Capturing the multibillion procurement opportunity in the GCC petrochemical industry

Capturing the multibillion procurement opportunity in the GCC petrochemical industry

CONTENTS Executive summary 4 The Middle East has become a major player in the global petrochemical industry

5

Lower commodity prices have put pressure on margins – the solution lies in cost optimization 8 Procurement functions need to evolve into true strategic partners to make their full contribution to margin improvement 10 Complementing the full suite of commercial levers with technical and demand levers

12

To ensure a successful journey, the procurement function needs added reinforcement 15 A successful journey promises major earnings advantages 22

Executive summary Strong growth over the past 20 years has made GCC petrochemical companies a major force globally. However, the recent decline in margins driven by falling market prices and increasing feedstock costs is now putting them under pressure. Effective management of non-feedstock procurement spend, which on average accounts for about 25-30% of petrochemical companies’ total costs, can play a key role in improving margins while having a net benefit for the region given majority of that spend is import based. For many players, this means evolving procurement into a strategic sourcing function that will collaborate with the rest of the business and proactively pull all available value levers. A 5-10% reduction in the procured spend of petrochemical companies in the GCC could lead to a value creation of $1-2 bn per year, strengthening their position on the cost curve and providing further insulation against shocks in global petrochemical prices and increases in feedstock prices.

4 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

The Middle East has become a major player in the global petrochemical industry The petrochemical industry in the GCC countries has witnessed

This roughly translates into a year-on-year increase of 9%, making

significant growth over the past two decades. It has quadrupled

the GCC the second-fastest-growing region globally after China.

in capacity, doubling its global share to 6.5% in 2016 compared to

The rise has mainly been driven by light olefin derivatives such as

3.2% in 2000 (Exhibit 1). The growth has resulted from increasing

ethylene, ethylene oxide, ethylene glycol, LLDPE, etc., where the

global and local demand, the availability of low cost feedstock, and

GCC’s share of global capacity ranges between 15% and 27%

an effort by the GCC countries to maximize hydrocarbons’ impact

(Exhibit 1). Organic growth, mostly from local capacity expansions,

on economic development by manufacturing products with higher

has played the largest role here. Nonetheless, the past decade

value added.

has also seen significant acquisitions by GCC petrochemical companies.

Exhibit 1

The GCC petrochemicals sector has grown by 9% p.a. since 2000, capturing significant global share in light olefin derivatives > 10% share of global capacity Global petrochemicals capacity1

GCC top 10 petrochemicals1 capacity 2016

Mtpa

Mtpa GCC share of global capacity Percent

CAGR Percent 4% p.a.

1,825 109 118

2.2 8.9

479 ROW GCC

3.6

949 77

30

Rest of Asia

274

China

80

632

Europe

215

220

North America

272

267

-0.1

2000

2016

3.2%

6.5%

25

15

Methanol

11

8

Propylene

9

7

Polypropylene Ethylene Glycols

13.8

0.1

GCC share of capacity

Ethylene

HDPE LLDPE Ethylene Oxide

10

8

24

7

15

7

27

6

18

6

MTBE

5

17

Xylenes

4

5

Others

31

3

Total

118

6.5

1 84 representative petrochemicals, excluding fertilizers SOURCE: ICIS Supply and Demand, McKinsey analysis

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

5

Going forward, expansions are set to continue in the GCC

in the product portfolio: downstream petrochemical products will

countries, driven primarily by Saudi Arabia, Oman and UAE, which

make up a greatly increased part of future expansion, accounting

collectively plan to add about 14 Mtpa of petrochemical capacity

for approximately 50% of the growth in Saudi Arabia and Oman

by 2025 (Exhibit 2). In addition, we will see a significant change

(PE, PP, PMMA, ABS, etc.).

Exhibit 2

GCC countries have different plans as to where capacity will be expanded along the value chain Downstream 2

Upstream 2

xx

2016 petchem 1 capacity, mtpa

GCC announced petrochemical1 capacity additions Mtpa, 2016-2025 11.0

4.9

ABS EPDM Ethanolamines PE PMMA

PE PP MTBE 6.1

1.1 1.1

EPS

Toluene

2.3

0.8 0.8

0

PE

0.1 0.1 0

0.1 0.1 0

Saudi Arabia

Oman

UAE

Qatar

Kuwait

82.4

6.9

11.2

8.2

9.0

1 Across 84 representative petrochemicals; 2 Upstream includes methanol, ethylene, propylene, BTX, BD, downstream includes remainder Source: ICIS Supply & Demand

6 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

The shift towards downstream petrochemical value pools should help hedge GCC countries against changing feedstock scenarios Even more downstream capacity could be added based on the needs of developing sectors in GCC

This growth in the petrochemical sector also has a significant

Nevertheless, the recent decline in petrochemical prices among

socio-economic impact in the region. For example, the

other factors could now put this developing picture at risk unless

petrochemical and chemical industry employs about 150,000

industry players act now to compensate the changing cost

people from the GCC’s workforce (Exhibit 3), most of them

structure.

currently in blue-collar jobs. However, the future move to specialty downstream chemicals will mean an opportunity to create higherpaying jobs in the sector and build specialized capabilities in the region.

Exhibit 3

Employment in the petrochemicals and chemicals sector has increased by 5% in the GCC countries between 2011 and 2015 Employment in the GCC petrochemicals and chemicals industry (thousands of people)

+5% p.a.

4

132 4

Oman

116

Bahrain

4

Kuwait

7

2

2 7

8

143 6

2

9 25

6 25

Qatar 38

UAE

96

87 59

Saudi Arabia

2011

2013

2015

Source: McKinsey analysis, GPCA reports

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

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Lower commodity prices have put pressure on margins – the solution lies in cost optimization The global cost curve for petrochemical products has flattened

the petrochemical industry in the GCC countries are now facing

significantly over the past 3 years, primarily due to the abundant

increasing pressure on margins. For example, the average price of

availability of low-cost gas feedstock in North America from

polyolefins in Middle Eastern and Asian markets has dropped by a

shale gas development (Exhibit 4). In China as well, costs of

third, from an average of US$ 1500 per ton to US$ 1000 per ton

products using naphtha feedstock or MTO, CTO technology has

(Exhibit 5). GCC petrochemical manufacturers have therefore lost

decreased significantly (~50%). At the same time, after a long

their traditional feedstock cost advantage.

period focused on sustaining growth through capacity expansion,

Exhibit 4

Lower oil prices have reduced the GCC’s competitive advantage, and increases in local gas prices may further squeeze profitability Illustrative Ethylene, $/mt

1,500

Middle East - Gas

China - CTO

China - Liquid

China -MTO

North America - Gas

Rest of world

Europe - Liquid

KTJ - Liquid

2013, oil $103

1,311 Traditional feedstock cost advantages for ME eroding as $70B global cost (86%) curve flattens

1,000 500 0 0

20

40

60

80

100

120

140

160

Effective Capacity1 1,500

2016, oil $53

1,000

976

500 0 0

20

40

60

80

100

120

140

160

Effective Capacity1 1 Assuming 93% utilization 2 Excluding CIS Source: McKinsey ethylene cost curve, ICIS, Expert Interviews, McKinsey analysis

8 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

Saudi Arabia has increased gas prices from $0.75/ MMBtu to $1.25/ MMBtu — if other countries also increase prices from current levels, this could present further $71B economic (90%) challenges

Exhibit 5

ME polyolefin prices are linked to Asia’s and have been decreasing and squeezing margins PP IM SEA1

PP IM ME1

HDPE BM ME1

HDPE BM SEA1

Polyolefin prices in Middle East and Asia $ per metric ton 1,800

Since cash costs in ME are stabilized by

1,600

favorably priced feedstock prices,

1,400

downward price 1,200

developments have

major implications 1,000

for producer margins and build

800

decisions

600 2010 11 12 1 All prices are Spot CFR assessments

13

14

15

16

2017

Source: ICIS, McKinsey analysis

Moreover, some GCC petrochemical companies are also moving

substantial gains. Our data on more than 500 chemical industry

towards cracking liquid feedstock (e.g., naphtha and LPG) due to

commodities show typical savings from adopting best practices

constraint in the supply of gas. Liquid feedstock is approximately

in procurement that range from 1% to 5% for basic commodities

three times more expensive than ethane. A new GCC cracker

to 10 to 20 percent for fine and specialty chemicals. In indirect

operating on 100% naphtha feed, for example, would be

categories, the savings potential can be even higher — as much as

positioned at the right-hand side of the global cost curve.

30 percent in facilities management, IT and telecommunications, or

Given these margin pressures, petrochemical companies in the

office supplies, for example.

GCC region have embarked upon transformational cost-cutting

In many companies, this requires procurement functions to evolve

programs. In view of the large share of sourcing cost, improving

from a transactional purchasing focus to become true strategic

purchasing practices and deploying commercial, technical and

sourcing partners aligned with the business and with other key

demand improvement initiatives can make a crucially important

contributors to margin improvement.

contribution to these companies’ financial performance.

Petrochemical companies that get this right can capture

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

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Procurement functions need to evolve into true strategic partners to make their full contribution to margin improvement Procurement functions have embarked on a journey to transform

value and contributing to their companies’ margins (Exhibit 6).

their role in many industries – including process industries - and

However, while the chemical industry worldwide shows good

have abandoned the position of administrative purchaser to

overall procurement performance, few companies have made

become a strategic partner in the business, capturing tremendous

purchasing a strategic weapon (Exhibit 7).

Exhibit 6

Supply functions have moved from transactional buying to strategic sourcing, yielding significant cost savings From transactional buying

From commercial levers From reactive buyer securing supply delivering on demand from business From procurement as a siloed function From traditional tendering & negotiations From long-standing, known suppliers From performance measured as the sum of activities

to early stage adoption ..

.... to strategic sourcing

to adoption of some technical and demand levers

to total cost of ownership improvement

to closer collaboration with business in identifying key drivers of performance

to proactive strategic partner that enables performance improvements in the business

to category management across key categories in cross functional teams to early stage adoption of basic tools and capabilities, but lacking full suite to initial steps in developing new suppliers through collaboration with business to performance measured based on “value creation” as opposed to only “cost savings”

Source: McKinsey and Company

10 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

to procurement as a crossfunctionally linked team aligned with the business to differentiated advanced tools including e-tenders, e-auctions, e-RFX etc. to systematically developing new sources and suppliers to transparent targets, clearly defined KPIs, & rigorous tracking

Exhibit 7

While the chemical industry shows good overall procurement performance, few companies have made purchasing a strategic tool Average of:

Average purchasing practice score (scale: 1 = low to 5 = high)

Purchasing leaders

Size of bubble represents share within group, % Public sector

Travel, logistics

Purchasing followers

Middle of the pack

1

Financial Energy, institutions utilities

Healthcare

Materials, construction

5

Chemicals Retail

High tech, telecom

Auto assembly

Packaged goods

18% 4

6%

4%

4%

9%

3%

3 79%

76% 2

83%

92%

85%

82%

89%

21%

14%

6%

75%

82%

73%

64% 36%

18%

18%

9%

13% 8%

8%

8%

4%

7%

6%

1

0 1 Figures may not sum, because of rounding Source: McKinsey analysis

Although it generally lags behind in terms of procurement

number of tools, and a limited amount of the category-specific

performance, the petrochemical industry in the GCC region is

knowledge needed in such a complex industry. It was hampered

now also pursuing this path, with some companies leading the

by sticking with a legacy list of suppliers rather than finding the

way and seen as models. Historically, procurement in the regional

optimal ones by sourcing from low-cost countries, for example.

petrochemical industry focused on reactive transactional buying

This passive role condemned procurement to a silo and to a

to deliver on business requirements, with skills limited to only a

position of undeservedly low relevance. However, the situation is

subset of commercial levers, with basic negotiating ability, a limited

already changing and needs to change more.

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

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Complementing the full suite of commercial levers with technical and demand levers This evolution of the procurement function from an administrative

systematically develops new sources of suppliers, and has become

to a strategic role has been visible in an increasing number of

a cross-functionally linked team, working hand-in-hand with the

petrochemical companies globally over the past decade. The

rest of the business to identify ways to optimize sourcing costs.

move has multiple objectives, including making procurement a

In addition, the local content push in the region requires strategic

proactive partner that enables performance improvement and value

sourcing functions to adopt the same total cost of ownership

maximization by embracing a total cost of ownership mentality,

approach in evaluating the localization options on hand and their

pulling all technical and demand levers as well as the full suite of

impact on companies’ costs, while also assessing their associated

commercial ones (Exhibit 8). This proactive approach can make a

socio-economic benefits.

crucial difference for the GCC petrochemical companies in the new era of lower oil prices. In these organizations, the new sourcing function leverages the most advanced tools and techniques,

The principal optimization levers and the importance of crossfunctional collaboration are discussed below.

Exhibit 8

Cost savings can be realized across commercial, technical and demand levers Cost optimization dimensions

Commercial levers

Procurement levers

Examples of tools

Leveraging purchasing power

Price benchmarking

– Consolidate spend for volume discounts

Clean sheet analysis

– Renegotiate contracts based on changes in market conditions – Outline frame agreements for longer periods

Total cost of ownership

– Source from low cost country suppliers

Technical levers

Optimizing design and specifications

Modularization

– Optimize design

Standardization

– Adapt item specifications to needs

DtV labs 3D printing

Optimizing quantity of purchases – Rationalize demand and stock

Demand levers

Inventory management

– Conduct project optimization to identify and eliminate waste

Project scrubbing

–

e-auctions

Streamline processes between user and supplier

Source: McKinsey and Company

12 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

e-RFX

Commercial levers:

optimizing supplier selection by considering alternatives from low-cost countries for non-critical items. This has typically been

Conventional procurement in petrochemical companies in the GCC region has reached a high level of maturity. Many companies have successfully improved their sourcing efforts by focusing on

done in collaboration with technical staff to enable cross-functional decision making. Nevertheless, the key still lies in conducting negotiations with suppliers effectively.

commercial levers that yielded essential benefits. Actions here include aggregating purchases to establish long-term contracts,

Some companies expend a lot of effort on understanding the

adding suppliers, and utilizing new negotiation strategies and

cost structure of the supplier’s value chain before they enter into

techniques.

negotiations. This includes building clean-sheet models as the most effective way to understand suppliers’ costs and devising the

However, few players have been bold enough to leverage the

right strategy for negotiation sessions (Exhibit 9). In some cases,

full suite of commercial levers. For example, best-in-class

companies leverage technology to streamline the negotiation

raw materials buyers take a systematic approach to gathering

process, by using reverse auction platforms for standard goods,

market intelligence on current and new market participants. By understanding these suppliers’ investment plans and the changing conditions in their major markets, they can often identify new

for example. In these auctions, multiple suppliers are encouraged to bid against one another in real time. Some chemical companies have been able to obtain price reductions of 30 percent or more

sources of savings. Even within regions that are well placed to

from incumbent suppliers by this approach. Such techniques

provide a commodity, differences in suppliers’ scale, technology,

are best applied to standard goods and in markets where buyers

plant utilization, and business strategy can lead to substantial

can choose from multiple suppliers. Nevertheless, they have to

differences in their costs.

be handled carefully, as we have observed that they can damage long-term relationships if not used properly.

For consumables and spare parts, select organizations are

Exhibit 9

the overall efficiency of its manufacturing processes. Some

Clean-sheet cost models

industry’s example in dispatching their own lean-

leading chemical players have followed the automotive manufacturing specialists to help suppliers with process-

Clean-sheet cost models, like the one shown in the exhibit,

improvement efforts.

use industry data to create a picture of suppliers’ likely production costs, based on plant technology, scale, and

Similarly, clean-sheet models can help negotiating teams

utilization, as well as on local raw material, energy, and labor

understand the supplier’s sensitivity to fluctuations in input

costs. Together, these factors provide an idea of what the

costs. In some cases, negotiating contracts that account for

material should cost, sowing negotiating teams to get a better

these fluctuations can be advantageous for both sides—doing

sense of suppliers’ price flexibility.

so, could mean suppliers won’t feel so much pressure to

Using clean-sheet cost models in a transparent way in negotiations can also help organizations identify ways to

include a price buffer to protect themselves against rising input costs.

reduce costs collaboratively. For example, if a supplier

Using clean sheets in supplier negotiations is a two-way

disputes a particular input-cost element, this may reveal

process. Companies can refine and improve their cost models

that the supplier has an opportunity to purchase its own

based on feedback from suppliers. The better those models

raw materials in a more advantageous way or to improve

become, the more useful they will be for future negotiations.

Illustrative model for chloralkali production1 $ per 1.00 kg chlorine and 1.07 kg caustic soda

Raw material

By-product Utilities credits

Variable cost

Direct fixed cost

Total Other direct cost fixed cost

Total Depreciation Total at cash cost 100% utilization

Total at 75% utilization

1 In chloralkali production, chlorine and caustic soda are produced at the same time; plant size 400,000 ton chlorine/year Source: McKinsey analysis

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

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Technical levers:

Demand levers:

Procurement functions in leading petrochemical companies have

Often, players can reduce their spend by lowering their own

been able to collaborate with their business counterparts to reduce

internal demand and inventory requirements for certain materials.

costs by deploying technical improvement levers. Companies can

For example, a company can standardize its safety material

realize significant savings by changing the grade or specification

products across sites, thus reducing total demand. Harmonizing

of the products they purchase; for example, by adjusting the

the specifications for a commodity can sometimes reduce costs

thickness of packaging material or substituting wooden pallets with

with little or no impact on the process or the end-product. One

plastic ones. The total cost of ownership of the purchased product

company found that different business units ordered a key raw

has to be considered: market conditions, such as the costs of

material with various concentration tolerances from two different

plastic, wood or transportation, need to be examined first to

suppliers. However, when the company analyzed the materials

determine the cost benefits of substitution. Another example is the

it not only found that the cheaper material was suitable for most

transportation of materials in their dry state: although substituting

of its processes, but also that samples of the material actually

a solution by the equivalent product in its dry state could decrease

exceeded the tighter specifications. Other companies totally

its unit cost and transportation cost, it could also significantly

eliminate demand for certain products or services by producing

increase the energy costs for treating it, making the total cost of

them in house.

ownership higher for the company.

Similarly, purchasing a different grade of a material can have total cost of ownership implications: caustic soda, for example, can be obtained in solution at a variety of concentrations. Higher concentrations mean lower volumes, which normally reduce transportation costs, but they also have a higher freezing point. A 20 percent caustic-soda solution will remain liquid at –22 degrees Celsius, while a 60 percent solution must be kept above 50 degrees Celsius. This means high concentrations may require more costly insulated containers to prevent freezing during transport. Other aspects such as the supplier’s production costs may also be affected.

Cross-functional collaboration: The critical importance of cross-functional collaboration with business counterparts is well known, but can never be stressed enough. Most of the potential for capturing value discussed earlier cannot be achieved without users’ participation. For example, our experience shows that 60-70% of the potential value can only be unlocked through cross-functional collaboration, with users, or with other in-house departments. Whether it is a matter of reducing or changing the scope of a service contract or adjusting the specifications of a procured material, users have to be involved in every step of the way. Petrochemical companies in the GCC region can significantly advance their purchasing excellence by getting the cross-functional collaboration right.

14 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

To ensure a successful journey, the procurement function needs added reinforcement To enable the procurement function to become a strategic player that works in cross-functional collaborative teams and actively deploys savings levers as described above, three key enabling areas need to be upgraded or put in place: advanced practices, leading-edge technology, and the capabilities to match.

»» Focusing cost reduction on total cost levers (rates, specification, quantity, process) rather than rates alone »» Facilitating the cross-functional development and implementation of improvement levers to target total cost levers

Practices that set the framework for strategic procurement

»» Supporting the continuous management of supplier

Many companies in the GCC region have already looked critically

Best-in-class approaches and processes encompass many

at their processes and practices and revised them to enhance their

elements including, but not limited to, building a strong fact base,

impact on margins, among other areas, in the present challenging

setting up cross-functional teams and understanding supplier

climate. Such revisions include the introduction of the category

markets, driving adequate analysis by leveraging advanced

management approach, performance management, and supplier

tools, building clean-sheet and total cost of ownership models,

segmentation practices.

conducting advanced negotiations, and leveraging web-based

Category management:

performance and cost savings based on targets and KPIs

technologies wherever possible. Standardizing this end-to-end category management process across all buyers is a first key step.

When companies move to a category-based organization,

To build a category strategy for petrochemical raw materials, the

their procurement functions aim to establish a category

market and what sets the price need to be properly understood.

management process that will facilitate the capture of the value

Typically, this involves a deeper understanding of suppliers’ cost

at stake. Category management enables purchasing and supply

drivers (clean sheets), cost curves, the supply and demand

management to optimize value in the supplier base by ensuring the

situation, trade information, substitution options or, conversely,

following:

alternative uses for products. There are several analyses and tools

»» Enabling a deeper understanding and knowledge of category specifications, spend, suppliers, and market dynamics to create

that have been particularly effective in helping design category strategy for petrochemical companies (Exhibit 10).

long-term category strategies

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

15

Exhibit 10

Key analysis to be conducted to develop a robust category management strategy for the petrochemical industry »» Understand how the supplier industry is structured, including level of competition, financial position etc.

Develop a robust fact base

»» Understand supplier margin and cost drivers over time »» Build transparency around historical volume and supplier decisions »» Build transparency around differences in spend or spend pattern between suppliers in different regions or divisions

»» Identify opportunities to standardize grades, find alternatives and downspec to lower grade or quality where possible

Identify key areas of potential

»» Identify global sourcing options and optimization opportunities in supply chain »» Identify re-pricing opportunities and global arbitrage opportunities »» Analyze contracts to identify opportunities and risks

Source: McKinsey and Company

Performance management Achieving the aspired performance goes hand in hand with having the right performance metrics and targets. Leading companies work out a limited but focused set of Key Performance Indicators that drive the procurement function’s priorities (Exhibit 11). One important KPI has always been savings, which are now more

important than ever, especially in the GCC. Traditionally, chemical companies and others in different industries have struggled to devise and implement the right methodology to measure this KPI. To be able to measure a delta improvement in cost, it is essential to adopt the right baseline and ensure that the calculation methodology reflects the real value generated for the business.

Exhibit 11

Best practice procurement KPIs Savings in procurement spend calculated as a % of historical spend on previous items Inventory level improvement, inventory value improvement Payment terms improvement Actual improvement in P2P cycle time (Requisition To PO issue) for materials and services Improvement in non-compliance items and services from suppliers Source: McKinsey and Company

16 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

Improvements in lead time for items Share of spend through LTPAs and frame agreements Share of POs under LTPA Reduction in number of suppliers Capability building progress along dimensions of category management

Supplier segmentation and relations

procure to pay processes, including decision-making workflows,

Given a petrochemical company’s broad range of suppliers, clear segmentation plays an important role in driving relationships. Such segmentation usually considers how critical the procured material is to the company's manufacturing process as well as the level

were integrated. Several petrochemical companies in the GCC countries have embraced all components of e-procurement, while some others still have to invest further resources to reap the benefits from it.

of spend with a given supplier. Once the segmentation has been

The next frontier in procurement technology will come in the form

completed, companies can tailor a number of aspects of the

of digital procurement. Digital procurement is about applying the

relationship to different supplier segments. They may start, for

advanced analytics of big data, introducing process automation,

example, by drawing up a hierarchy of the frequency of meetings

and establishing new models of collaboration with suppliers and

and the seniority of attendees. For high-volume, highly critical

business users to improve the effectiveness of procurement

suppliers of raw materials, CPOs or CEOs could opt to meet

functions and achieve the higher, faster, and more sustainable

the supplier’s president once or twice a year to discuss strategic

impact which will, in turn, feed through into cost savings and

matters, while for low-criticality, low-volume suppliers, category

margins.

managers may handle the relationship on their own. Further segment-specific aspects include adjustments to contractual details as well as the installation of risk management and supplier performance management.

A myriad digital procurement applications are expected to spring to life, given the vast amount of data that flows between the procurement function, a company, and its supplying partners.

These solutions will enable companies both to generate new

Procurement enabled by technology

insights and to collaborate at scale – which in turn will allow

E-procurement became prevalent in the 2000s, to different extents across industries and geographies. Such e-tools as spend cube, e-RFX, e-catalogs and reverse auction tools were introduced, and

them to raise data-driven decision making to a new level. Exhibit 12 maps out a digital procurement landscape that includes applications to identify and create value as well as other applications to prevent value leakage.

Exhibit 12

Digital will transform the procurement value chain – landscape of use cases Identify and create value Spend visibility

1 Advanced spend intelligence and automated sourcing insights Collaborative and advanced sourcing

2 Category strategy workflow portal

6 Supplier qualification and selection: Supplier x-ray

3 Category analytics solutions

7 eSourcing events: eRFX, eCatalogs, eAuctions

4 Cleansheet and should cost analyses

5 Business collaboration portals

8 Supplier collaboration platforms

Prevent value leakage Procure to pay

9 PTP process workflows

Performance management

11 Supplier performance scorecards

10 Automated compliance management: vendors, contracts, buyers

12 Procurement organizational performance scorecards

Source: McKinsey Digital Procurement Service Line

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

17

In a recent survey on digital procurement conducted with 20 GPCA petrochemical member companies, the vast majority considered digital procurement to be a high priority for their organization,

respondents include supplier contract management, strategic alignment between functions, identifying new savings pools, and increasing the breadth of saving opportunities. The major

but at the same time they believed that their capabilities to

challenges, on the other hand, lie in prioritizing one such effort vs.

implement digital procurement were low to medium (Exhibit

others, demonstrating tangible benefits, resolving low adoption by

13). The major benefits of digital procurement perceived by

suppliers, and dealing with legacy platforms (Exhibit 14).

Exhibit 13

Digital procurement is clearly a priority for petrochemical companies in the GCC. However, digital procurement capabilities are not advanced Is digital procurement a high-profile topic for your company?

How digitally mature do you consider your company to be?

What is your company’s level of capability in digital procurement?

18

19 16

4 2 1 Yes

No

Mature or developing

Source: Results of survey conducted with 20 petrocheical companies in the GCC

18 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

Aware or low

High

Medium-Low

Exhibit 14

GCC petrochemical companies see a wide range of benefits and potential challenges towards implementation of digital procurement Top benefits of digital procurement as identified by respondents

Top barriers to implementation as identified by respondents

Number of respondents identifying the factor as a recognizable benefit (out of 20 respondents)

Number of respondents identifying the factor as an implementation barrier (out of 20 respondents)

More effective supplier/contract management

14

Prioritizing effort vs. impact

Strategic alignment between functions

9

Demonstrating tangible benefits

Identify new savings pools

9

Low adoption rate by buyers

Widen breadth of spread addressable by procurement

7

Legacy platform

12

11

9

4

Source: Results of survey conducted with 20 petrocheical companies in the GCC

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

19

A majority of the respondents see a potential of 5-10% increase

progress in capturing the full potential of savings that digital

in annual bottom line enabled by implementation of digital

procurement has to offer. Penetration rates across technical

procurement (Exhibit 15). This potential will be realized through a

platforms for 12 use cases in digital procurement is low, with only

decrease in number of transactions as well as reduction in value

one exceeding 50%. Nonetheless, most of the use cases have

leakage. Nonetheless, 75% of respondents foresee significant

been identified as high priority for these organizations with P2P

changes in establishing leaner and more agile organization

process work flows, advanced spend intelligence and automated

structures as a result of implementing digital procurement.

sourcing insights, procurement organizational and supplier

In spite of a clear consensus in the benefits of digital procurement, petrochemical companies in the region have not made significant

performance scorecards and automated compliance management identified as priority use cases (Exhibit 16).

Exhibit 15

Majority of respondents expect to see a 5-10% increase in bottom-line savings, driven by reductions in transactional activities and leakage % reduction on transactional activities

% increase in annual bottom-line savings generated >50%

>50%

1 9

30-50%

0

2

20-30%

4

10-20% 30-50%

1

3

5-10% <5%

1

2

20-30%

% reduction on value leakage 4

10-20%

30-50%

12

5-10%

2

>50%

1

10-20% <5%

1

7

20-30%

2 6

5-10% <5%

2

75% foresee significant changes in establishing leaner and more agile organization structures as a result of implementing digital procurement 50% believe a temporary surge in manpower will be required to perform the initial setup of digital procurement practices Source: Results of survey conducted with 20 petrocheical companies in the GCC

The journey towards digitization of procurement will not be

and generate value for the companyâ&#x20AC;&#x2122;s businesses, enhancing

easy. Respondents identified change management within

the sourcing teamâ&#x20AC;&#x2122;s procurement capabilities takes on a high

the organization, capabilities of regional suppliers and lack of

priority. In many companies, the use of analytic tools, such as

specific skilled human resources as the top 3 priorities towards

clean sheets, to determine the fact base for negotiations may

implementation of digital procurement. Implementation will require

be new, and such skills will need to be acquired and embedded.

commitment and collaboration of every individual involved in the

Likewise, the move into strategic partnership with the business

process, across the organization and an increased awareness and

from administrative buying requires not only new skills, but a new

willingness for adoption of digital procurement with suppliers.

mindset as well. It is important for companies to understand

Investing in talent â&#x20AC;&#x201C; measuring and upgrading needed skills Once procurement functions in petrochemical companies adopt the goal of raising their role so that they become strategic partners

20 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

the starting point for capabilities along all key areas of sourcing activities. A tailored training program to bridge the skills gap can then be developed, allowing the procurement organization to perform at its best and create value (Exhibit 18).

Exhibit 16

Organization wide technical platforms have very low penetration rates across the 12 digital procurement use cases identified; only one exceeds 50% Priority level High

30

57

17

25

25

27

20

Medium

10

Low X % with organization wide technical platforms

10

10

7

7

0

5 8

10 16

16

16

16

14

14

13

12

9

3

3

3

3

1

1

1

1

Supplier performance scorecards

Procurement organizational performance scorecards

Advanced P2P process spend work flows intelligence and automated sourcing insights

4

4

2

2

Supplier qualification and selection: supplier x-ray

Automated compliance management: vendors, contracts, buyers

10

4 3

8

2

E-sourcing Business events: e-RFX, collaboration e-catalogs, e- portals auctions

9

12

4

3

1

Category Category Cleansheet strategy work and should analytics flow portal cost analyses solutions

3 Supplier collaboration platforms

Source: Results of survey conducted with 20 petrocheical companies in the GCC

Exhibit 17

Capabilities Assessment covers 3 overarching themes and 11 key topics in procurement organizations Key areas and topics Develop robust fact base

Clean sheets

Linear performance pricing Spend analysis

Develop sourcing strategy

Execution Contracting for

Effective RFPs

Sourcing strategy

performance Negotiations excellence

Stakeholder alignment

Supplier analysis Supply market analysis Total cost of ownership Source: McKinsey and Company

Capturing the multibillion procurement opportunity in the GCC petrochemical industry |

21

A successful journey promises major earnings advantages Against a background of narrowing margins, petrochemical companies in the GCC countries can tap into considerable costsaving potential by revamping their purchasing practices. Some are already far advanced along the road, while others have yet to embark on the journey. Morphing the procurement function from an administrative, reactive purchasing role to the status of a strategic partner in the business, calls for multiple alterations in the levers that procurement can pull and the challenging of the status quo practices. In addition, it is crucially important to cultivate a new mindset that enables procurement professionals to work cross-functionally with in-house colleagues as well as customers and suppliers. This transformation will not be easy, but it promises rich rewards for the players who get it right: a successful procurement-improvement program can make a difference to the bottom line of up to five percentage points in net profit.

22 | Capturing the multibillion procurement opportunity in the GCC petrochemical industry

Sami Bejjani McKinsey & Company, Inc DIFC Gate Precinct 4 Dubai, UAE sami_bejjani@mckinsey.com

Gaurang Jhunjhunwala McKinsey & Company, Inc DIFC Gate Precinct 4 Dubai, UAE gaurang_jhunjhunwala@mckinsey.com

Christos Seremptis McKinsey & Company, Inc DIFC Gate Precinct 4 Dubai, UAE christos_seremptis@mckinsey.com

Dr. Marco Ziegler McKinsey & Company, Inc. Bleicherweg 30, 8002 Zürich Switzerland marco_ziegler@mckinsey.com

About McKinsey McKinsey & Company is a global management consulting firm. It is the trusted advisor to the world’s leading businesses, governments and institutions.

McKinsey has grown continually since it was founded in 1926 in Chicago. Among McKinsey’s clients is the majority of the 100 biggest companies worldwide. They are served from a global network comprising over 100 offices in more than 50 countries.

McKinsey’s Chemicals Practice is a global network of chemical experts and practitioners. In the past five years alone, our Chemicals Practice has supported clients across the world on more than 1,000 projects.

The Chemicals Practice collaborates closely with functional practices (e.g. Operations, Marketing & Sales, Corporate Finance, and Innovation) as well as with other industry practices (e.g. Pharma, Automotive, Electronics, Consumer Goods, Construction Materials) within McKinsey to create solutions tailored to clients’ needs.

McKinsey has served the majority of global leaders in the chemicals industry, as well as midsized organizations, start-ups, and leading private equity companies. McKinsey has a global perspective on the chemicals industry’s challenges and opportunities—and how they differ in emerging and mature markets.

For more information, visit www.mckinsey.com

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