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chemco case study

Case date
Supply chain relationships:
Wheatco Ltd and Chemco Ltd (A)
Marie Koulikoff-Souviron, Alan Harrison and Jaques Colin
Wheatco and Chemco are two US-owned corporations that have much in common.
Both are in the chemical industry, both are leaders in their chosen activities
and both are of similar size (around $2bn in sales). Their culture is close, centred
on quality of products and services, safety and profit. Ten years ago, the two companies decided to form a partnership with the strategic objective of gaining
competitive advantage through mutual access to low-cost raw materials.
One of the outcomes of this partnership was the establishment in the UK of two
units of a large Wheatco plant of 700 employees combined with a small Chemco
facility of just 70 employees. The division between Chemco and the Wheatco plants
was marked only by a fence, with selected employees being able to pass freely by
means of swipe card access. The two firms form a ‘closed’ supply chain, whereby
they are customer of, and supplier to, each other.
The Chemco plant was built in 1991. It is dedicated to the production of a chemical
additive called ‘A1’ used in the production of rubbers, paints and other compositions.
The feedstock used in the Chemco process is manufactured by Wheatco. The manufacturing process of the additive A1 generates a gas, ‘B3’, as by-product, which is
recycled back into the Wheatco feedstock process. The supply chain ‘loop’ is illustrated in Figure 36.1.
Figure 36.1 Outline of the production process
Recycled B3 gas
Raw material
Fluid bed reactor
(feedstock 1 & 2
Building 150)
additive A1
(Building 88)
B2 gas
Wheatco Ltd and Chemco Ltd (A)
Figure 36.2 Chemco organisation chart (additive A1 supply chain)
Safety Health
Half of the additive A1 made on the Chemco site is sold to Wheatco, and the rest
to other customers in Europe and the USA. World capacity for A1 is limited, so
Chemco can sell all that it can make. Capacity was extended in 1996 from 8000 to
13 000 tonnes. Another extension project is under discussion, which would bring
Chemco capacity up to 20 000 tonnes within the next two years. Figure 36.2 shows
the Chemco organisation chart.
The Wheatco plant is the largest plant in the world, and comprises 15 production
areas. The production unit which supplies the feedstock to Chemco (Building 150) is
located in the largest area, where about 100 people are employed. Figure 36.3 shows
the Building 150 organisation chart. Only Unit 1 produces the additive A1. This area
is geographically at the opposite end of the site from the rubber manufacturing area
(Building 88), which is Chemco’s customer. The two areas belong to different strategic business units (SBUs). Building 150 is in the Basic Chemicals SBU, and Building
88 is part of Specialities SBU. Figure 36.4 shows the Building 88 organisation chart.
Part 5 • Supply networking
Figure 36.3 Basic Chemicals area organisation chart
Basic Chemicals SBU
Area Manager
Building 150
Unit 1
B150, B151,
Unit 2
Units 3, 4, 5
Supply Chain
Basic Chemicals
Figure 36.4 Specialities area organisation chart
Specialities SBU
Area Manager
Building 88
1 Quality
2 Process
Wheatco Ltd and Chemco Ltd (A)
There is very little interaction between employees of these two units, although their
Area Managers have regular meetings at site management level.
In order to avoid unnecessary investment, Wheatco supplies Chemco’s utilities –
such as water, electricity and compressed air. Wheatco also handles Chemco’s waste
products. Similarly, the overall costs for the Wheatco–Chemco partnership are
reduced to a minimum with very little buffer stock both upstream (Building 150 to
Chemco) and downstream (Chemco to Building 88). This creates a total interdependence between the members of the ‘closed’ supply chain.
The structure of the supply chain partnership is multifaceted, with interactions
taking place at many levels. Locally it includes plant management, engineers and
operators. In the USA, an executive contact (Business Manager) has been appointed
by each firm in order to manage the relationship at a strategic level, especially in
regard to the global contract agreement, which provides the commercial terms for
the relationship.
Local management does not perceive the relationship between the two US Business
Managers as being very good. Indeed contract negotiations can be a source of conflict
as both firms pursue their own interests. At local level, however, collaboration appears
necessary in order to meet the operational requirements of the joint process. Thus the
local relationship is developed independently of corporate involvement. One of the
managers said during a meeting: ‘we don’t understand the big picture: we don’t
understand the global relationship between Wheatco and Chemco.’
● The production process
Wheatco receives raw material from an external supplier. This raw material is a fine
powder, which is heated up to 300°C together with the gas B3 supplied by Chemco.
The powder is suspended in a fluidised bed reactor in order to allow perfect mixing
and an optimum reaction process. The reactor is about 2m diameter and 9m high,
with close temperature control. The result of the reaction process is a mixture of
three components: feedstock 1, feedstock 2 and another gas, ‘B2’.
Next, feedstocks 1 and 2 are purified, refrigerated and condensed into a liquid,
which is supplied to Chemco via a pipeline. The B2 gas is also purified, and shipped
direct to Chemco via another pipeline. It is important to maintain the ratio of feedstocks 1 and 2 at 40/60. Any variation within this ratio will negatively impact the
quality of the additive A1 produced by Chemco. For the same reason, the B2 gas has
to be extremely pure.
The rate at which the two feedstocks are produced is key to ensuring that a constant blend is maintained, and hence consistency of the batches of A1. The storage
capacity of the feedstock tanks, when they are full, gives Chemco no more than 15
hours of production in the event that the Wheatco process is stopped. At Chemco,
the feedstocks are mixed with gas B2 in a high-temperature process in order to produce the additive A1. The additive is a low-density powder, which is stored in silos
and blown via pipeline to the Building 88 production unit. Temperature is a critical
parameter in the chemical reaction: problems in the reactor can produce overheating, which creates variations in the feedstock, which in turn negatively impacts the
quality of the A1 additive. The final properties of the additive A1 are therefore the
result of the process control within Chemco as well as within Wheatco.
Part 5 • Supply networking
● Coordination of the supply chain
In keeping with the close product integration of the two companies, interaction
within the supply chain takes place at many levels: production operators, engineers,
logistics and management. Communication takes place both informally via telephone, e-mail or visits, or formally within inter-organisational team meetings.
Formal interactions
The formal relationship structure of the local Wheatco/Chemco partnership consists
of four teams, with different missions and time horizons, as shown in Table 36.1.
Logistics Coordination Team
Annual forecasts of demand for the chemical additive A1 are defined contractually.
Because of the constraints in world capacity of chemical loading, Chemco operates
at full capacity; hence logistics coordination consists essentially of short-term adjustments. Every Monday morning planners from both firms meet on the Wheatco site
Table 36.1 The Chemco–Wheatco formal relationship structure
Objectives/ •Measures
Meeting frequency
Logistics Coordination
Short-term forecasts and
production issues
* On-time delivery of feedstock
and A1 additive; inventory
Chemco: Planner, shift
Wheatco: Planner,
production engineers
Building 150, shift managers
Building 150
Technical team
Process improvements between
Building 150 and Chemco
(upstream of the supply chain)
* Consistency of feedstock rate
* Purity of B2 gas
* Less than 12 ‘trips’ per year
(reactor shutdowns)
Chemco: Technical Manager,
Operations Manager,
process engineers
Wheatco: Supply Chain
Manager Building 88,
Building 150 Production
Leader, production
engineers Building 150
Every six weeks
Quality Improvement
Team (QIT)
Quality improvement of
chemical loading (downstream
of supply chain)
* A1 additive quality and
Chemco: Production
Manager, Quality Manager
Wheatco: Rubber production
manager, quality engineer
and rubber production leader,
SC manager (Basics)
Steering Committee
Set the direction and tone of
the Wheatco/Chemco
Define and set performance
improvements and metrics
Provide guidance to QIT and
Technical Team
Chemco: Facility Manager,
Production Manager
Wheatco: Basic Chemicals
Area Manager, Rubber Area
Manager, Supply Chain
Manager (Basic Chemicals)
Every eight weeks
(set up March 2000)
Wheatco Ltd and Chemco Ltd (A)
in order to determine the weekly demand of additive A1 required by Building 88 and
by other Chemco customers in order to calculate the weekly feedstock production
volumes. Chemco shift managers also attend the meeting, as well as the production
engineers from Building 150, in order to discuss coordination of production shutdowns for equipment maintenance.
Technical team
The Technical Team meets every six weeks and focuses on upstream process improvement between Building 150 and Chemco. This involves joint discussion on causes of
production shutdowns or variability of feedstock. Implementation of action plans
can involve capital investments from one side or another of the process. In the
Technical Team, Chemco is identified as Wheatco’s customer.
Quality Improvement Team (QIT)
This team meets on a quarterly basis and includes all members of the supply chain –
representatives from the Building 150 production unit, from Chemco and from
Building 88. Its aim is to work on long-term quality improvement for the additive
A1 supplied to Building 88, together with cost improvements. The QIT emphasises
Chemco’s role as a supplier of Wheatco.
Steering Committee
The Steering Committee was formed in March 2000. Its members are, for Chemco,
the plant manager and the operations manager, and for Wheatco the supply chain
manager from Building 150 in charge of the relationship, the Building 150 area
manager and the Rubber Area Manager. The mission of this team is to determine
the local operational strategy for the relationship and to provide guidelines for the
QIT and the Technical Team.
Informal interaction: the day-to-day coordination
The production processes are operated on a round-the-clock basis and there is very little
buffer stock within the supply chain loop. This close interdependency of the process
means that the three operating teams are in contact on a 24-hour basis: Building 150
with Chemco and Chemco with Building 88. There is a direct telephone link (called a
‘bat phone’ to mimic the fast response in Batman films!) between Building 150 and
Chemco operators. This allows easy communication by either side in order to warn of
any changes occurring in either of the processes (such as the production rate), or to
inform of any shutdowns or production breakdowns. In the best case, shutdowns only
last for an hour or so and do not induce downstream problems. In case of longer shutdowns (five hours or more), the process start-up needs to be synchronised, with no
certainty that the process will start up again without further hitches.
Operators from Building 88 contact Chemco operators every morning in order to
confirm their daily demand. Indeed, depending on the production problems within
Building 88, volumes can vary between ±30% from the Monday morning forecasts.
Chemco operators will adjust their production rates in line with this information.
When the consumption is much larger than forecast, the silo of additive A1 will
become empty quicker than expected, possibly causing an out-of-stock situation. A
three-day buffer stock of bags of A1 is kept at the Building 88 warehouse.
Part 5 • Supply networking
Building 88 operators will immediately be aware of any deviation in the quality of
A1 because it will cause the rubber to become either too hard or too brittle. In this
case, it is very important that the information is immediately passed on to Chemco
operators so that they can make adjustments to their process. However, it often happens that complaints are not forwarded on the spot but on the following day.
Every year the two production units agree on a date for the annual shutdown,
which takes place over two or three weeks and allows each unit to do the equipment cleaning and necessary maintenance and repairs.
1 Map the supply chain management process, indicating the physical product flows.
2 What information flows should ideally underpin the physical flows?
3 What are the potential failure modes within the Wheatco–Chemco relationship?
Wheatco Ltd and Chemco Ltd (A)
Case date
Supply chain relationships:
Wheatco Ltd and Chemco Ltd (B)
Marie Koulikoff-Souviron, Alan Harrison and Jaques Colin
This case study should only be used after Supply chain relationships: Wheatco Ltd and
Chemco Ltd (A) which gives background information on the businesses and the issues
involved in the Wheatco–Chemco relationship.
About eight years ago, shortly after the Chemco facility was built and the partnership was set up, joint ‘team days’ had been organised on two occasions to allow
employees from each production unit to meet and get to know each other. This
allowed people to ‘put a face to a name’ and thus make it easier to collaborate on
the technical process. However, since these early days, such meetings have no
longer been organised, and yet a number of reorganisations within Wheatco have
introduced new faces, especially within the Building 150 operating room.
In 1997, a new very large production process was established on the Wheatco
site. All of the operators who had originally installed the Building 150 production
unit were promoted to shift manager status. A completely new team of operators
was appointed. Moreover, Wheatco recently put in place a new procedure of ‘operator cross-training’ in order to increase the number of personnel who were qualified
to operate each of the three production processes. Building 150 operators now
rotate from one process to another instead of being dedicated to a single production
process. There have been two impacts of these changes on employees at Chemco:
on the one hand the new Building 150 operators are unfamiliar, and on the other
hand they have to deal with more than one person during a shift, so they complain
about a lack of follow-up in communication. Moreover, they have the feeling that
the Building 150 process is a kind of training ground for new operators who, once
they are suitably experienced, are moved to other, more strategic production units
on the Wheatco site.
There is another cause of tension among production operators. Over the last two
years a new incentive scheme has been put in place at Chemco, which is based on
the performance of the additive A1 production process. Thus if the process is
stopped, for whatever reason, the Chemco bonus is reduced. The Chemco operators
blame the Building 150 operators for not being committed and capable of running
their process, and in cases of shutdowns, they use the ‘bat phone’ to ask when the
process will be running again. This annoys the Building 150 operators, who are
busy looking for the cause of the problem. A Wheatco engineer comments:
‘The Chemco operator will ring up our operator and say, “Are you ready yet?” And our
operator will say, “No, we won’t be ready for 12 hours”. Another hour later, the phone
Part 5 • Supply networking
rings again: “Aren’t you ready yet? What? Are you the same person I talked to an hour
ago?” Clunk (as the phone goes down).’
Several quality issues have recently arisen in regard to the supply of additive A1
from Chemco to Building 88. Thus during meetings in March, it appeared that
some testing procedures had not been properly followed by the Chemco quality
department. The Wheatco production engineer has become very upset: ‘I can’t trust
them any more!’
● The new situation
The situation with regards to the Wheatco–Chemco partnership is currently very
tense. It is being described as ‘not a smooth supply chain at the moment’. Although
Chemco has had its fair share of technical failures in the past, the current situation
seems to be better with regards to the Chemco side of the supply chain ‘loop’. Over
the last four or five months it has been Building 150 which has been the source of
most of the problems. This lack of reliability is due to the fluid bed reactor, whose
temperature can rise beyond the 300°C limit and cause the reactor to ‘trip’ (cut out).
It’s usually possible to start up the reactor again without further problems. When
this is not the case, it can take up to several days to succeed in starting up again (the
number of these trips has been estimated at about 50 per year). These problems are
a cause of tension and conflict. In the words of a Building 150 operator:
‘Through a 12-hour shift, the feed trips then you put them back online, then it trips
again and it does wear you down if you’re constantly having to start the plant up again.’
When either of the two production units (Chemco or Building 150) shuts down, it
has to carry the blame for the shutdown of the entire supply chain.
Several causes have been envisaged for the reactor hot spots. One solution has
been identified, which engineers estimate would have an 80 per cent chance of success, but this requires purchasing a piece of equipment, which is on order but
which will not be available until March 2002. Michael Bond was made Director of
the Chemco facility in March 2000. He has a solid experience of plant management
at other Chemco sites. However, it is the first time that he has had to face the task
of managing such an intricate partnership. His challenge is to manage his own
plant performance, whilst being aware that it is very dependent on an external
company. Upon arriving at the Chemco facility, Michael Bond found the relationship with the Wheatco site very open and honest with excellent information
sharing between both firms at management level. However, he is very much aware
of tensions existing at other levels, especially among production operators.
Beside this he is under pressure because the decision to extend the site has been
put on hold by the US corporate management because of the current unreliability
of the Wheatco process. The final decision will be made in March 2002. Michael
knows that he has no other alternative than to collaborate with his partners – but
the situation is difficult and conflicting at various levels. Moreover, problems
within his own quality organisation are such that Michael is mulling over changes
within his own organisation to reinforce the quality drive within Chemco.
Wheatco Ltd and Chemco Ltd (B)
At Wheatco, a new Supply Chain Manager for the Basic Chemicals SBU – Jonathan
Price – was also appointed in March 2000 to coordinate the partnership with Chemco.
He has a very good experience of the Wheatco–Chemco relationship because nine
years ago he was an Area Manager within Basic Chemicals – where Building 150 is
located. He is very aware of the strategic problem caused by Wheatco to Chemco.
Indeed Chemco’s long-term development is threatened by lack of reliability of the
Building 150 process. Jonathan has to convince Chemco that Wheatco has been channelling a lot of resources in order to resolve the technical issues encountered within
Building 150. Could it be that a better collaboration between both firms with regard to
human resource management could help resolve the numerous sources of conflict
that exist at various levels? What could be done?
1 How can Michael Bond and Jonathan Price face the crisis situation within both
firms, which is expressed through the lack of trust and conflicts that make the
relationship difficult to manage?
2 How can Michael Bond manage the internal difficulties within Chemco, with
most of his employees questioning the level of priority that Wheatco grants to
Chemco? How convincing is the Wheatco position?
3 How different would the situation be if the two organisations were 200km apart
instead of being on the same site? Focus in particular on the human issues involved
in the case, and ignore the likely increases in stocks and transportation costs.
Part 5 • Supply networking