Fill Up Your Plants
Why operating at or near full capacity is the key to long term innovation
Welcome to the January Product Development issue of The Polymerist. Over the past few months in 2021 I detailed the reasons why large chemical and materials companies want to do incremental innovation and why start-ups are trying to bring world changing technologies to the market. This year I want to try and focus on some ideas around making the process better for both larger companies and start-ups.
This issue and the next 5 of The Polymerist is sponsored by:
The business of making and selling chemicals either as commodities or specialties all come back to the concept of selling as much of your total theoretical production capacity as possible. Getting your manufacturing operations to capacity is also known as filling up your plants (plants = chemical plant = where you manufacture chemicals). There are two concepts of capacity: the first is reactor capacity and the second is staff capacity.
What Is Capacity?
Stay in the chemical industry long enough and the conversation almost always comes back to are your plants at capacity?
Reactor capacity means that the vessels your organization uses to transform things into your product are being used to make as much product as possible. Reactor capacity is primarily governed by volume, yields, and cycle time. If you fill a 100 gallon reactor with 100 gallons of reactant and then you get 90 gallons of product this is a 90% yield on the reactor. If you expected to get 90 gallons then it’s 100% of your theoretical yield.
If your theoretical yields are low in that if you ran your reaction to perfection 100% of the time every time then your reactor capacity is not being utilized very well. As in the best yield you could get is 50 gallons from 100 gallons of reactant. Anything that takes away from your output is in theory bad for profitability.
If it takes 20 hours to do the reaction then you can do in theory 6 production runs in a week with 1 day reserved for upkeep and maintenance. The real world isn’t this simple, but this would be an example of having that reactor capacity filled. Get the reaction time from 20 hours to 10 hours and you have nearly doubled your total capacity.
A 100 gallon reactor is small—it’s a pilot reactor used to scale up reactions from the lab at best, but it typically requires the same amount of operators that a 10,000 gallon reactor would use provided everything is automated. This is where the concept of economies of scale kick in from a supply chain perspective, but also from a labor perspective. The labor costs are reduced by 100x at the 10,000 gallon size in labor costs per gallon. The problem with a reaction taking almost a day to run is that you need a minimum of two 12 hour shifts or three 8 hour shifts of operators to load, watch, and run the reaction and if you are running 6 days a week that is a lot of people working both day and night shifts. In case you didn’t know there is a labor shortage.
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Why A Full Plant Can Enable More Innovation
Often, manufacturing operations have to make decisions based on their staffing ability and the reactor availability, which is also known as the art of scheduling. The ideal situation to be in is to have enough staffing and reactor capacity to be able to run near 100% capacity for both. Being near 100% capacity is a position of strength that can enable bigger innovations.
If we think of big Innovation as taking on a lot of risk for your product team it is because the act of doing big innovation takes a lot of time. There is more risk on invested capital not yielding a return and this is especially a big risk if your plants are not full. Being at capacity means your sales teams aren’t chasing new customers and your product team isn’t trying to tweak products to win new business in their traditional end markets.
The short term best use of the product’s team time is cost reduction either in shortening reaction times or raw material cost reduction. I suspect most chemists out there are working on this right now to combat raw material inflation. Having lower costs either enables higher margins or selling more at a lower cost to get capacity.
The long term best use of a product team’s time is to work on bigger Innovation that will create new business that is more profitable than the current business. Ideally, this new product will create a new category or re-define an old category. On a long enough timeline a specialty product gets commoditized due to competitors copying you and pricing their product lower, designing around your patent, or waiting for your patent to expire and then copying you outright. Once a product is commoditized (not necessarily a commodity) then the market gets into a “race to the bottom” scenario. An example of this would be something like the antioxidant Irganox 1010 from BASF (formerly Ciba).
In a commoditized market your sales and marketing teams need to be very good at their jobs because there isn’t much technical differentiation. If you are working at a chemical company now and you are annoyed at having to do cost reduction projects or copying someone else’s product, my advice to you is to get your plants filled up. A full plant with healthy margins (20%+) means there is time to work on cool new ideas. Ideally, you are the ones to cannibalize your own sales with a new more profitable product than your competitor.
It might take a technical team 3-5 years to develop that next great product the company will rely on to return money to shareholders and keep your fellow coworkers employed. It might take another 2-3 years for the engineering team to build out the new capacity for it and then it might take another few years for a sales team to sell out the capacity. It’s even better if this new product can be run on the current plant infrastructure (i.e. no CAPEX) and this can lead to price increases on existing products or letting go of the lower margin products.
All-in, this means 5-10 years to get that big innovative product off the ground and on the front page of trade magazines provided the company has a high performance cross-functional team capable of trusting and working together without a lot of churn. The technical group needs to trust that the sales and marketing group can sell the product once it's been developed. The sales and marketing group also needs to trust that the technical group can deliver on timelines and costs. Both groups need to trust their lawyers, regulatory compliance professionals, operations teams, and project managers to have a clear vision on the risks and communicate the value being created by the team.
Eventually, it all comes back to communication and having a plant at capacity.
Here is the quick guide:
Have enough good products that your manufacturing operations are at capacity
Use product team to develop better and category creating products at higher margins
Launch category creating or re-defining products to displace lower margin products
Repeat