Executive Briefings

Growing Demand Brings Its Own Kind of Growing Pains                     

Sales of its nitrogen-based products became so great that Terra Industries, a chemical manufacturer with a large agricultural business segment, had to implement a demand planning solution.

Most of us would probably say no if someone asked if you can have too much business. However, more than likely we would have to say, yes, that booming growth in demand generally brings supply chain complexities. And because those supply chain growing pains cost us money, we absolutely should act to ease them.

Terra Industries, Sioux City, Iowa, found itself in precisely that position. Terra, which makes and distributes several nitrogen-based products for agricultural and industrial markets, has seen its sales soar in recent years, according to Kevin Dean, director of supply planning. That growth has impacted operations at the company's five production facilities in the United States and at a sixth one in Trinidad & Tobago, and it has added significantly to Terra's transportation costs as well. The old way of managing the supply chain just wasn't sufficient for the growth in demand that the chemical manufacturer was experiencing.

In a nutshell, as the complexity of Terra's business increased with the acquisition of new manufacturing plants, it found that its SAP enterprise resource planning system didn't have the punch required, especially for analyzing financial and sales data.

Then there were great concerns over the primary raw material used by Terra, natural gas. The company estimates it spends about $1bn a year on natural gas alone, and with the vastly fluctuating prices of gas, the company needed a more efficient way to manage its natural resources spend.

Terra has the capacity to produce about 4.8 million tons of anhydrous ammonia each year. Much of this ammonia is upgraded into other nitrogen-based products, including urea ammonium nitrate solutions, ammonium nitrate and urea. These products are then used as fertilizers or in a number of industrial applications, such as pharmaceuticals, heat treatment, phosphates, fermentation, explosives, dyes and man-made fibers.

In addition to the deficiencies in the ERP backbone, the production group at Terra had another problem: It was using multiple systems to gather and crunch the numbers, and for forecasting and planning.

A single solution was desired, something that would tie Terra's demand planning, production and importing all together. The manufacturer also needed something more reliable than the Excel spreadsheets used in its manufacturing plants. Spreadsheet errors bedevil businesses, no matter the industry, and Terra wrestled with them, too. In addition, management wanted a single set of numbers that could be used by every department.

Part of the problem was the sheer volume of data generated. Dean says a lot of data came to the planning group either verbally or in e-mails. Of course, manual input was the norm, so there was always the risk that data would be corrupted or lost if changes were made to the forecasting model when information was being extracted.

"From a planning and analysis standpoint, we needed to implement a forecasting system that was more user-friendly than our previous solution, and that could easily provide us with historical information. Zemeter provides us with a forecasting solution that enables us to run statistical and causal analysis scenarios, ultimately helping us to maximize our product margins and enable our facilities to produce the right mix of products to maximize the company's bottom line."

A snapshot of the demand on Terra shows that sales are booming in all segments, not least of which is agriculture. "We're following on the shirttails of the ethanol boom, Dean says. "We provide the nitrogen that grows the corn-that's how we're tied to the ethanol business."

In fact, business is so good that demand exceeds Terra's production capability, Dean says. "What we're having to do now with certain contracts is try to maximize margin possibilities, and that's where the complexities within Terra have become more difficult to manage."

Dean says the manufacturer has no intention of getting rid of a valuable system like SAP, but its limitations make it difficult to extract the customized reporting information that Terra needs for forecasting. "We did have some reports that were written for us here to SAP, but it takes a full-time staff  to customize reports, and we were utilizing a lot of spreadsheets. Of course, a lot of that information had to be extracted and hardloaded into those spreadsheets. So there was a lot of possibilities for errors and time consumption."

The difficulty in forecasting produced a side effect that could not have pleased management: the SAP system was under-utilized.

"Our sales force didn't use it to the degree that management was looking for," says Dean. Something more user-friendly was needed. "We were getting a budget number out of the old system. We weren't getting what I call a 'rolling forecast' as the market shifted and changed and requirements were being shifted."

In addition, there was no central location where all sales reports and problems could be "quantitatively" accessed.

Its search for an improved reporting system led Terra not just to vendors but to users as well, Dean says. "It seemed that [the Zemeter] system of extraction and customizing information fit with what we're were looking for going forward."

Supply Chain Consultants, the developer of Zemeter, got involved with Terra in early 2007. Chief of Operations Subit Singh says it was easy to see that the complexity complicating Terra's life was demand-driven. Unfortunately for Terra, some of its systems clearly had been developed when demand was not as strong.

"The old process was totally manual-oriented, whereas what we tried to do with the new process was an 80-20 split, where 80 percent was software-math-driven techniques-and the remaining 20 percent was manually oriented on an exception basis-you know, to provide intelligent input into any changes that might be happening in the market."

Singh says the old system was cumbersome, and that was counterproductive. "There was a feeling that the data, even though always available, wasn't able to be used as information by people. If someone wanted to, you could go into the system to get the data, but not many were doing it because it wasn't easy.

"You had the feeling that decisions were almost being made on gut feeling and anecdotes and not necessarily on the latest information.

"One of the changes that we tried to make was to bring in a simpler system providing all that data in a format that was no longer just data but usable information."

A major task for Terra Industries planners is to figure out how to best distribute the natural gas that each plant needs, based on a facility's projected production. Accuracy in those forecasts is vital in determining just how much gas to move into any one plant at a given time.

That's on the front end. Better management of freight costs is just as important on the back end, when the product is being distributed.

Terra uses both a private fleet of trucks and rail cars of its own and those of outside providers. Because it also has a plant in Trinidad, Terra's transportation management has a marine element. Dean refers to Terra's transportation spend as "enormous," and part of that stems from the product line's high water content, which is heavy-and costly-to move. "Our product is very heavy, so freight is upwards of about 25 percent of the cost of our product."

Singh says Terra sounded out SCC about its logistics needs as well. "I will tell you that as soon as we were done with the demand part, a request was made to to try to tie together some of the logistics footprint," Singh says. "And what I mean by that was, different plants still need to move materials between these locations based on the current demand forecast. And as soon as they saw the data and how easy it is to use, they figured if the same data was made available to logistics planners, they could make better, more informed decisions on how to move those materials."

Seasonality greatly affects chemical companies' production as well, and Terra is no different. Certain industrial demand runs from May to September, driven largely by high electricity needs. Terra's extensive agricultural business is impacted mostly during the heavy planting season. Anything produced the rest of the year is stored. Overall, seasonality compels Terra to have a highly fluid and adaptable distribution system.

Supply chain improvement is a multi-phase project, Singh says. There are several steps to revamping a supply chain, and the first deals with the demand side. Both Singh and Dean feel that part has been successful, though Dean says it isn't easy to quantify the benefits Terra has received from the partnership.

He acknowledges that Zemeter has reduced the time spent on inputting data and analysis. Further, with more accurate sales forecasting, Terra is able to better manage its freight costs. Putting a number to those things, however, is difficult.

"Our business activity has been shifting so much, specifically in the last 12 months, it's to the point that any stake in the ground that I started with in January, I've had to move," he says. "It's difficult to put a metric on that other than to say that we have had some significant margin improvements."

So what's next? Supply Chain Consultants is ready to work with Terra on the supply side. As for Dean, he says the company is still manually providing quarterly updates on volume and pricing projections to its financial group. "We want to automate that process, to give them the raw data that they need to extrapolate rolling margins going forward."

Most of us would probably say no if someone asked if you can have too much business. However, more than likely we would have to say, yes, that booming growth in demand generally brings supply chain complexities. And because those supply chain growing pains cost us money, we absolutely should act to ease them.

Terra Industries, Sioux City, Iowa, found itself in precisely that position. Terra, which makes and distributes several nitrogen-based products for agricultural and industrial markets, has seen its sales soar in recent years, according to Kevin Dean, director of supply planning. That growth has impacted operations at the company's five production facilities in the United States and at a sixth one in Trinidad & Tobago, and it has added significantly to Terra's transportation costs as well. The old way of managing the supply chain just wasn't sufficient for the growth in demand that the chemical manufacturer was experiencing.

In a nutshell, as the complexity of Terra's business increased with the acquisition of new manufacturing plants, it found that its SAP enterprise resource planning system didn't have the punch required, especially for analyzing financial and sales data.

Then there were great concerns over the primary raw material used by Terra, natural gas. The company estimates it spends about $1bn a year on natural gas alone, and with the vastly fluctuating prices of gas, the company needed a more efficient way to manage its natural resources spend.

Terra has the capacity to produce about 4.8 million tons of anhydrous ammonia each year. Much of this ammonia is upgraded into other nitrogen-based products, including urea ammonium nitrate solutions, ammonium nitrate and urea. These products are then used as fertilizers or in a number of industrial applications, such as pharmaceuticals, heat treatment, phosphates, fermentation, explosives, dyes and man-made fibers.

In addition to the deficiencies in the ERP backbone, the production group at Terra had another problem: It was using multiple systems to gather and crunch the numbers, and for forecasting and planning.

A single solution was desired, something that would tie Terra's demand planning, production and importing all together. The manufacturer also needed something more reliable than the Excel spreadsheets used in its manufacturing plants. Spreadsheet errors bedevil businesses, no matter the industry, and Terra wrestled with them, too. In addition, management wanted a single set of numbers that could be used by every department.

Part of the problem was the sheer volume of data generated. Dean says a lot of data came to the planning group either verbally or in e-mails. Of course, manual input was the norm, so there was always the risk that data would be corrupted or lost if changes were made to the forecasting model when information was being extracted.

"From a planning and analysis standpoint, we needed to implement a forecasting system that was more user-friendly than our previous solution, and that could easily provide us with historical information. Zemeter provides us with a forecasting solution that enables us to run statistical and causal analysis scenarios, ultimately helping us to maximize our product margins and enable our facilities to produce the right mix of products to maximize the company's bottom line."

A snapshot of the demand on Terra shows that sales are booming in all segments, not least of which is agriculture. "We're following on the shirttails of the ethanol boom, Dean says. "We provide the nitrogen that grows the corn-that's how we're tied to the ethanol business."

In fact, business is so good that demand exceeds Terra's production capability, Dean says. "What we're having to do now with certain contracts is try to maximize margin possibilities, and that's where the complexities within Terra have become more difficult to manage."

Dean says the manufacturer has no intention of getting rid of a valuable system like SAP, but its limitations make it difficult to extract the customized reporting information that Terra needs for forecasting. "We did have some reports that were written for us here to SAP, but it takes a full-time staff  to customize reports, and we were utilizing a lot of spreadsheets. Of course, a lot of that information had to be extracted and hardloaded into those spreadsheets. So there was a lot of possibilities for errors and time consumption."

The difficulty in forecasting produced a side effect that could not have pleased management: the SAP system was under-utilized.

"Our sales force didn't use it to the degree that management was looking for," says Dean. Something more user-friendly was needed. "We were getting a budget number out of the old system. We weren't getting what I call a 'rolling forecast' as the market shifted and changed and requirements were being shifted."

In addition, there was no central location where all sales reports and problems could be "quantitatively" accessed.

Its search for an improved reporting system led Terra not just to vendors but to users as well, Dean says. "It seemed that [the Zemeter] system of extraction and customizing information fit with what we're were looking for going forward."

Supply Chain Consultants, the developer of Zemeter, got involved with Terra in early 2007. Chief of Operations Subit Singh says it was easy to see that the complexity complicating Terra's life was demand-driven. Unfortunately for Terra, some of its systems clearly had been developed when demand was not as strong.

"The old process was totally manual-oriented, whereas what we tried to do with the new process was an 80-20 split, where 80 percent was software-math-driven techniques-and the remaining 20 percent was manually oriented on an exception basis-you know, to provide intelligent input into any changes that might be happening in the market."

Singh says the old system was cumbersome, and that was counterproductive. "There was a feeling that the data, even though always available, wasn't able to be used as information by people. If someone wanted to, you could go into the system to get the data, but not many were doing it because it wasn't easy.

"You had the feeling that decisions were almost being made on gut feeling and anecdotes and not necessarily on the latest information.

"One of the changes that we tried to make was to bring in a simpler system providing all that data in a format that was no longer just data but usable information."

A major task for Terra Industries planners is to figure out how to best distribute the natural gas that each plant needs, based on a facility's projected production. Accuracy in those forecasts is vital in determining just how much gas to move into any one plant at a given time.

That's on the front end. Better management of freight costs is just as important on the back end, when the product is being distributed.

Terra uses both a private fleet of trucks and rail cars of its own and those of outside providers. Because it also has a plant in Trinidad, Terra's transportation management has a marine element. Dean refers to Terra's transportation spend as "enormous," and part of that stems from the product line's high water content, which is heavy-and costly-to move. "Our product is very heavy, so freight is upwards of about 25 percent of the cost of our product."

Singh says Terra sounded out SCC about its logistics needs as well. "I will tell you that as soon as we were done with the demand part, a request was made to to try to tie together some of the logistics footprint," Singh says. "And what I mean by that was, different plants still need to move materials between these locations based on the current demand forecast. And as soon as they saw the data and how easy it is to use, they figured if the same data was made available to logistics planners, they could make better, more informed decisions on how to move those materials."

Seasonality greatly affects chemical companies' production as well, and Terra is no different. Certain industrial demand runs from May to September, driven largely by high electricity needs. Terra's extensive agricultural business is impacted mostly during the heavy planting season. Anything produced the rest of the year is stored. Overall, seasonality compels Terra to have a highly fluid and adaptable distribution system.

Supply chain improvement is a multi-phase project, Singh says. There are several steps to revamping a supply chain, and the first deals with the demand side. Both Singh and Dean feel that part has been successful, though Dean says it isn't easy to quantify the benefits Terra has received from the partnership.

He acknowledges that Zemeter has reduced the time spent on inputting data and analysis. Further, with more accurate sales forecasting, Terra is able to better manage its freight costs. Putting a number to those things, however, is difficult.

"Our business activity has been shifting so much, specifically in the last 12 months, it's to the point that any stake in the ground that I started with in January, I've had to move," he says. "It's difficult to put a metric on that other than to say that we have had some significant margin improvements."

So what's next? Supply Chain Consultants is ready to work with Terra on the supply side. As for Dean, he says the company is still manually providing quarterly updates on volume and pricing projections to its financial group. "We want to automate that process, to give them the raw data that they need to extrapolate rolling margins going forward."