the data. to ensure a comparable a nd robust database. and BCG’s proprietary ChemCom and ChemProd databases. owing to economic. Our analysis of the share of industria l and specialty chemica ls in the third-party distributor market was ba sed on BCG’s proprieta ry ChemProd databa se. The data were consolidated from Eurostat. p-xylene. cross-checked the da ta for consistency. butadiene. Our assessment of third-party distributors’ sha re of distribution was made on the basis of more tha n 150 interv iews with executives at chemical companies. We ca lculated the market size of third-party distribution markets using the steps described below. Projections for the future development of the chemica l distribution ma rket and the releva nt market segments were based on forecasts of GDP a nd chemical consumption developments. For example.Opportunities in Chemical Distribution 12 Appendix: Chemical Distribution Market Model We developed a market model for chemica l distribution comprising both 50 individual countries and region-specific clusters of countries. Step 1: Assessing Domestic Consumption of Chemicals. the results of our more than 150 interviews. technica l. when required. Step 2: Adjusting for Chemicals That Are Not Relevant for Distribution. ethylene oxide. a nd various national statistics bureaus. a nd chemical distributors in all regions of the world. comprising more than 20 0 chemical product groups and their respective applications in customer industries. and cumene. Not all products within the chemical product la ndscape are distributed. Step 4: Differentiating the Share of Industrial Chemicals and of Specialty Chemicals. toluene. We categorized the chemical product groups into industrial and specia lty chemicals a nd then linked them via releva nt applications in customer industries. or sa fety reasons. The domestic consumption of chemicals is adjusted for consumption of ethylene. The Boston Consulting Group January 2010 . benzene.

com. Mary Yves Wil lers is a pa rtner and managing director in BCG’s Hamburg office. The Boston Consulting Group (BCG) is a globa l ma nagement consulting firm and the world’s leading adv isor on business strategy. Udo Jung is a senior partner and managing director in the firm’s Frank furt office a nd the globa l leader of the Chemicals sector.yves@bcg. You may contact him by e -mail at willers. Huw Richards. a nd Jörg Klein for their contributions to our research and analysis.udo@bcg. and production of this paper. and transform their businesses. Katherine Andrews. Kim Friedman. build more capable organizations. please visit www. Gary Ca lla han. © The Boston Consulting Group. Helge Hofmeister. For more information. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive adva ntage.Opportunities in Chemical Distribution 13 About the Authors Bernd Elser is a principal in the Fra nk furt office of The Boston Consulting Group. Acknowledgments The authors a re grateful to Nicole Fietkau. Inc. You may contact him by e-mail at elser. We partner with clients in a ll sectors and regions to identify their highest-value opportunities.bernd@bcg. You may contact him by e-ma il at Abiga il Ga rland. All rights Pamela Gilfond. and Sara Stra ssenreiter for their contributions to the writing. 2010. 1/10 The Boston Consulting Group January 2010 . Founded in 1963. and secure lasting results. address their most critical challenges. editing. BCG is a private company with 68 offices in 3 9 countries. The authors a lso wish to thank Barry Adler.