ANNUAL REPORT 2011

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Clariant Exellence

Clariant Exellence

Continuous improvement coupled with cultural change characterizes the Clariant Excellence (CLNX) initiative launched in 2009. Based on the well-known LeanSigma approach, this holistic method involves all Business Units and is primarily designed to improve competitiveness by increasing efficiency and generating added value for Clariant customers. After just three years, Clariant Excellence has already become a successful model, and its implementation across all departments and functions has produced significant results. For example, by the end of 2011, more than CHF 140 million in financial benefits had been achieved through more than 1 900 CLNX projects. The objective is to continue to expand this success story in the years to come.

As a holistic initiative, Clariant Excellence changes and improves the business culture and internal procedures for the long term in an ever-changing complex world and thus brings about regular annual benefits. CLNX is a combination of basic system approaches tailored to specific areas and LeanSigma, a method for improving individual business processes. The LeanSigma approach was conceived at the beginning of the 21st century and combines Six Sigma and Lean Management. Six Sigma was developed in the late 1980s and is established worldwide as a method for increasing efficiency and managing quality based on the core elements of description, measurement, analysis, improvement, and monitoring of business processes using statistical methods. Lean Management helps develop principles, methods, and procedures for efficiently structuring the entire industrial product value chain.

Clariant Excellence is based on four pillars: Operational Excellence, Commercial Excellence, People Excellence, and Innovation Excellence. Since the beginning of 2009, a total of more than 1 900 CLNX projects have been launched, including around 500 in 2011. Improvements worth more than CHF 160 million have been realized through these projects. The goal is to bring about further improvements totaling CHF 60 million per year in 2012 and subsequent years through the Clariant Excellence initiative. After all four pillars have been introduced in the form of individual improvement initiatives, the defined objective is to achieve even more efficient value creation for the Clariant Group and its customers by networking the four areas of excellence with one another.

More than 3 000 employees are already directly involved in Clariant Excellence

Clariant Excellence is being implemented by specially trained staff. The concept is based on defined roles modeled on rank designations in the form of “belt colors” – as used in Asian martial arts. Within three years,more than 3 000 of all Clariant employees have been specifically trained as “belts”, i.e. project managers or project staff, for tasks in connection with the Excellence Program, and entrusted with its implementation within the Group. Süd-Chemie employees will also be included in this process from 2012. Regular surveys are carried out in order to monitor the successes and to identify potential improvements while introducing CLNX.

The four pillars of Clariant Excellence

Operational Excellence focus on efficiency and productivity

In 2009 and 2010 the emphasis of Clariant Excellence was on Operational Excellence and Commercial Excellence, and in 2011 attention was turned to Innovation Excellence and People Excellence. In 2010 the Clariant Production System (CPS) initiative was introduced as part of Operational Excellence, which focuses on efficiency improvements in all operating processes. The goal of the CPS program is to achieve optimum productivity and financial performance in the production units of all Business Units. Once the foundation had been laid in 2010 by introducing CPS at pilot locations, the focus in 2011 was on company-wide implementation. This will also be the main objective in 2012. The goal is to increase productivity by 3 – 5 percent per year by standardizing and continually improving processes.

Clariant also launched the Clariant Supply Chain System (CSS) initiative in early 2011. Under the initiative, the entire value chain from suppliers to customers is analyzed and scrutinized for optimization potential. This will result in further improvements in net working capital, cash management, and service quality. CSS plays a crucial role in meeting Group-wide targets. For Clariant Supply Chain Systems, the specific targets are: improvement in the punctuality of deliveries to significantly above 90 percent, reduction in the ratio of net working capital to sales to less than 20 percent, and a 10 to 15 percent reduction in supply chain-related costs. As part of Operational Excellence, Clariant will use CSS to develop a “best in class” supply chain.

Commercial Excellence – focus on sales and marketing

The kick-off for Clariant Commercial Excellence took place in 2010. Implementation of the Clariant Commercial System (CCS) laid important foundations within the Group for optimizing sales and marketing processes. This will allow Clariant to offer its customers the best service and the most attractive price-performance ratio in the future. In this context, Clariant launched initial basic modules in the Business Units focusing on improving margins and operational efficiency, among other aims. In 2011 the CCS team concentrated primarily on the area of transactional pricing. By 2013 the focus will switch to customer and sales management, and value-oriented pricing and sales volume. These efforts will be closely networked with the other Clariant Excellence pillars – for example, through intensified innovation management via Innovation Excellence. The three modules will place Clariant in a position to structure an integrated price adjustment process, improve the sales team’s effectiveness and focus more strongly on customer needs.

Innovation Excellence – focus on growth through innovations

A further strategic focus for 2011 was Innovation Excellence, with the objective of establishing Clariant as a global innovation leader in the area of specialty chemicals in the coming years. The focus is on developing new products and services, finding and establishing new applications for existing products. Clariant will concentrate its research and development activities on future global megatrends such as environmental protection, raw material and energy efficiency or alternative energies as well as food availability. Sustainability is an important part of Group strategy, with the focus on technologies for instance for the development of products based on renewable raw materials. At the same time, Clariant will work intensively on resource-conserving processes.

Innovation Excellence, which was officially launched in July 2011, will be introduced in a multi-stage process:

Definition of an innovation strategy: the entire organization will be informed as to the strategic goals and the core areas that will be emphasized.
Establishment of innovation processes: with a focus on process management and guaranteeing efficient development of advancements that fit the innovation strategy.
Creation of an innovation culture: raising awareness among all employees about the need to look beyond the current product portfolio and to focus on continuous development of sales potential through development and promotion of new product ideas and technologies.
Training of relevant staff: systematic training and empowering of employees to recognize the needs of rapidly changing market environments, and to implement the necessary processes of improvement through innovation.

The implementation process across all Business Units is slated to begin in 2012. Once the four stages have been successfully implemented, Clariant will be able to advance the process of profitable growth by 1 – 2 percentage points per year – solely through Innovation Excellence. Clariant has also introduced the new “idea to market” concept throughout the Group; it is designed to discover, develop, implement, and commercialize innovation ideas within the shortest possible time frame.

In organizational terms, the realignment of R&D and the innovation chain in 2010 has already laid important foundations for leveraging considerable additional synergy potential while also increasing efficiency. Further information on this topic can also be found in the separate section of this Annual Report entitled “Innovation and Research & Development.”

People Excellence – focus on continuing development of all employees

The introduction of People Excellence will increasingly become the new focus of Clariant Excellence after 2011. A basic requirement for making Clariant a global leader in specialty chemicals is to be able to rely on a well trained and motivated team of employees. Clariant is therefore building on a strong organization that is oriented to the core elements of strategy, structures and processes, as well as values and conduct. The company dedicated itself to the first two elements primarily in 2009 and 2010. One of the first implementation steps of People Excellence was to define new corporate values consisting of six basic principles:

Drive for Excellence
Disciplined Performance Management
Deliver to Promise
Courageous and decisive leadership
Lived appreciation
Corporate Responsibility

Sustainable value creation within the entire Clariant Group is not possible unless these values are implemented in everyday operations.

Everyone must uphold corporate values

The corporate values have been supported in all Business Units of the Clariant Group since mid-2011 through regional workshops and executive training programs. The background and consequences for daily operations and the specific distinguishing characteristics of certain regions and activities are integrated into the process and developed further. A People Performance Cycle will be introduced in 2012. It will consist of systematic performance and talent management and application of a 360 degree feedback process leading to qualification and permanent development monitoring of all regional and local managers. The pilot phase for the new Local Leadership Training program was launched in October in Frankfurt; between November and the end of 2012, it will be expanded to cover the entire Group.

Summary and Outlook

The results of Clariant Excellence after three years are as follows:

We have succeeded in improving Clariant’s performance sustainably; this is reflected in the improvements already achieved, which represent financial benefits of more than CHF 160 million.
Clariant has created a solid platform for additional significant improvements by implementing a large number of projects and launching further initiatives.
Clariant has redefined its corporate philosophy and reestablished employee focus on sustainable value creation.
By doing so, Clariant has changed the way and culture of working in the Group.

All Business Units and Services are wholeheartedly committed to establish and expand the four pillars of Clariant Excellence and LeanSigma in their local and regional organizations. Based on the processes already launched and the upcoming initiatives, Clariant firmly believes that it can achieve additional sustainable improvements totaling more than CHF 60 million per year. This number is backed up by the following targets: productivity in the Clariant Group as well as the operationg margin relative to EBIT will be increased significantly through the disciplined implementation of Clariant Production System as well as through the Clariant Commercial System. In addition, net working capital, service quality and supply chain costs will be significantly improved by implementing and applying the Clariant Supply Chain System.

“The initiative Clariant Excellence brings about a cultural change at Clariant.”

Interview with Bernd Högemann and Michael Riedel.

why does Clariant need an excellence initiative?

Michael Riedel: Clariant Excellence is a key building block for implementing our Group-wide strategy concept for generating sustainable profitable growth. The initiative brings about a cultural change at Clariant. It puts us in a position to be able to respond flexibly to the dynamic changes in the globalized world. This helps us improve our competitiveness and generate added value for our customers.

What has actually changed at Clariant since 2009?

Michael Riedel: We have successfully established the Clariant Excellence approach in the minds and conduct of our employees through more than 1 900 projects to date. More than 3 000 staff members have been trained as “belts”, who then manage or help implement the projects.

And what has this produced in concrete terms?

Michael Riedel: The improvements are quite impressive. In just three years, the financial benefits attributed directly and indirectly to Clariant Excellence projects totaled more than CHF 160 million. And this is by no means the end of our initiative.

What are your plans for the next few years?

Bernd Högemann: In the future we want to achieve additional average improvements of CHF 60 million per year through projects already introduced and projects still to be launched. And this does not even include the additional potential that we want to achieve by consequently implementing Clariant Excellence at Süd-Chemie as of 2012.

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Master Black Belt

In addition to the yellow, green, and black belts, there are currently also 10 individuals called “master black belts” who are driving the execution of LeanSigma projects in their respective regions. Sunil Joshi, Master Black Belt in the Asia/Pacific region, describes his job as follows: “As master black belts, we primarily support our black and green belts in executing their improvement projects which is quite a challenge considering the size of the territory as well as the wide variety of different cultures. A key task for the MBB’s is to identify and drive the implementation of Best Practices across the world. It is important to utilize Asia’s potential for Clariant as efficiently as possible and to have the right products available locally at the right time and in the highest quality for our customers’ benefit. All employees in my region must be made aware of this objective and be trained accordingly to achieve sustainable improvements.”

Percentages of employees trained for Clariant Excellence

Examples of excellence

Example of Operational Excellence: The first successes at Latin American plants after just a short time

The Clariant Production System (CPS) was introduced in Latin America in June 2010 at the Masterbatches plant in Cota, Colombia. This was followed in January 2011 at the Business Unit’s Brazilian sites. The first step in implementation of CPS is a detailed analysis. Bernd Hirschberg, Head of CPS for chemical sites, describes this process as follows: “The roll-out of CPS at every site follows a standardized process. First we analyze all areas and identify together with the employees the opportunities for productivity improvements. These ideas are then worked out in detail and implemented under the direction of local management and with the support of the CPS team.” For the Brazilian site in Suzano, for example, this means standardizing processes. In concrete terms, this is manifested in a significant reduction in maintenance costs and increases in productivity. “The decisive success factor is that people experience the improvements and that they take ownership for the continuous improvement of any implemented solution,” says Chris Hansen, Head of CPS for Masterbatches.

Example of Commercial Excellence: What does transactional pricing involve?

Transactional pricing is simply the basic module for Clariant Commercial Excellence. It involves, first of all, definition of customer groups, price-performance management, and a link-up with the pricing mechanisms already used in the operating areas. Specifically this means that internal price guidelines must be defined for each group of similar customers and previous prices adjusted accordingly. A second objective is to pass on raw material price changes to the customers. This requires raw material price planning that in turn defines future sales prices. And finally, other cost outflows must be reviewed and analyzed from a cost avoidance perspective. Price adjustment processes and tools that are clearly defined and include deadlines are then developed on this basis. They are supported by key performance targets as part of a separate performance management process, and these targets are also reviewed regularly. The process of transactional pricing is rounded out by regular training sessions for sales personnel where negotiating strategy is practiced, thus fixing the Clariant Commercial Excellence philosophy firmly in the minds of the staff.

“All team leaders will complete the leadership training.”

Interview with Klementina Pejic, Head of Senior Management Development

Who will go through leadership training?

Klementina Pejic: All team leaders will complete the leadership training to increase proficiency in daily people management and to coach the organization for high performance. The regional and local leadership trainings will deepen the reflection of what Clariant’s new corporate values will require of Clariant leaders. This initiative is the key milestone to achieve People Excellence in Clariant.

How was the roll-out organized?

Klementina Pejic: BU and Functional senior managers from all regions have participated with much passion and enthusiasm in different pilot training programs and have supported the core team to elaborate the final training content. We started the roll-out on regional level in May 2011 and on Country level in October 2011. We aim to implement the trainings throughout the entire Clariant organization in 2012. The leadership trainings will be an ongoing curriculum on Clariant’s training landscape.

What are the next steps in introducing People Excellence?

Klementina Pejic: We laid the foundations by defining, communicating and training all employees on Clariant’s new corporate values. We explained and trained the application of corporate values in our leadership trainings. To ensure that our people live our corporate values in their daily work and interaction with their colleagues we have introduced the 360 degrees feedback for our senior executives. All managers at the top four management levels will get general feedback from their superiors, their colleagues and their teams on how they live corporate values. In addition, the evaluation of corporate values will be part of our annual performance dialogues throughout the organization.

What is the 360 degree feedback about?

Klementina Pejic: A 360 degree feedback provides each Management Level 1 – 4 position holder the opportunity to receive feedback from his or her supervisor, peers and subordinates. The focus-person does also a self-assessment. The 360 degree feedback allows each individual to understand how they are perceived living up to the Clariant Corporate Values and in particular to understand their strengths as well as potential development areas. We aim to encourage our people to openly and constructively share their observations and to support each other in personal development and growth through sincere feedback as well as recommendations for improvement. After all, living our values will help us to create and sustain a high performing organization.