SAP Ariba Solutions for Direct Spend

The Digital Evolution in the Chemicals Value Chain: From Recipe Creation to Delivery

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Table of Contents

3 The Changing Face of the Chemicals Industry

5 The Vision: Digitalizing Processes from Recipe Creation to Delivery

6 How SAP Ariba Solutions Can Help

8 TheBenefitsofDigitalizingSupplyChains for Direct Spend

9 ProvingtheValue:CustomerSuccesses

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Digital transformation is expected to drive up to €25 billion of new value per year in Europe alone for chemicals companies.Source: “The Digital Transformation of Industry,” A European study commissioned by the Federation of German Industries (BDI) and conducted by Roland Berger Strategy Consultants (www.rolandberger.com/en/Publications/pub_digital_transformation_industry.html)

The Changing Face of the Chemicals Industry

For chemicals companies that are still managing direct spend source-to-settle processes in traditional silos, the time for change has come. Leading chemicals companies are finding new ways of looking at their business, which is being transformed by three major industry trends:

• Shifting market dynamics • Acquisitions, mergers, and divestitures • Business model and portfolio innovation and growth that depend on complex, global, nonlinear supply chains

SHIFTING MARKET DYNAMICSShifting market dynamics are creating the need to aggressively manage manufacturing costs. These dynamics include: • Increased competition: Competition is emerging from low-cost suppliers ranging from spinoffs of established providers to firms in developing countries. Regardless of the source of the

competition, an increasingly crowded field is leading to growing price and margin pressure.

• Demand complexity: Globalization and environmental trends are changing demand patterns. For example, customers require niche products to satisfy diverse local regulations and end users, while environmental consciousness is changing how products are packaged. Consumers in many regions prefer products with green packaging, shifting demand away from plastics, shrink-wrap, and other nonbiodegradable pack-aging. This leads to further pressure on margins in these categories.

• Ongoing instability and volatility: Underlying commodity prices are unpredictable today, making it difficult to forecast and manage costs and profitability. Volatility in oil prices alone, for example, creates tremendous instability in an industry where oil and oil-derived products can represent more than one-tenth of total spend.1

The chemicals industry is undergoing a major transformation brought about by mergers and divestitures, shifting market dynamics, and nonlinear supply chains. Industry leaders are responding by harmonizing their supplier management, sourcing, and supply chain processes using a digital strategy that enables them to extend business processes be-yond the four walls of the enterprise. Along the way, they are realizing new efficiencies and cost savings needed to compete in today’s complex marketplace.

1. SAP chemicals industry business unit.

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ACQUISITIONS, MERGERS, AND DIVESTITURESAs with most industries today, the chemicals industry is accelerating innovation in ways that create competitive advantage and grow corporate product portfolios. For example, market leaders are investing in innovation through internal R&D initiatives and their own venture capital arms, as well as by adopting disruptive technologies. They are also expanding their product portfolios by ac-quiring product lines from peers and competitors. These investments and acquisitions increase the urgency for – and the challenges of – harmonizing business processes and supply bases across disparate lines of business.

NEW OFFERINGS REQUIRING GLOBAL, NONLINEAR SUPPLY CHAINSTo support new business models and product portfolios, many chemicals companies are taking advantage of trends such as toll manufacturing (when a third party performs a service on a product

for a volume-based fee, or toll, quickly and effi-ciently). Tolling makes costs predictable because the toll manufacturer buys its own equipment and uses its own floor space – huge costs that chemical manufacturers no longer need to bear. In addition, toll manufacturing helps companies become more agile at innovating. According to SAP Performance Benchmarking, companies typically see a 10% increase in new product revenue from accelerated innovation resulting from an extended ecosystem.

But as dependency on global, nonlinear networks of toll manufacturers and other companies grows, chemicals companies also need deeper supply chain visibility and collaboration. Visibility into product quality of batches or lots produced by toll manufacturers is critically important for customer satisfaction as well as for regulatory compliance. In addition, having better visibility into the availability of supply is imperative for companies seeking to ensure their ability to meet market demand.

>10% Higher new-product revenue from faster innovation with extended ecosystem Source: SAP Performance Benchmarking

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Given these trends, how can you transform your business from a disconnected organization to a digital enterprise? By connecting processes from recipe creation to product delivery and evolving into an interconnected supply chain that senses and swiftly responds to changes in demand, supply availability, and other events. Let’s take a closer look at what this means.

DIGITALIZE THE EXTENDED ENTERPRISEIn response to shifting market dynamics, you can improve cost management and responsiveness by digitalizing your extended enterprise by:

• Using standard, end-to-end integration to help ensure that the accurate contract information in your ERP system is used to complete the ordering process, reducing contract leakage

• Overseeing strategic supplier relationships more effectively in order to manage raw material volatility, capture pricing data on the core components of products, and use that data to run what-if analyses

STANDARDIZE AND HARMONIZE PROCESSESTo reduce complexity and streamline procurement processes across lines of business and acquisitions, leading chemical manufacturers are transforming strategic procurement. Focusing on supplier quali-fication and selection processes and harmonizing disparate supplier bases across regions can help you achieve purchasing scale in new ways that were previously not possible.

COLLABORATE WITH SUPPLIERS ACROSS PLAN-TO-DELIVER PROCESSESTo harness global, nonlinear supply chains and achieve operational excellence, industry leaders are providing “one face” to suppliers by eliminating fragmented communications. In addition, they are collaborating with key direct trading partners, including toll manufacturers and suppliers in low-cost countries. These strategies can help you obtain proactive supply chain visibility, increase flexibility, and effectively manage volatility.

The Vision: Digitalizing Processes from Recipe Creation to Delivery

“This global digital economy accounted for 22% of the world’s economy in 2015. And it’s rapidly growing, as we forecast those numbers to increase to 25% by 2020.”Source: Digital Economic Value Index, Accenture, January 2016

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and extending these systems to suppliers for collaboration on key supply chain planning and execution processes.

The following table summarizes the key capabilities of SAP Ariba solutions for direct spend.

SAP® Ariba® Functionality AssociatedBenefitsSupplier risk information

Help your buyers make smarter, safer supplier decisions by providing them with a comprehensive view aggregating supplier profiles, ongoing activities, and risk profiles.

Supplier categorization and segmentation

Use comprehensive tools to onboard, qualify, segment, and manage supplier performance. You can also use a unified vendor data model in the cloud, which suppliers can keep up to date to help ensure accurate supplier records. Supplier lifecycle management is integrated with sourcing so you can control whom to invite to bid and drive spend to preferred suppliers.

End-to-end process management

Integrate your sourcing and contracting processes with manufacturing execution through your ERP system to help ensure that terms negotiated during the sourcing process are fully executed. This can be done in an automated, fast, and efficient way.

Integration with ERP systems and advanced supply chain optimization tools

Enjoy streamlined integration with back-end systems so that sourcing agreements flow to your ERP software from SAP® Ariba® solutions. Execution documents such as purchase orders, work orders, and quality notifications also flow seamlessly between internal and supplier systems. Choose from a portfolio of integration options and get support for over 100 prebuilt processes to accelerate digital supply chain transformation. Chemicals industry customers are using SAP Ariba solutions to integrate multiple ERP systems across multiple business units and acquisitions – providing a “single face” to suppliers.

Complex services and service master

Simplify and improve strategic sourcing with seamless data sharing through integration with services, material management, and vendor management systems. Note: these are future capabilities on the road map.

Total landed cost calculation

Advanced lookup tables and customized data allow you to include values not specified in your sourcing activities – but germane to total landed cost calculations – in your cost formulas by creating a reference to the uploaded table. You can include, for example, shipping and logistics costs to compare different incoterm and incoterm locations offered by the supplier; taxes and import duties; key internal costs; exchange rate scenarios; and other reference data to obtain a comprehensive view of total landed costs.

How SAP® Ariba® Solutions Can Help

SAP® Ariba® solutions for direct spend can help accelerate the digital transformation of procurement by managing your source-to-contract and supplier management processes, integrating smoothly with your ERP and supply chain optimization systems,

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SAP Ariba Functionality AssociatedBenefitsFull visibility into contractual commitments

SAP Ariba contracting capabilities make your procurement team fully aware of any contractual commitments to suppliers and customers, which is an especially important consideration in light of mergers and divestitures.

Sourcing and cost optimization

Negotiate best-value sourcing agreements and help ensure that your sourcing teams use only the suppliers that have been qualified – at the commodity, region, or plant level.

Commodity index-based pricing

Use sophisticated cost optimization tools such as what-if analyses to develop base pricing on a particular commodity price index (for example, oil) where you could base contracts on the price plus/minus a discount or surcharge. Develop best and worst case what-if scenarios to optimize awards based on the likelihood of certain commodity pricing systems. Note: these are future capabilities on the road map.

Order collaboration Check the real-time status of order confirmations and supply availability while giving suppliers greater transparency into longer-term and near-term demand.

Toll manufacturer collaboration

Collaborate with toll manufacturers, using subcontracting purchase orders to inform them about the product ordered and the ingredients needed to make it.

Quality collaboration Share quality information with suppliers and toll manufacturing partners, such as inspection results and deviations on components, work-in-process, and end products to help ensure alignment before, during, or after manufacturing, shipment, or invoicing. Create a joint record and resolution process for quality issues initiated by your or your trading partners’ quality assurance teams across multiple quality notifications types (deviations), and request and obtain inspection results from your trading partners. Obtain certificates of analysis (CoA’s), confirm or make usage decisions and stock posting based on the inspection results, and collaborate with trading partners to exchange and review quality documents, including unstructured communications, such as batch records or change requests. Equip quality managers with better visibility into quality of supply from suppliers and toll manufacturers.

Supplier onboarding Use flexible, on-demand tools and technology to segment and onboard thousands of global suppliers and connect supplier systems and processes to internal systems. SAP Ariba onboarding experts are ready 24x7 to help plan, prioritize, and execute, if needed. Self-service functionality automates enablement for any supplier, and open, standards-based electronic commu-nication and support for 20 languages ease adoption.

Intelligence and collaboration dashboards

Newly enhanced collaboration tools provide intelligence that wasn’t possible in the days of EDI. Get real-time status information, measure trading partner performance, and prevent potential supply chain disruptions using proactive exception alerts that flag potential issues.

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SAP Ariba solutions for direct spend drive digital transformation that can help you compete more effectively in a turbulent market. McKinsey & Company, for example, has reported that business-to-business (B2B) companies that are digital leaders generate 8% more shareholder returns and a revenue compound annual growth rate (CAGR) that is five times greater than the rest of the field.2 And SAP Ariba customers have reported they have: • Improved compliance through reduced risk in supplier selection and management: By employing more sophisticated and granular supplier qualification and management, they can enhance compliance on an ongoing basis, which reduces financial, brand, and other risks.

• Reduced costs by harmonizing processes: Global companies that grow through acquisition and organic investment can gain the best of both worlds – benefiting from local and commodity expertise, and from the efficiencies that harmo-nized, shared services organizations offer.

• Achievedgreaterprocessefficiency:Source-to-settle processes run faster and smarter because

SAP Ariba solutions integrate with ERP and supply chain optimization systems, connecting the people, partners, processes, and information needed to effectively manage all source-to-settle activities.

• Increased inventory turns: Supplier collaboration enables companies to reduce inventory levels, increase fill rates, and minimize supply chain risks through better supply chain visibility – all with minimal manual data entry and rekeying.

To quantify the business impact of SAP Ariba solutions for direct spend, consider the key perfor-mance indicators that SAP Ariba customers have reported:

• 4% to 15% average unit price reductions • US$20 million in contract leakage prevented per every $1 billion of spend

• $40 million of improved free cash flow per $1 billion of addressable spend

• $1 million to $2 million in savings per $1 billion of impactable spend

The Benefits of Digitalizing Supply Chains for Direct Spend

Enterprises can achieve a 12% reduction in days inventory outstanding (DIO) with dynamic, fre-quently updated forecasts.Source: SAP Performance Benchmarking

2. McKinsey & Company, “How B2B Digital Leaders Drive Five Times More Revenue Growth Than Their Peers,” October 2016.

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PTT CHEMICAL PUBLIC COMPANY LIMITEDPTT Chemical Public Company Limited (PTTGC) decided to transition its decentralized tactical teams at its 18 manufacturing plants into a centralized strategic organization. The company required a solution to help scale the business quickly, support business needs proactively, and manage volatile, changing market conditions. By implementing SAP Ariba solutions, PTTGC has developed an award-winning, best-in-class procurement organization. With standardized processes in place and tools to manage compliance spending, PTTGC has achieved aggressive growth goals and accelerated cycle times by 44% while reducing inventory costs by 56%.

BASF SEBASF SE, a leading global chemicals company, is transforming its sourcing and supplier management across direct and indirect spend and packaging. The company’s vision is to capitalize on its massive scale and digitalize with new technologies.

Supported by SAP Ariba solutions for direct spend, the new operating model is structured around strategic category teams, shared services procurement, and local procurement to benefit from local and commodity expertise and efficiencies from shared services organizations. The company’s initial focus is on the highest value of the 350 categories that it sources.

Supplier management is a key focus for BASF because it sells into regulated industries like health and nutrition and must meet various regional environmental regulations. BASF uses SAP Ariba solutions for direct spend to qualify and segment sup-pliers by region, commodity, and even at the local plant level. What’s more, BASF also uses the solutions to enforce that qualification in its direct materials sourcing processes.

NEXT STEPSTo learn more about SAP Ariba solutions for direct spend, please visit www.ariba.com/solutions/solutions-overview /supply-chain.

Proving the Value: Customer Successes

© 2017 SAP SE or an SAP affiliate company. All rights reserved.

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