How to manage profits with growth opportunities
“Global economic growth is lifting more people into the middle class in developing countries, and higher incomes mean sharply rising demand for consumer goods and services.”
This statement from a recent International Energy Agency (IEA) report is good news for the petrochemicals market, forecasting 25% growth for this oil and gas sector. However, does growth mean increased profits? If capacity, product mix, inventory costs, and numerous other factors are not aligned, the answer is…not necessarily.
One solution to ensuring profitability is a companion to growth by expanding the technology stack to include prescriptive analytics. More specifically, prescriptive insights that are taken from optimization runs rather than from the output of rules-based or heuristics-based runs. This form of advanced analytics is known for its ability to model infinite complex factors (constraints, variables, objectives — across operations, finance, strategy, and more) and distilling into an easy-to-navigate treasure map of sorts. With the added ability to optimize outcomes to multiple objectives, companies can ensure that profits, at a minimum, are maintained. At best, profits increase with opportunity. Insights like these are especially valuable in today’s state, where rapid growth very often puts profit at risk.
How else can prescriptive analytics advance the petrochemicals sector?
- Prescriptive analytics can help petrochemical companies:
- Optimize staff scheduling for efficiency. As covered in a previous post, the oil and gas industry, like others, is challenged by a skilled labor shortage. Prescriptive analytics can help with allocation, identifying the most efficient shifts at one location or across several facilities within a region. Alternatively, it can answer questions like how to balance maintenance upgrades with a reduced workforce.
- Reduce inventory costs and optimal positions. As product mixes fluctuate, it answers questions on what positions the company should take and with which types of feedstocks.
- Manage logistics to drive profits. Are there alternate routes/transportation methods that increase profits with production at another location further away, despite seemingly counterintuitive, higher transportation/logistics costs?
- Maximize profit-boosting opportunities by balancing tradeoffs between things like capacity and product mix. Are the right demands increasing profits overall?
Note: although prescriptive insights can be focused on simply optimizing a single business function, the end goal should always be to leverage ‘what-if’ analyses across an entire business or enterprise. This provides an accurate “big picture” view of how decisions within one function of the business impact other areas of the business, thus helping companies paint a true picture of profitability and align tactical and operational decisions with corporate goals.
Capital Investments and Unexpected Challenges
As the global product mix transitions with demand, particularly in the U.S. and China, products like personal care items, food preservatives, and furnishings are projected to outpace transportation fuels. However, it’s this sector’s shapeshifting that has capital investments in a quandary with all the possibilities that the future holds. How can enterprises gain more certainty around investments that impact markets in the years, if not decades, ahead? One way that analytics provides insights to answer a question like this is by integrating an economic model with the company's current portfolio of assets.
External events ranging from truck driver shortages to NAFTA deal points will make the flexibility of prescriptive analytics crucial for ongoing insights.
It may be difficult to believe that a technology platform can preview financial outcomes for the future. However, the oil and gas companies that are using optimized analytics today are the ones that are successful and quietly maneuvering growth opportunities, making sure that profits grow, too.