The chemicals industry can trim SG&A costs by up to $157 billion

As the chemical industry emerges from the economic shock of the pandemic, it’s looking for every way possible to trim costs in order to improve the bottom line, and doing more with less. One area of cost-cutting that the industry may stand to benefit from is to further tackle SG&A costs while yielding greater analytics and insights from the back office, despite recent concerted efforts of many in the industry to do so. 

A PwC benchmarking analysis of more than 20 chemicals companies collecting data from the 2018-2020 period found that, on average, closing SG&A cost gaps could equal approximately 4% of revenue in cost savings. These savings can amount to about $65 million per year for the typical company included in the study and about $157 billion in aggregate for the $4 trillion global chemicals industry.

Overall, chemicals companies have yet to harness the efficiencies and savings yielded by changing their operating processes and protocols through the enterprise-wide adoption of global shared services and managed services. While our study found that larger entities (more than $10 billion in revenue) typically have implemented shared service models widely for SG&A work, we were surprised to learn that mid-tier companies ($1 billion to $9 billion in revenue) currently underutilize that model and therefore are in a better position to benefit most through cost-savings. For instance, our survey found that less than 20% of mid-tier companies use shared services of any kind for financial planning and analysis (FP&A), and just a-third use them for treasury.

Our study unveiled the potential for measurable cost-savings through increased adoption of automation technology (e.g., robotic process automation solutions) for repetitive and mundane tasks currently carried out manually. According to our study, the use of spreadsheets is rampant in key finance areas, notably in the tax and FP&A functions, with 73% and 86% (respectively) using spreadsheets “to a great extent” or “exclusively.” Reducing widespread manual spreadsheet use could save time and limit irregularities in production of internal management reports — and in specific areas like financial planning and analysis (FP&A). Our study found, for example, a surprisingly high rate of manual report creation, with about 60% of study respondents saying that they “dump data from systems into spreadsheets” and manually produce reports from there. Less than 15% of our survey of respondents use self-service business intelligence (BI) applications. On the accounting systems front, there is also room for standardization. Just one in five of the companies in our study describe their accounting system modules as “largely standard,” with most describing them as involving some complexity and in-house development. It’s not surprising, then, that one of the biggest challenges of finance and accounting data is the manual processes and work-arounds required to deal with those systems.

We also found that chemicals companies have a way to go on the digital IQ curve. For example, less than a third of the companies in our study currently deploy data visualization tools, and fewer than one in four use RPA. Only 10% use artificial intelligence (AI) in their SG&A functions. However, planned investment by the companies included in our study over the next two years suggests these figures will likely grow, with 60% planning to invest in RPA and data visualization and almost 40% expecting to invest in AI to address SG&A management.

Our study also indicates that some chemicals companies struggle with containing costs surrounding broader, corporate-wide issues — most notably incompatible and/or unconsolidated processes due to multiple ERPs introduced by acquisitions. According to our study, approximately 70% of companies are using an SAP software for accounting, and a majority using it for most operations and commercial functions. Therefore, many chemicals companies are now beginning their S/4HANA upgrade journey — which, carried out properly, should lead to greater consolidation and operating model efficiencies.

Nearly half of all our study participants maintain multiple ERPs, with more than a quarter of participants maintaining more than five ERPs. Yet, only one quarter of top-quartile cost performers maintained multiple ERPs.

Viewed broadly, the supply chain incorporates procurement, manufacturing, and distribution; taken together, these likely comprise the bulk of costs faced by most chemical companies. Yet supply chain is an often overlooked area that should be scrutinized more carefully (especially by producers of specialty chemicals) for potential cost savings and other opportunities for improvement. For many organizations, supply-chain management straddles SG&A and cost of goods sold (COGS). As a result, some companies lack visibility to assess whether their centralized supply chain organization is right-sized, given the lack of real-time information on the workload at plants or other business unit levels.

For specialty chemicals, the complexity of their product portfolios leads to even greater order-fulfillment and supply-chain complexity, which, in turn, can lead to higher inventory levels. Therefore, specialty chemicals companies can assume supply chain costs that are about 50% higher than do commodity and other chemicals segments.

We suggest building a roadmap for enterprise technology investment and emerging technology adoption. The roadmap should outline how technology will be used to improve performance.

To keep a keen focus on your people, their digital IQ maturation and, perhaps most of all their morale as they go through significant change management. Review how you recruit and retain.  Our study indicates that a large plurality of participants disagreed with the idea that “there is a clear career path for everyone” in SG&A functions. Likewise, many doubt that they have “the right skill sets in place to meet our operation’s future needs.” These companies should consider a review of their workforce strategy.  

And, finally, look outside the chemicals industry “echo chamber” for leading practices in finance for people, process and technology.