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Procurement and Supply ChainKey drivers for delivering sustainable added valueBy Nando GalazzoLogiChem 2011 will be the event's tenth anniversary and an opportunity for the most senior chemical supply chain & global logistics directors from the European chemicals community to come together once again share experiences, make new contacts and benchmark the latest chemical supply chain initiatives. Not only will LogiChem 2011 be a chance for the chemical industry to reminisce about the last ten years but an opportunity to shape the next decade. To celebrate a decade of LogiChem, there will be an exciting three day programme filled with networking opportunities in our new location, Antwerp.
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Procurement and Supply Chain
Key drivers for delivering sustainable
added value
Nando Galazzo – Former VP Procurement Borealis
Managing Director – Transitive Management
Logichem 2010
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Credentials
• Board Member of the Supply Chain
Council ( SCC inc. )
• Vice-Chairman SCC ELT
• Former VP Procurement Borealis
• Managing Director Transitive
Management
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Outline
Presenting Borealis Borouge
Macro Factors: Changing Markets & Volatility
Classical “Must-be” Response
Rethinking strategies
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28 April 2010
Presenting Borealis
4
Borealis at a Glance
• Leading provider of innovative, value creating
plastic solutions
• Developing Base Chemicals business
• More than 40 years of experience
• Unique Borstar® technology to develop polyolefin
solutions that are tailored to customers’ needs
• About 5,400 employees in 20 countries
• Ownership 64% IPIC / 36% OMV
• Joint venture in Middle East and Asia: Borouge
(Abu Dhabi)
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28 April 2010
Presenting Borealis
5
Borealis and Borouge Locations
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‘Commodity’ path
Feedstock Olefins Polyolefins Converters End users ConsumersReduceRecycleRecover
Commitment to Value Creation through
Innovation Secures Future Growth
‘Value Creation’ path
Feedstock Olefins Polyolefins Converters End users ConsumersReduceRecycleRecover
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Macro Factors
Changing Markets and Volatility
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Demographics
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... Crowded indeedbut not equally around the Globe ...
World Demographics: It is getting crowded !
YearPopulation
Millions
Years
to double
-81000 0.2 20000
-10000 10 19000
0 200 1200
1700 800 500
1900 1500 200
1960 3000 60
2000 6000 40
2009 6800
2040 9000
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Population … who is biggest in 2050 ??
And we are getting OLDER, Europe is leading, median from 39 years to 47 years in 2050.
�China 1.4 billion (+0%)
�India 1.6 billion (+30%)
�N.America 600 million (+40%)
�Europe 750 million
(helped by massive integration from East)
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GDP & Unemployment
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Percentage of World GDP
4 %7 %12 %Japan
10 %21 %20 %Other
26 %27 % 28 % US
15 %25 %34 %EU
2050 est.2025 est.2004
Source: Business Week Aug 2005
17 % 5 %2 %India
28 %15 %4 %China
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Outlook 2007 – GDP % Growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1995 2000 2005 2010 2015
An
nu
al
ch
an
ge
, %
WE USA EE China India
?
Where do we go now ?
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Unemployment gap widens
How fast will employment and consumption rise
after the financial crisis ?
March 06 March 07 March 08 March 09 Jul-09
EU 26 8.4 7.3 6.7 8.3 9.5
Germany 8.7 8.6 7.4 7.6 8.9
UK 5.0 5.5 5.2 6.6 7.7
France 9.1 8.6 7.6 8.8 9.9
Spain 8.7 8.1 9.5 17.4 18.7
US 4.7 4.4 5.1 8.5 9.1
Japan 4.1 4.0 3.9 4.4 5.4
China (1) 4.3
Taiwan 6.0
Hong Kong 5.4
Australia 5.8
(1) Urban Economy Official Stats - 9.4 % July 09 according to other sources
Source OECD
Unemployment Statistics 2006 - July 2009
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Cost Drivers Volatility
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New Perspectives for Cost Drivers
2007- 2008 2009
... and next years ?
?
Expected Scenario Reality
• Short Markets
• Maintained Margins
• (Self) Sustainable Growth
• Long Markets
• 20-40 % Margins Squeezes
• High Volatility
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Overheating Commodity Markets
2007 perspective .... and now ?
"The possibility of $150-$200 per barrel seems
increasingly likely over the next 6-24 months,
though predicting the ultimate peak in oil prices
as well as the remaining duration of the up cycle
remains a major uncertainty.” (Goldman Sachs,
May 2008)
Can you Forecast
your Markets ?
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Cost drivers…. Are they driving you?
• How much do you know about the real picture?
• Can you mitigate some of the cost escalation scenario?
• Is there any value to include cost drivers into contracts?
• Will price revision clauses work for your contract ?
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Beyond and over the Downturn
Market Swap: EU ���� M-East / AsiaThe real “Storm” still to come
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The financial crisis ...
... a storm which only comes on top
• Banking Crisis
• Cash Flow Management
• Investments / CAPEX stopped
• Governance
• Risk aversion
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28 April 2010
Presenting Borealis
21
LD LLD HD PP
22.826.9
31.135.9
2005 2010 2015 2020
25.230.0
33.739.0
2005 2010 2015 2020
18.6
25.3
34.7
48.0
2005 2010 2015 2020
5.5 6.8 8.2 10.0
2005 2010 2015 2020
3.6 5.3 7.410.3
2005 2010 2015 2020
4.2 5.8 7.3 9.1
2005 2010 2015 2020
External challenges
Polyolefin Demand Growth 2005-2020
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External challenges on top of Downturn
15
20
-15
Europe M East ISCSAMUSA Asia
0
10
-10
-5
5
Ethylene Equivalent trade 2006
(million tonnes)
���� 2011
MEG
HD
LLD
LD
• Demand shift to Asia
• Simultaneous capacity expansions in Middle East
2009-2012
• Major Global Demand/Supply unbalances by 2010
• Tight Supplier Markets
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The Classical Response of Companies
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Adding Supply Chain Value in Procurement
Arm’s length...... a la Lopez ?
Sustainable Value Creation through Innovative,Collaborative Partnerships
OR
COMPETE OR COLLABORATE
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Most companies developed collaboration, ...
... Yes But
• Focus on CASH flow (DPO, DSO, DOI)
• Mitigate Supply Risk (Monitoring Suppliers)
• Squeeze Fixed Costs + Variable Costs
• Shorter Contract Terms
• No Firm Commitment / Liabilities
10-20%
reduction
boost to 3 times
normal Productivity
But is that enough beyond the downturn ?
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Optimizing cash-to-cash cycle time
Getting DPO, DSO, DIO in Balance
Working Capital Days
Reducing the DSO / DPO
gap, but challenging to bring all 3 to balanced level sustainably
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Critical supplier monitoring
Risk AND Mitigation plan
27
Sourcing
Area Supplier
Current
Risk
status
Current
Risk
Level
Mitigation
status Comment Action
Date of
last
update
Packed ZZZZZ GMBH High
Follow closely and work out back-up
solution. Business is being moved away
May 29,
2009
Bulk XXX Ltd High
1. Put automatic financial tracker via D&B
for early warnings on new fiancial
info/downgrades etc...
2. Design plan B; for each XXX route, who
could take over immediately
3. Discuss with MH plan B for container
terminals
4. Update from XXX through Proc
Manager and evaluated by Credit:
Company's financials described as stable. CEO/CFO meeting held. Plan B being developed
April 29,
2009
RM YYYYY GMBH High
Prod A supply to Plant X: due to the high
level of fines contained in the RM batches
catalyst supply only secured until mid of
May, major concern to lose xx kt of
business volume in May, impact on
subsequent months not yet known
Crisis team established, official request sent to
YYYY to 1) get approvel to conduct audit at US
production plant,2) strictly operate according to
the decision flow diagram to find the roote cause,
3) continue the production of Prod A until agreed
safety stock level has been reached
June 9th,
2009
RM ABC ABC Ltd High
High risk of business failure. Followed
closely together with credit department Working on own product substitution
June 9th,
2009
Tech ZZZZZ, UK High
Represents a high risk of business failure.
The financial strength is not discclosed to
D&B. In direct contact with ZZZZZ
Sep 9th,
2009
Tech XXX & Brothers, NL Medium
Private company publishing no results.
D&B score improved from 61 in March'08
to 75 in Dec 08, down to 72 in Feb 09. In direct contact. on going
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Rethinking Sourcing Strategies
Preparing for Post-Downturn Conditions
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Rethinking Mid Term Sourcing Strategies
Cash GenerationPriority 1
Value CreationPriority 2
Relationship MGT:
• Rebuilding
• Retaining
• Resilience
Next
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Creating New Value
NewValue
ELIMINATE
What factors shouldbe eliminated that the industry has taken for granted ?
REDUCE
What factors shouldbe reduced well below industry standard ?
CREATE
What factors shouldbe created that the industry has never offered ?
RAISE
What factors shouldbe raised well beyondthe industry standard ?
Source: Harvard Business Review - Insead
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Value Creation Directions
INTERNAL
• Reinforce Procurement into S&OP and Supply Chain Processes
• Receive view on business requirements, volatility, priorities
• Provide view on critical resources capabilities & risks
• Faster, prioritized, purposeful response
• Articulate, Activate and Share Relevant Metrics end-to-end
EXTERNAL
• Implement New Supplier Relationships Management
consistent with company strategy and tactical plans
• Sustain supply capacities, capabilities
• Mitigate risks
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Stronger Involvement of
Procurement in S&OP
Implementing Relevant Metrics
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33
Procurement in S&OP
2007
No PermanentInvolvement
2008
Procurement inAsset MGT Meeting
2009
Improved visibilityInteractivity
Faster Response
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S&OP Critical resources risk mgt
Types of Supply Risks
1 Availability
2 Cost
3 Regulatory/legal
4 Contractual - what happens if Borealis demand falls dramatically in the storm
5 Financial/Currency
6 Quality
7 Health & Safety
8 Others
1 2 3 4 5
5 5 10 15 20 25
4 4 8 12 16 20
3 3 6 9 12 15
2 2 4 6 8 101 1 2 3 4 5
RISK SCORE MITIGATION
High risk 20-25 Immediate action to be implemented together with Asset Team
Medium risk 10-19 Define action and execute in agreed timeframe
Low risk 1-9 Acceptable risk
Pro
ba
bil
ity Severity
Define Business Risks
Identify key factors onSupply Market side
Classify, PrioritizeRisk Classes
Apply to CriticalResources
ManageInteractively
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Alignment, Articulation, Sharing in SC
Align
&Share
► Company Performance Metrics & Scorecard
► Supply Chain Operational Metrics & Scorecard
► Procurement Metrics and Scorecard
► Share among key SC Partners
Perfect OrderFulfillment
ResponsivenessFlexibility
COGS
Total SC MGT Cost
Cash to Cash
• Value Creation
• Cost Containment
• TCO
• Logistics Sourcing
• Execution Efficiency
• DIO
• DPO
• Supplier Reliability
• Source Cycle Times
• Source Flexibility
Value at Risk • Supply Risk Mgt
Customer Facing: Top Line Internal Facing: Bottom Line
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SC Metrics impacting Top and Bottom LinesProcurement impactDirect / Indirect
EVA: Economic
Value Added
ROIC-NOPAT
Cost of Capital
EBIT
Tax Rate
SALES
Total costs
WACC: weighted
avge cost of cap
Net invested
Capital
Fixed
Capital/assets
Working capital
Inventory
A/R
A/P
Other credits &
Debts
-
x
x
-
+
Perfect Order FulfillmentOrder Fulfillment Cycle TimeFlexibility
Total SC Mgt costs (TSCM)COGS
DOI
DSO
DPOCost AttackMaverick Compliance
Cash-to-cash cycle timeReturn on working capital
Return on SC fixed AssetsTCO
+
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Developing Winning Collaboration
with
Suppliers and Service Providers
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CLASSICAL PROCUREMENT
• Best Country sourcing
• Total Cost of Ownership
NEW PARADIGM
• Supply Chain Integration
• Fully Collaborative Relationships
• Value-sharing
+
This calls for new concepts for value creation:
Articulating
Ingredientsfor new
Procurement
Vision
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Collaboration in Innovation
The Innovation CompetitiveMatrix
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Relative Importance of the Innovation
low high
low
high
Co
mp
eti
tive A
dv
an
tag
e
TheFocus
Quadrant
Mapping and Understanding Opportunities
The Innovation
Pool
Customer�
�
☺�
Co
mp
eti
tio
n ��
☺�
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Applying the Innovation Competitive Matrix
Borealis
Competitive Index
Inn
ovati
on
In
dex
Borealis Maps Innovation
Opportunities in Matrix
Competitive Index
Inn
ov
ati
on
In
de
x
Supplier
Supplier Maps Innovation
Opportunities in Matrix
KEY IP
Initiative 1 A
Initiative 2 B
Initiative 3 C
Initiative 4 D
Initiative 5 E
Initiative 6 F
Initiative 7 G
Initiative 8 H
Mutually benefiting Innovation Pool
Projects resourced by joint C-level Steering
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The BOB Supply Management Network
Borouge
Supply
Network
OMV-Petrom
Supply
Network
Borealis
Supply
Network
• Virtual Organization
• Started 2006 from joint 3 VP Proc initiative
• Objective: Leverage Across Supply Networks
• Spend, Opportunities, Visibility
• Resources, Tools, Knowledge
• Capacities, Working Capital
• Provide Strategic Opportunities to Suppliers
Compared to previous model
�Procurement Savings boosted by 500 %
�Teams Productivity increased by > 30 %
� Shared Lead Buyer Resources
�Suppliers’ Awareness and Reach simplified
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SC Operational Collaboration
Business Case
Borealis – DegussaUsing SCOR across enterprises
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Supply Chain Operational Collaboration
• We create Supply Chain visibility
• Use of the SCOR roadmap and analysis tool kit
• Experts talk to Experts
• Customer Service to Planner
• Project leader to project leader
• Account manager to buyer
• We share performance targets (common SCORcard)
• Reliability: Delivery performance & Forecast accuracy
• Responsiveness: lead-time
• Cost: Deliver cost
• Cash-to-Cash: Supply Chain Inventory
• We extract value and share
Total Business Volume: > 10.000 tons and > 30 Mio. € revenue24 Products, 8 Countries, 21 Production sites, 30 Shipping points
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Borealis
Burghausen
Borealis Schwechat (AT)
Borealis Beringen (BE)
Borealis Stathelle, Ronningen (NO)
Borealis Porvoo (FI)
Borealis Stenungsund (SE)
Borealis Schwechat (AT)
7
2
6
2
5
4
Pullach
M1/M2 D1/D2
Production Warehouse Pullach
S1/S2 D1/D2
Warehouse Göteborg, ANT
S1 D1
S1
Borealis Kallo (BE)
S1M1
BLK
M1
PCKD1
S1M1
BLK
M1
PCKD1
S1/S2M1
BLK
M1
BLKD1
S1M1
BLK
M1
PCKD1
S1M1
BLK
M1
PCKD1
S1M1
BLK
M1
BLKD1
11424
10868/19
S1
S1
M1
BLKD1
S1 M1 D1
S1 M1 D1
S1
M1
BLK
M1
BLK D1
OMF - Polycomp
Peroxide
OMF - Polymerchemie
M1 D1S1
S1 M1 D1
Eylria
M2 D2
Import Hafen
S D
S1 D1
D1
Japan
Indonesien Rotterdam
S1 D1
Overview Supply Chain PeroxidesSCOR Level 2 – bottlenecks and opportunities
Forecasts sent to Malmö & info sent to Pullach
Why not to send straight to Pullach ?
Empty packaging --> opportunity to value
waste ?
Standard LT could be reduced from 15 days to
8 days
SC today --> Degussa US (6 weeks LT)--> Pullach --> Bamble
Why not : Degussa US --> Bamble. Elements to be considered :
Why not relocate product from US to
Pullach plant
LT reduction opp Got --> Sten, in Got. Degussa keeps
sales + Buffer some containers, in Sten, Borealis kepts
some tons of safety stock. Do we really need GOT
storage location ?
Combine shipments to optimize container fill-rate :
use of planning calendar ?
Improved purch. Req. processing (collective by vendor)
Quit COA and promote SQC
ERS or invoicing plan --> potential ?
Realize strategic Vision PP%:
Strategic Vision
OMF growing volume potential for
consolidation transportation, for
Polycom and Polymere
Bottlenecksidentified, measured,
and prioritized for solutions
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One set of SCOR performance metrics
Continuous improvement monitoring
Overview Metrics SCOR Level 1 Metrics Total BU PE PP
Median
Process
Industry
Best in class
Process Industry
(02/05)
Delivery Performance (Commit date)
BOREALIS 95,5% n.c. n.c. 92% 99%DEGUSSA (per) 72,7%
Order Fulfillment Lead Time 18,5 [days]SOURCE (peroxides - MTF) 15 [days]
MAKE (MTF) 1 [days] 1 [days] 1 [days]DELIVER 3 [days] 3 [days] 3 [days]
Supply-Chain Flexibility 95 [days] 5 [days]SOURCE (per) ? [days]
MAKE 240 [days] 240 [days] 240 [days]DELIVER 0[days] 0 [days] 0 [days]
Total Supply Chain Management Cost 9% 11% 7% 10% 2%
Cost of Goods Sold 91% 86% 94% 78% n.c.
Value-Added Productivity per payroll € 2,7 [€] 3,7 [€] 3,2 [€] 2,3 [€] n.c.
Days of coverage (per) 32,7 [days]
Inventory Days Of Supply (RM) 3,8 [days] 7,4 [days] 1,8 [days]
Inventory Days Of Supply (all) 29,5 [days] 45,9 [days] 19,9 [days] 51,3 [days] 40 [days]
Days of Sales Outstanding 47,7 [days] 70 [days] 33,5 [days] n.c. n.c.
Days of Payables 28,8 [days] 51,3 [days] 17,1 [days] n.c. n.c.
Cash-To-Cash Cycle Time 48,4 [days] 64,6 [days] 36,3 [days] 55,1 [days] 40 [days]Assets Asset Turns 3,6 turns 2,4 turns 5,3 turns 1,4 turns 4,5 turns
Supply Chain SCOR-Card (Level 1)
EX
TE
RN
AL
INT
ER
NA
L
Supply Chain
Reliability
Responsiveness
Flexibility
Cost
Cash Cycle
DEGUSSA BOREALIS
Overview Metrics SCOR Level 1 Metrics Total BU PE PP
Median
Process
Industry
Best in class
Process Industry
(02/05)
Delivery Performance (Commit date)
BOREALIS 95,5% n.c. n.c. 92% 99%DEGUSSA (per) 72,7%
Order Fulfillment Lead Time 18,5 [days]SOURCE (peroxides - MTF) 15 [days]
MAKE (MTF) 1 [days] 1 [days] 1 [days]DELIVER 3 [days] 3 [days] 3 [days]
Supply-Chain Flexibility 95 [days] 5 [days]SOURCE (per) ? [days]
MAKE 240 [days] 240 [days] 240 [days]
DELIVER 0[days] 0 [days] 0 [days]
Total Supply Chain Management Cost 9% 11% 7% 10% 2%
Cost of Goods Sold 91% 86% 94% 78% n.c.
Value-Added Productivity per payroll € 2,7 [€] 3,7 [€] 3,2 [€] 2,3 [€] n.c.
Days of coverage (per) 32,7 [days]
Inventory Days Of Supply (RM) 3,8 [days] 7,4 [days] 1,8 [days]
Inventory Days Of Supply (all) 29,5 [days] 45,9 [days] 19,9 [days] 51,3 [days] 40 [days]
Days of Sales Outstanding 47,7 [days] 70 [days] 33,5 [days] n.c. n.c.
Days of Payables 28,8 [days] 51,3 [days] 17,1 [days] n.c. n.c.
Cash-To-Cash Cycle Time 48,4 [days] 64,6 [days] 36,3 [days] 55,1 [days] 40 [days]Assets Asset Turns 3,6 turns 2,4 turns 5,3 turns 1,4 turns 4,5 turns
Supply Chain SCOR-Card (Level 1)
EX
TE
RN
AL
INT
ER
NA
L
Supply Chain
Reliability
Responsiveness
Flexibility
Cost
Cash Cycle
COMBINED
Overview Metrics Shared SCOR Level 1 MetricsActual
"As-is"
"To-be"
(progress)
"To-be"
(success)Competition
Median
Process
Industry
Best in class
Process
Industry
(02/05)
Delivery Performance (Requested Del.
date)
73% 85% 95% 92% 90% 95%
Forecast accuracy
65% 80% 90% 75% n.c n.c
Order Fulfillment Lead Time
SOURCE (peroxides - MTF) 15 [days] 8 [days] 10 [days] n.c
SC Avg 2005 Inventory qty (Tons) -
Peroxides332
10%
reduction
20%
reduction
SC Avg 2005 Consumption qty
(Tons/Month) - Peroxides202
SC Inv days of supply (days) -
Peroxides50 [days]
INT
ER
NA
L
Cash Cycle
Degussa - Borealis Supply Chain SCOR-Card (Level 1 & 2)
EX
TE
RN
AL
Responsiveness
Supply Chain
Reliability
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Degussa – Borealis collaborative work
SC Performance Attribute Metric Results
ReliabilityOTIF
Forecast accuracy
From 85 to 93%
From 60 to 76%
Responsiveness Avg Lead-time 40% reduction
SC cost Transportation cost 40% reduction
Working capital SC Inventory 18%-60% reduction
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Reference
Conclusion:
“The best way to predict
the future is to invent it…”