In recent years, the stunning growth of low-cost suppliers has exerted increasing pressure on chemical producers. Chinese companies in particular have leveraged incredibly low factor costs to become reliable suppliers of products at prices that Western manufacturers cannot easily match. To stay competitive, chemical companies have turned to advanced productivity approaches, such as Six Sigma and lean manufacturing.[1] These programs rely on a blueprint - a fully detailed description of what the company’s operating and production systems will look like at best practice, derived from a deep understanding of site and plant operations - to help chemical producers along the path to operational excellence.

Getting the program started can be difficult, however, for three reasons. First, a true best-practice blueprint will provide a plan for building a chemical company from the ground up - but an existing chemical producer cannot restart from scratch. Producers have too many physical assets and operational processes in place to implement an idealized solution.

Second, target-setting presents a particular challenge for chemical companies. Benchmarks common in other industries are not readily available for chemical companies due to the large structural differences among assets and plants, even within industry subsectors. Moreover, most chemical companies are unwilling to share detailed process and cost information, which makes it difficult to establish targets and quantify performance gaps.

Finally, the mindset and behavior of employees at chemical companies can pose obstacles to achieving operational excellence. Accustomed to following well-established procedures, workers are often reluctant to buy in to the new thinking that successful transformation demands.

To create a useful blueprint, a company must adapt its ideal vision by analyzing its current business processes and core functions, such as production, maintenance and logistics. A customized blueprint provides realistic targets to achieve best practices within two years as well as recommendations for how the company must modify its organization and business processes to meet these goals.

The best way to launch this process is with an on-site diagnostic that provides the data needed to create a site- or plant-specific blueprint, identifies how and why current operations differ from the ideal, and sets the company on the road for operational transformation.

Although the transformation proper is a multi-year effort, the diagnostic, including comprehensive interviews and observations and an analysis of assets, costs, and capital expenditures, requires no more than a few days. Within this brief period, enough can be learned about the company "as is" to pinpoint current causes of underperformance and identify the measures needed to address them.

Further, by providing an alternative to top-down target setting and seeking to understand employees’ concerns, the diagnostic provides the right foundation for the arduous process of changing mindsets and behaviors. Upon completion of the diagnostic, the company will have a plan for a customized operating system that, when implemented, will yield sustained improvement and a clear competitive advantage.

Over the last two years, some 50 on-site diagnostics have brought best practices to a variety of companies within the chemical industry, primarily in Europe and North America, and have proven to have broad applicability despite the diversity of products and customers.

How the Diagnostic Works
The diagnostic considers all core manufacturing functions, including production, asset maintenance, logistics, quality control, site services, engineering and other on-site services. Special attention is paid to their connections with other processes, such as supply chain management, order-to-cash, finance and purchasing. The diagnostic is applicable to both batch and continuous processes as well as to goods ranging from steam cracker products to active pharmaceutical ingredients and finished dosages.

To prepare for the diagnostic, a company should collect basic data about the site’s revenues, capital and operating expenses, cost structure (in aggregate for the site and broken down by function), production volume, organizational structure (including head count), and sales history. The goal is to provide an overview of the site’s financial performance, current business processes, core competencies, main products and key functions. At most companies, these data are readily available.

It is vital to evaluate operating and capital expenditures in parallel to attain a complete picture of opportunities for cost savings. In the past, many chemical companies have tried - some successfully - to "outgrow" cost problems with investments designed to achieve economies of scale. We have found that most producers can uncover significant opportunities for improvement in their current asset structure without investing in new capacity.

Building on the data compiled in the preparation phase, the diagnostic gathers insights via on-site interviews with senior managers, as well as through a site tour and shop-floor observations. The diagnostic should include interviews with approximately 20 to 30 site personnel. The company should advise all site personnel that the diagnostic will be occurring and provide them with an overview of what it will entail. Note that the diagnostic can be conducted simultaneously with ongoing operations, with only minimal disruption to production and alongside other performance improvement programs.

The diagnostic has two main components: understanding the gaps between current and ideal operations, as well as the root causes of those gaps; and preparing the organization for change. To complete the first component, over a dozen analyses are conducted on the gathered data. Examples of those that are most effective for many sites include:

Material and information flow analysis: Mapping the current material and information flows helps identify disconnects, redundancies, and inefficiencies. This kind of analysis typically uncovers a tangle of interfaces, with too many people coordinating processes and exchanging information and too few people adding value. In most cases, we find that core functions in any one site have optimized their individual parts of the value chain but have yet to optimize the material flow across functions. Furthermore, very few sites have tapped the full potential of integrating suppliers and customers in the material flow. Overall equipment efficiency analysis: The diagnostic should investigate the company’s potential to improve capacity by optimizing its overall equipment efficiency (OEE). At a chemical production site, the most valuable assets, besides employees, are pieces of production equipment. Suboptimal use of assets always causes cost problems. The chief issues related to equipment inefficiency are planned non-production time (e.g., scheduled downtime for maintenance), breakdowns, changeovers in multi-product plants, off-grade production time, startup losses and lack of raw material or personnel. Because capacity in most product segments currently exceeds demand, chemical companies often fail to manage their OEE losses aggressively. Analyzing where OEE losses are occurring and then minimizing these losses can generate significant cash savings. Work processes analysis: The diagnostic must achieve a detailed understanding of work flow processes. By conducting interviews, reviewing quality control processes, and observing activity on the shop floor, a company can identify opportunities for further applying "lean thinking." The goal is to streamline processes to maximize the amount of time spent on value-added work - such as loading and unloading, inspecting, and packaging - and minimize work that fails to add value, such as searching for materials, tools, and documents or moving from one work location to another. To help an organization prepare for transformation, the second part of the diagnostic focuses on mindsets and behaviors. When conducting the diagnostic, companies can lay the groundwork for sustainable change by evaluating the mindset and behavior of employees at all levels of the organization. The goals are to identify the reasons for misalignment or mistrust within the organization and to gauge whether employees believe that their concerns have been heard. To assess the current performance culture, we have used an Internet-based survey that solicits feedback from several hundred employees. The survey evaluates three areas: alignment (including leadership and direction), execution (including accountability, coordination, and capability), and renewal (including external orientation and innovation). Completing the survey takes about 45 minutes, and the typical response rate is roughly 70 percent.

A Customized Blueprint
The on-site diagnostic will yield a tail-ored plan comprising organizational charts, staffing levels, reporting lines, performance management goals and training needs. The plan should highlight the main improvement levers and estimate their potential impact on the operating system.

This customized solution should reflect the findings of each of the analyses conducted during the diagnostic. For example, the material and information flow analysis should reveal opportunities to optimize interfaces between the supplier and the site, as well as between on-site functions. At a fine chemicals producer, for example, a quick material flow analysis uncovered an opportunity to reduce the number of handovers from 10 to four by reorganizing on-site logistics.

Understanding the material and information flow within a site can also help a company determine whether functions such as production planning have been optimized. Especially in multiproduct sites, optimizing production flows can result in significant improvements, allowing for drastic reductions in intermediates, for example, and decreasing exposure to price volatility. Similarly, opportunities to trim costs and increase value can nearly always be found in outbound material flow to the customer.

Improvements in OEE can translate into value. Keeping assets busy with higher volumes can lead to increased sales without adding fixed costs, thereby driving unit cost down. Investments in new capacity should be delayed or avoided until losses related to inefficiency have been properly addressed.

For example, after completing a diagnostic, a polymer-film producer was able to avoid a planned investment of $40 million in a new plant by achieving a 31 percent increase in OEE, mainly by reducing downtime. Diagnostics can also help identify opportunities to produce the same volume in a shorter time, such as by changing the shift system (e.g., from a full "24/7" five-shift system to three shifts or even a single, long day shift). A more radical option is to produce the same volume in more shifts over fewer months and then, in the remaining "production-free" months, reduce the number of working hours or full-time employees, or close the production plant entirely for several months and reassign employees to other production units.

The analysis of work processes will reveal actions that reduce non-value-added time, such as minimizing distances between work locations, standardizing work sequences, developing low-cost automation devices, and reorganizing the responsibilities assigned to individuals (usually by broadening the scope of an individual’s work). Optimizing management of existing resources - by redesigning work processes and plant layout, for example - can significantly improve the time spent on value-added work. Craftsmen in the maintenance department at a life-science products company spent 55 percent of their time on activities that fail to add value - but making significant changes to procedures and organization, and helping workers adapt to those changes, could reduce that figure to just 20 percent.

Recent client experience, supported by independent academic research, indicates that successfully addressing mindsets and behaviors accounts for about 60 percent of the value potential of a transformation. During one recent client transformation program, senior managers were surprised to discover that a number of key performance factors were lacking, including frontline worker engagement, trust across hierarchies and a collective sense of direction. This discovery spurred them to clarify the objectives of the transformation and set it more effectively in the context of competitors’ actions, launch an improved communications program to drive these messages to the front line, include more frontline workers in generating and evaluating ideas to help solve problems, and foster less hierarchical interactions across management layers.

By synthesizing the results of the diagnostic, a company can effect a bottom-up transformation of its organization, customizing the ideal blueprint to achieve the best fit between current and future states based on the existing asset structure and product portfolio. Once clear design criteria are in place for the core functions, a company can design the overhead structure and interfaces with other functions and processes. The final product is a realistic and achievable vision for the "organization to be."

Looking Forward
Before undertaking a diagnostic, a company must answer several threshold questions to determine whether it is ready to begin the process. Is site management willing to engage in a constructive dialogue on improving its operating system? Does top management support the need for change? Is a team with sufficient experience available to perform the diagnostic and deliver a tailored blueprint? If these conditions are met, management should give serious consideration to moving forward with the diagnostic as a quick and effective first step toward transformation.

[1] In a previous article, we described a four-part program that incorporates the best ideas of the Six Sigma and lean approaches and outlines an implementation method ("Transforming Chemicals Production: A New Approach to Building a Comprehensive Operating System," European Chemical News April 2004).

Leonhard Birnbaum is a partner in McKinsey’s Düsseldorf office; Philip Eykerman is a partner in the Brussels office; Jakob Fischer is an associate principal in the Munich office; Karsten Hofmann is McKinsey’s Global Chemicals Practice manager based in Frankfurt, and Joseph Hughes is a partner in the Chicago office. †E-mail contact: Karsten_Hofmann@McKinsey.com