What is Risk-Adjusted Supply Chain Management?
Risk-adjusted supply chain management combines expertise in risk management with the knowledge of supply chain operations resulting in an organization that has embraced a risk-adjusted supply chain management strategy. This approach seeks to optimize the performance of the supply chain by focusing on supply chain risk and extracting from this analysis the information needed to make sound business decisions.

Risk-adjusted supply chain management can help an organization identify, quantify, and prioritize the risks inherent (though sometimes hidden) in an organization’s supply chains. Paying more attention to risk — and to managing that risk — is critical as new technologies, regulatory requirements, consumer demands, and potential disruptions combine to make supply chain management increasingly complex.

Oftentimes, organizations fail to understand the potential vulnerabilities that can compromise the supply chain’s ability to handle unexpected and sudden shocks. By understanding the risks — both internal and external to the supply chain — an organization can more clearly identify its options for ensuring the viability and strength of its supply chains. A risk-adjusted supply chain management strategy enables organizations to identify vulnerabilities and the financial impact of supply chain risks and provides them with additional information needed to make key business decisions. Through this analysis, an organization develops a business case that identifies and quantifies critical supply chain risks.

Overview of the Basic Chemicals Industry
The chemicals industry includes companies that manufacture and/or distribute chemicals, including basic, intermediate, and specialty chemicals. These may include petrochemicals, plastic resins and materials used in synthetic fibers, paints and coatings. Commodity chemicals include petrochemicals — both organic, inorganic, and agricultural chemicals, such as caustic soda, potash, and benzene— and plastic resins, such as polyethylene and polypropylene. These chemicals are the essential elements for plastics, glass, fibers, and some are included in the product of fertilizers.

The commodity chemicals industry’s overall health is closely tied to the U.S. and global economies. The manufacturing, automobile, housing, and agricultural sectors are the largest markets for chemical producers, and because these businesses are cyclical, the commodity chemical industry is also highly cyclical in nature. Imbalances in the supply and demand caused by capacity additions also add to the cyclicality of the industry.

Few industries are as sensitive to increases in raw material and pressure by competitors to keep prices down. Rising oil and gas prices can dampen the overall economy, forcing manufacturers, construction products companies and other users of these materials to curtail purchases. As costs rise and prices fall in response to the decrease in demand, chemical companies experience a loss of revenues and profits. During the 1990s, chemical sales grew about 2–5 percent each year, but have slowed of late because of the sluggish economy.

Customer demands for lower prices and convenience, coupled with the potential for new revenue sources and cost savings, are driving the development of business-to-business (B2B) e-commerce. Customers can now obtain product information and browse for the lowest prices by surfing Web-based auction sites. Since commodity chemical makers are susceptible to greater price competition from the Internet, they are hoping B2B activity will allow them to lower inventory levels and thus reduce their capital needs.

The chemical industry is highly energy and capital intensive. In 2002, it accounted for almost 7 percent of the total annual U.S. energy consumption. The majority of the industry’s consumption stems from natural gas and oil, with the remainder lying in coal and electricity. In 2001 aggregate capital spending reached $31.1 billion dollars (U.S.), while spending by the basic chemicals sector was around $12.6 billion (U.S.) for the year. These high capital levels reflect the hefty plant sizes and economies of scale that are necessary to create chemical products efficiently. Capital spending is also needed for the continual refurbishing and replacement of existing facilities, which occasionally need extensive upgrading.

Basic Chemicals Industry-Specific Supply Chain Risks
Ramifications of supply chain disruptions can be financial, political, economic, and social. Understanding the risks and their potential impact on a company’s operations can help a firm manage its supply chain more effectively and gain a strategic advantage in a competitive marketplace.

Organizations in the same vertical do not always face the same types of supply chain risks. Different circumstances and operating styles will cause similar organizations to have different degrees of exposure. All industries face similar risks, such as economic uncertainty, natural hazards, technical innovation, changing regulations, and market fluctuations. By researching some of the main players in the industry, it is possible to identify a list of risks that are specific to the chemicals industry. These risks include:

• Vulnerability/Security — Post 9/11, the biggest risk to the supply chain in the chemicals industry remains security. Despite its self-regulation efforts in recent years, the federal government has mandated improved security measures. The legislation that created the Department of Homeland Security (DHS) stated that it must, in concert with the EPA, work with Congress to enact legislation that would require certain chemical facilities to undertake vulnerability assessments and take reasonable steps to reduce the vulnerabilities identified.
• Impact of oil and gas reserves and prices — Increased energy costs are worrisome for the industry, eating into the earnings of basic chemical makers. These companies are large consumers of oil and natural gas, both as raw materials and as fuel for power generation to run their plants. In addition, higher energy prices could slow economic growth, reducing consumer demand for chemicals and their derivative products.
• Facility regulations and environmental laws and regulations — Regulation has tended to focus on health, safety, and environmental protection. Producers incur sizable costs for complying with various rules and regulations, which often include reducing, treating, handling, and disposing of hazardous waste. Efforts to self-regulate have been helpful, but change to regulations remains a large and imposing risk for the industry.
• Ability to maintain plant utilization rates and to implement planned capacity additions and expansions — Building new facilities and expanding capacity are costly endeavors in the chemicals industry, with costs in the several of millions of dollars. Inability to maintain utilization rates and failure to implement capacity additions can severely hinder a company’s ability to produce product and stay competitive.