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To Get An Edge With A Commodity Product, Fertilizer Giant CF Industries Relies On Distribution

How do you gain a competitive advantage with a commodity product? For CF Industries, it’s in how they’ve designed their entire supply chain.

CF produces nitrogen fertilizers for big agriculture. They started off as a farmers’ cooperative in 1946, to supply chemical fertilizers to member farmers. They first got into manufacturing in 1954, and over the years they’ve gotten very good at it. (They also got into potash production four years later, but exited that business in 2000.) They went public in 2005, and now have nine manufacturing plants (five in the U.S., two in the U.K., and two in Canada) and 24 distribution facilities, all in the American heartland. Retail agricultural sellers are their customers. Today they produce about 13 million tons of liquid and granulated fertilizers each year.

For manufacturing, in which nitrogen is extracted from natural gas to form the basis of the fertilizers, the key is keeping the plants running, 24 hours a day, every day. “Starting these plants up and shutting them down is very costly and very dangerous – that’s why we run them all the time,” said Tom Grooms, CF’s Chief Information Officer. This means they’ve become specialists in production system design, planning and scheduling, and most important of all, predictive and preventive maintenance.

But important as all that is, and as good as they’ve become at it, it isn’t what sets them apart from their competitors. “Our distribution model is our competitive advantage,” said Grooms. The key is to have what the farmers need, when and where they need it. For example, Grooms referred to harvest time: “There may be a window afterward to apply [fertilizer]. If a bushel of corn is expected to get a higher price next year, or if a barrel of oil (which is correlated to corn prices) is forecast to be up, then there’s a big incentive to apply.

“Weather drives the harvest schedule,” he said. “So we could have different places needing fertilizer at different times, or it could come all at once.” These market conditions drive CF decisions on where to sell – not just across the U.S., but also whether to sell domestically or to export. The company has a fast-growing production plant and shipping terminal facility in Donaldsonville, Louisiana, that allows them to export product worldwide, particularly to South American and Asian markets.

“We have a lot of options our competitors don’t,” said Grooms. “We’re capable of storing product strategically along major rivers, roads, and rail lines. We may lease storage capacity in a specific market so we can have product available when and where it’s needed. Or we may put one, two, three barges on a river headed toward Ohio if we expect a demand spike there.”

The company leases rail cars, they own and lease barges, and they leverage trucking as well. The trick is to optimize their distribution network. They look at the overall cost of delivery per ton per mile and employ the most efficient means available. “We built expertise in logistics to gain advantage over our competitors in commodity distribution,” said Grooms. “Coupled with our low-cost and safe plants, that’s a huge advantage.”

Having used natural gas as their primary resource for over 70 years, they’ve also become experts at its procurement. This means they have cost advantages from one end of their supply chain to the other. “Macroeconomics drives our business,” Grooms said.

Increasingly, this also calls for the latest and greatest in enterprise resource planning (ERP) software tools. They’ve had some growing pains here. “Originally we didn’t want to change our business processes, and that drove ERP customization,” said Grooms. “But those weren’t best practices. We’ve learned to put the focus on our data instead of customizing. Now we’re trying to resist the temptation to customize. We’ll still have a few areas of customization, but we’ll be very selective.”

CF has partnered with SAP and is now moving to their Cloud ERP platform. Grooms explained, “The standardized platform will give us better real-time data, and will allow rapid integration of new [business] acquisitions.”

Looking forward, the company sees potential new advantages in predictive analytics. This is another advantage of their partnership with SAP, which offers a suite of tools encompassing automated data preparation and analysis, predictive modeling, and a graphical user interface. CF’s existing data sets can provide a basis for predicting future behaviors and outcomes to identify potential unforeseen opportunities and risks.

“At the end of the day, combining our data with state-of-the art technology is supercharging our distribution and logistics capabilities,” said Grooms. “We’re gaining new insights daily, so the prospects are bright that we’ll continue to stay ahead of the competition, the weather, and anything else that comes our way.”


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