Chemical suppliers brace for an oil shock

Although it is important, it is not enough to analyze the impact of oil price only by microeconomic model. The shock in 2014 showed that many chemical suppliers could not change direction quickly enough to cope with the oil price shock appropriately. Since 2010, the stable oil price environment has led many chemical supplier leaders to shift their attention from fluctuation management. However, with the recent fall in oil prices, leaders have realized that they no longer have the organizational flexibility they need.

To ensure that their businesses are ready for further shocks, leaders must enhance their agility in three areas - strategy, management, and function - to enable their organizations to respond quickly to oil shocks.

Facing the rapidly changing environment, chemical suppliers can quickly determine the right direction. This ability is based on four pillars:

Monitor oil price shocks. Companies must monitor oil price indicators and have excellent analytical ability to deal with the coming oil crisis as soon as possible.

Analyze portfolio risk. Leaders in the chemical industry need to know how different oil price scenarios will affect their portfolios. This requires a regular microeconomic review of the cost structure and price mechanism of its products on a chain by chain and region by region basis, so as to determine the extent and timing of the impact of oil price changes.

Optimize risk. Producers should take decisive action to understand what is the "right" risk for their business, and then eliminate unwanted risks through contracts, financial hedging, and internal operational choices (e.g., purchasing alternative raw materials).

Create scripts. Producers need to invest in creating a comprehensive business script to guide actions under different oil price scenarios, including learning from recent shocks. The best scenario would list three to five clear priorities or expectations (for example, maintaining North American prices), which could easily be translated into tactical actions during an oil shock.

Management flexibility

Management flexibility refers to the speed at which leaders can quickly shift the focus of an organization and align on new priorities. The best companies have established such a mechanism:

Set up a cross functional senior decision-making team. In a highly unstable environment, decisions must be made faster and at a higher level than in normal times. It is essential to quickly assemble and empower these teams as they are at the heart of driving the necessary communication, feedback, and accountability during the shock.

Reallocate resources to key functions. Producers need flexibility to support over stretched functions and businesses with resources from other less critical areas. In the end, it comes down to motivation and culture. Do managers act in the best interests of the organization as a whole, or just focus on their areas?

Functional agility

In our experience, functional capabilities will be tested in major shocks as standard processes designed for stable market development no longer work. Often, we see tremendous pressure on business and purchasing functions, which must act quickly to gain value and minimize threats. Powerful functional agility requires the company to do the following:

Identify values and develop action plans. Enterprises must quickly translate priorities into specific actions, identify risky value areas (e.g., customers may turn to other suppliers), and develop clear and specific action plans (e.g., customers) for implementation by front-line teams.

Communicate actions with the front line. To reduce errors and set expectations, functions need to quickly communicate new priorities to the front line. Speed is the key to providing guidance and managing immediate action for all legitimate stakeholders.

Carry out strict tactical execution. The key to successful implementation is to shift decision-making from autonomous driving to manual driving and to drive daily performance tracking. We often see that the best way to implement is through the war room method, combining market data, decision makers and financial performance tracking.

Never ignore operational excellence. In the prevailing low oil price environment, excellent operational and capital efficiency is more important than ever, and more important than ever for more participants. The profit margins of producers who used to benefit from superior raw materials have fallen sharply, so efforts need to be made in terms of operation and capital expenditure to restore at least part of their previous profitability.