Volume 4, Number 3, July 2006
This newsletter is published in cooperation with the ISM Chemical Group.  

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In This Issue ...
  • Chemical Industry News
    • Tapping European Markets: U.S.-based pharmaceutical companies are relying more on their competitors to help them launch new drugs in lucrative European markets. Read more.
    • Successful E-Waste Recovery: Directives such as waste electrical and electronic equipment (WEEE) and Restriction of Hazardous Substances (RoHS) have firmly placed the responsibility on electronic equipment manufacturers to adopt design concepts with end-of-life recycling in mind. Read more.
    • Chemical Security Plan: The Department of Homeland Security issues the first nationwide plan to secure chemical facilities and other critical infrastructure against terrorist attack. Read more.
  • Feature Article
    • In Search of Chemical Supply Chain Excellence: In its Supply Chain Best Practices Study, Accenture explores the relationship between technology utilization and supply chain performance. Read more.
  • Commodity Report: After a period of short supply and the effects of last year's hurricanes, the U.S. chlor-alkali market is correcting. However, upward pressures from various sectors and a strong hurricane season forecast may elevate prices in the second half of 2006. Read more.
  • Announcements: Organizations are invited to apply via the ISM Web site for the second annual R. Gene Richter Awards. Read more.
  • Additional Resources: Check out these links to additional resources on the ISM Web site. Read more.
  • Contact Us about ISM eDigest: Chemicals.

Chemical Industry News

Tapping European Markets

Co-Promotion Deals Pave Way Into European Markets

U.S.-based pharmaceutical companies are relying more on their competitors to help them launch new drugs in lucrative European markets, this according to Cutting Edge Information, a leading pharmaceutical business intelligence firm.

In its report, "European Pharmaceutical Marketing: Launching Successful Brands," U.S.-based drug makers are finding commercial success with product co-promotion agreements, a quick and efficient way to promote new drugs in markets where companies do not have the necessary sales and marketing infrastructures to promote their brands. In a typical co-promotion deal, a drug company with a strong commercial presence in Europe will agree to promote a U.S.-based firm's drug in exchange for a portion of the drug's European sales.

Co-promotion agreements are a particularly effective commercialization strategy for mid-sized and smaller drug companies because they enable these companies to penetrate key markets in Europe without needing to build their own sales and marketing organizational infrastructures.

For more information about the report "European Pharmaceutical Marketing: Launching Successful Brands," visit the Cutting Edge Information Web site.

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Successful E-Waste Recovery

Recycling Directives Critical in Successful E-Waste Recovery

The emerging area of electronic waste (e-waste) recovery is attracting increasing attention as governments of several developed countries issue directives to address the environmental hazards posed by existing methods to dispose of waste electrical and electronic equipment (WEEE).

Conventional methods, such as disposal in landfills and incineration, are both potentially damaging to the environment due to the leaching and emission of certain toxic substances. Hari Ramamoorthy, a research analyst for Technical Insights, says Japan and some European nations have been forerunners in the recycling of e-waste. "Very soon, recycling directives for e-waste will be prevalent in many major countries and the various technologies developed for this purpose will be adapted globally," she says.

The increasing emphasis on e-waste recovery is forcing electronics equipment manufacturers to take greater responsibility for designing products that facilitate effective recycling. Given that they cater to global clients and have to comply with various directives in different countries, it is imperative for these manufacturers to develop successful product take-back programs as well as establish recycling operations or outsource them to major recyclers.

Essentially, manufacturers need to ensure the usage of appropriate technologies that can recycle large quantities of e-waste in a cost-effective manner. Because electronics recycling calls for the synchronized operation of different processes to achieve valuable material streams, the focus will increasingly shift to emerging technologies that are suitable for these processes.

Ramamoorthy says it is important for recyclers to anticipate the adaptations they might need to make to their processes in the next few years, as the incoming composition of e-waste is bound to change, as well as to develop secondary markets for the materials recovered. "Directives such as WEEE and Restriction of Hazardous Substances (RoHS) have firmly placed the responsibility on electronic equipment manufacturers to adopt design concepts with end-of-life recycling in mind," she adds.

For more information about e-waste recycling, visit the Frost & Sullivan Web site.

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Chemical Security Plan

U.S. Government Issues First Nationwide Chemical Security Plan

The U.S. Department of Homeland Security (DHS) announced the completion of the national Infrastructure Protection Plan (NIPP), a comprehensive risk management framework that clearly defines critical infrastructure protection roles and responsibilities for all levels of government, private industry, nongovernmental agencies and tribal partners.

Prompted by the September 2001 terrorist attacks, the infrastructure protection plan is designed to assess the threat against and vulnerability of 17 major industries, including chemicals manufacturing, reports ICIS, the chemicals industry's real-time newswire. It is also designed to assess the possible consequences of a terrorist attack against key national resources such as pipelines, rail traffic, the electric power grid and others.

While speaking at the Chemical Security Summit in June, Robert Stephan, assistant secretary for infrastructure protection at DHS, endorsed pending legislation in Congress that will give the department a broad enforcement policy for chemicals plant site security. He said a mandatory federal role is necessary because not all elements of the chemicals sector or other industries have responded adequately to the security threat and consequently represent "a serious security gap" in the nation's defense.

The NIPP will be followed by the end of this year, Stephan said, by industry-specific plans that will detail how the protection plan is to be implemented at operational levels in each of the 17 key industries.

For more information about the National Infrastructure Protection Plan, visit the Department of Homeland Security Web site.

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Feature Article

In Search of Chemical Supply Chain Excellence

It has been well documented that improving your supply chain performance can deliver significant benefits to shareholders. The biggest challenge expressed by chemicals executives time and time again is the steps they need to take to achieve that performance, where to invest and how to measure results.

Earlier this year, Accenture completed the largest review of supply chain best practices ever conducted in the chemicals industry — Accenture Supply Chain Best Practices Study. This was a study developed by the chemicals industry for the chemicals industry. The findings are based on information collected from more than 250 business units across North America, Europe and Asia-Pacific.

Accenture also recruited executives from 10 leading companies to form a steering committee charged with overseeing the study. Those companies include Air Liquide, BASF, Bayer, Dow, DuPont, Huntsman, Lyondell, Shell Chemicals, Sumitomo and TOTAL Petrochemicals.

Technology Underutilization is a Major Barrier to Supply Chain Improvement

The topline finding shows technology underutilization is a major barrier to supply chain improvement. Less than 30 percent say their technology is fully utilized. Less than 10 percent feel technology performs at an excellent level. The area of technology along with several others demonstrate that chemical company supply chains, while unquestionably valuable to a company's performance, are far from achieving best practice status.

Some of the additional key findings go a long way to supporting how having technology and using technology can be better matched.

1) Supply chain hiring and training practices do not coincide with the importance placed on function.

It's rare for companies in the chemicals industry to place emphasis on the strategic hiring and training of supply chain professionals. An alarming 78 percent of respondents in the Accenture Supply Chain Best Practices Study who work in supply chain management report insufficient supply chain training.

What's more, chemicals companies seldom align compensation with supply chain performance, and hiring supply chain professionals is handled in an ad-hoc fashion. Chemicals companies would be better served by placing a higher emphasis on the hiring and training of supply chain professionals.

2) Though system interfaces with customers appear to be commonplace, rarely does the automation reduce the volume of orders that are high-touch.

Chemicals companies are racing to automate a range of important supply chain processes. Only one-third of respondents say they have fully integrated order management systems. Less than 1 percent achieved best practice by minimizing manual interventions to below 10 percent of orders. And 84 percent of order volume in the chemicals industry is still processed manually through a customer service representative.

Few automation efforts are yielding the results that characterize best practices. For example, in the chemicals industry, best practices in order management automation require order-entry technology to be fully integrated with enterprise resource planning (ERP) so that manual entry is not necessary, and exceptions requiring manual intervention represent less than 10 percent of orders.

3) Poor forecast accuracy creates an immediate disadvantage for supply chain management.

Without a solid ability to forecast demand, chemicals companies find themselves at a loss to make the critical strategic planning decisions that will help them achieve high performance.

  • The industry average range for forecast error rate is between 20 percent and 40 percent. By comparison, best practice is less than 10 percent.
  • It is encouraging that 60 percent of respondents use modeling tools linked to their data warehouse and ERP system.
  • Only 7 percent reported excellent performance and 14 percent reported fully utilizing the technology solution.

When it comes to demand planning, most industries find it challenging to attain high forecast accuracy. Particularly in forecasting, many chemicals companies have a long way to go before they make the most of their technology investments.

4) Supply chain has not yet won an official seat at the commercial optimization table.

Commercial optimization is one area where, even though a variety of best practices are identified and regularly evident, it is rare that a single business unit employs even half of all best practices listed.

  • 42 percent of business units involve multiple functional stakeholders in the review of customer segmentation and cost-to-serve data.
  • 27 percent of business units see the review process as solely a sales/marketing exercise that does not involve the supply chain function at all.
  • 36 percent review cost-to-serve information at least quarterly and 37 percent actually perform this review on a monthly basis.

More than half of the study respondents exhibited three or fewer best practices in this area, while no respondent's company demonstrated all seven. Our findings show that commercial optimization is an open frontier for supply chain advancement, with the greatest opportunity being a negotiated seat next to marketing at the customer management table.

5) Collaboration on both ends of the supply chain remains in the infancy stage.

The act of collaborating with other parties along the supply chain can streamline processes, improve demand forecasts, reduce inventory, generate significant savings in the cost of raw materials or logistics and boost revenues. Unfortunately, most study respondents are failing to leverage the potential for collaboration to the point of achieving best practice.

  • 26 percent of respondents provide shipment requirements with a 48-hour leadtime.
  • Less than 10 percent of total business units supply a short-term or long-term forecast or collaborate on joint efficiency opportunities or product handling/safety training.
  • Only 18 percent provide information to carriers in an electronic format, while 64 percent provide forecasts manually through discussions.
  • The majority of participants reported that less than 50 percent of customers are engaged in collaborative planning, including 52 percent of respondents that do not engage in collaborative demand planning at all.

Chemicals companies can take advantage of a range of opportunities to collaborate with suppliers, transportation providers, customers and others, as well as numerous possibilities for internal collaboration.

6) Audit and payment of freight bills frequently requires significant manual intervention.

A surprising finding was the relative inaccuracy of the freight audit and payment process. Three-quarters of the participants indicate that the number of freight invoices requiring manual intervention exceeds 12 percent for at least one mode.

Chemicals companies tend not to view the process of paying carriers and logistics service providers from a strategic perspective. But chemical distribution is complicated and, therefore, yields complicated contracts. This complexity drives many errors in reconciling and paying carriers leading to disputes and dissatisfaction for both parties.

What works: simplifying contracts and employing a reliable process to capture the data so that proper analysis can be performed. A strong audit and payment process will produce the critical data needed to manage many of the tradeoffs facing chemicals companies.

Supply Chain Technology Integration — Good, Not Great

Overall, the net effect of underutilized technology is a less integrated system. Based on experience we can conclude that integration is less common in the chemicals industry than in most other industries. More than 70 percent of respondents reported integrated systems for order management and commercial optimization. However, less than 10 percent of respondents felt their supporting technology performed at an excellent level for each and every functional area. Clearly, all the parts in the process — hiring, training, collaborating, automating, forecasting and the like — are not working together.

Even by the chemical industry's own admission, there's a long way to go.

By Christopher F. Lange, senior executive in the chemicals industry group for Accenture, Chicago. To contact the author, please send an e-mail to author@ism.ws.

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Commodity Report

Caustic Prices Falling but Upward Pressures Linger

After a period of short supply and the effects of last year's hurricanes, the U.S. chlor-alkali market is correcting. Prices have drifted below pre-hurricane levels and the spot market in the U.S. Gulf is around $300 per ton. In this market where producers and consumers agree to six-month prices, the second half of 2006 is being discussed and the expectation is that the settlement will be between $300 per ton and $320 per ton.

With the trend coming close to $300 per ton, producers will be reluctant to let prices fall to $200 per ton. The markets in China and Europe are tightening, but currently there is some relief in the United States. If the predicted strong hurricane season proves true in the U.S. Gulf, securing delivery on demand without contracted volumes could be difficult.

Uses of Sodium Hydroxide (Caustic Soda)

Caustic soda, the chemical sodium hydroxide, is an important inorganic chemical produced by the electrolysis of salt. World production of caustic soda is about 45 million tons per year and it is used in a variety of products and in a wide range of processes. The input components used to produce caustic soda are sodium chloride, sulfuric acid, hydrochloric acid and water. Energy is a major driver in the cost structure of caustic soda.

The following are industries that rely on caustic soda in their manufacturing processes:

  • Pulp and paper industry. The pulp and paper industry is clearly the largest consumer of caustic soda. It is used as a bleaching, sizing and Ph-process-control chemical.

  • Oil processing industry. The petroleum industry uses caustic to remove contaminants.

  • Textile industry. Caustic soda is also used in the chemical processing of cotton, including de-sizing, scouring, mercerization and for dying synthetic fibers, such as nylon and polyester.

  • Soaps and detergents industry. Caustic soda is the alkali material frequently used in the saponification or conversion of fat, tallow and vegetable oils in the soap manufacturing process. The largest use of caustic soda in detergents is in the manufacture of anionic surfactants.

  • Bleach manufacturing industry. Caustic soda is used to make bleach (sodium or calcium hypochlorite).

  • Petroleum products industry. Caustic soda is used in the exploration, production and processing of petroleum and natural gas. A major use of caustic soda is in the removal of objectionable acidic materials, such as H2S and mercaptans, from hydrocarbons and off-gases generated in processing.

  • Aluminum industry. The production of alumina from bauxite is a major end-use application for caustic soda. It is used to dissolve bauxite as a first step in the production of aluminum.

  • Bio-diesel production. Caustic is being used in the production of bio-diesel fuels. This is a rapidly growing new industry and it will eventually place a demand on caustic soda supply as the world seeks renewable sources of energy.

  • Chemical processing industry (CPI). Caustic soda is a basic feedstock for a wide range of downstream products in the chemical processing industry. It is used as an intermediate and as a reactant in processes that produce solvents, plastics, synthetic fabrics, adhesives, coatings, herbicides, dyes, inks, pharmaceuticals and many more industrial products. It is also used for the neutralization of acidic waste streams and scrubbing of acidic components from off-gases.

End-Product Pricing Impacts

With such a wide range of applications and a wide number of industries impacted, caustic soda is an important chemical to follow because of its impact on end-product pricing. The price volatility over the past 10 years has been quite significant, including price swings from $30 per ton to $500 per ton. Caustic soda pricing is closely linked to the outlook for chlorine. Its importance is not the demand for caustic in Asia, India or the growing low-cost-country chemical producers, but the influence it has on the trade in chlorine chemicals, notably ethylene dichloride (EDC), vinyl chloride monomer (VCM) and polyvinylchloride (PVC). The pricing methodology is one of an economic unit pricing.

The pricing is traditionally based on the economics of all of the components of the process. Caustic soda is co-produced with chlorine by electrolysis in the ratio of 1.1 tons of caustic soda for every 1.0 ton of chlorine. More than 95 percent of all chlor-alkali production is based on the electrolysis of brine using one of three types of technology. In Europe, typical of an industrialized region, about 60 percent of production is by the mercury cell, about 30 percent by the diaphragm cell and 10 percent by the newer membrane technology cell. Worldwide, membrane cell technology represents about 20 percent of production and nearly all new investment in chlor-alkali production.

There are some 520 major chlor-alkali producers worldwide with a nameplate capacity of about 50 million tons of caustic, of which one-third is produced by the United States and other producing regions such as the Middle East and Asia.

Caustic Outlook

With an upward trend in pricing, the global outlook for caustic is continuing pressure through the balance of 2006. It is likely that the slowdown in the housing market, the impact of increasing commercialization of bio-diesel and the demand impact on EDC, VCM and PVC will continue the market pressure. This commodity is one that has been on allocation in the past and all buyers should have some contractual provisions to protect their companies and ensure supply in times of allocation. It is interesting to note that caustic soda is subject to specific pricing by industry sector. It is essential to understand where your industry fits in the total demand and supply of this category.

Bill Michels is CEO and Linda Michelsis global operations director for ADR North America LLC, Ann Arbor, Michigan. To contact the authors or sources mentioned in this article, please send an e-mail to author@ism.ws.

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R. Gene Richter Awards Accepting Entries From Innovative Supply Management Departments

Organizations invited to apply via ISM Web site July 3 - September 29, 2006

While the inaugural R. Gene Richter Awards for Leadership and Innovation in Supply Management have been presented, the Institute for Supply Management™ (ISM) is announcing its call for entries for the second annual awards. ISM's Richter Awards are open to supply management departments of all sizes and geographic locations, both domestic and international. Entries should address big challenges for which new solutions have had wide organizational and/or supply chain impact.

ISM will accept entries through an online submission process from July 3 to September 29, 2006. Multiple entries are welcome in four award categories, including process, organization/structure, people and technology. Winners will be notified in January 2007, and award recipients will be publicly announced and honored at an awards dinner on Monday, May 7, 2007, at ISM's 92nd Annual International Supply Management Conference and Educational Exhibit in Las Vegas. Winners agree to present at ISM Conference sessions the Tuesday afternoon following the awards dinner.

Questions regarding the R. Gene Richter Awards for Leadership and Innovation in Supply Management can be directed to Scott Sturzl, C.P.M., at 800/888-6276, extension 3105 (or, for callers outside the United States, 480/752-6276, extension 3105), or by e-mail at richterawards@ism.ws.

For information on entry categories, applying for the 2007 awards or to download the 2006 Richter Award Winners Brochure, visit the ISM Web site.

ISM Introduces P-Strat: Supply Management Strategy Simulation

Now available through its Onsite and Virtual Education Programs, ISM introduces P-Strat: a multi-dimensional, classroom-based workshop that uses a computer simulation to facilitate the formulation and construction of a supply strategy. This unique computerized model enables users to develop and implement purchasing strategies in a real-time environment. Reinforce your team's skills in market intelligence, financial analysis, risk management and business case presentation. The ultimate goal is to apply leverage tools to improve your bottomline. Join other supply management professionals to discover learning at its best!

Here's what attendees are saying about P-Strat:

"P-Strat is very challenging and rewarding. It taught us to look at all facets of a business and develop a strategy to meet the overall goals that we set for our company."

"P-Strat brings key procurement and supply chain management principles to life and the real value they can add to the bottomline."

"This program was fun and engaged the participants, allowing us to try different supply management strategies."

For more information, visit the ISM Web site or contact:

Rene A. Yates, C.P.M.
Manager, Professional Development Services
480/752-6276 or 800/888-6276, Extension 3080

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Additional Resources

A Wealth of Information at www.ism.ws

Visit ISM's Web site, www.ism.ws, for more supply management resources. The site provides published articles, conference presentations and reference materials that pertain to supply managers in all industries. Here are some items that might be of interest:

  • What are the critical assets in your company? The obvious are people, products and facilities — the physical assets. However, there may be an even more important asset that, if not protected, could mean the loss of all the physical assets as well. The asset in question is a company's intellectual property — trade secrets, patents, copyrights and trademarks. In the article "Keep Your Chief Asset Secret," find out what constitutes a trade secret, how trade secrets are protected or, even more important, how trade secrets are disclosed. With as much as 80 percent of the assets in today's New Economy companies comprised of trade secrets, it is an issue that cannot be ignored.

  • Choosing suppliers based on their capabilities and the potential "win/win" relationship is paramount in today's supply management environment. In order to accomplish this, supply management professionals need to begin by educating, communicating and socializing the supply management process with their internal customers. Customer guidelines are designed to set the expectations of the internal customer and prepare them as they work with supply managers throughout the solicitation and supplier selection process. In her 2006 Conference proceeding "Developing Customer Guidelines — A Communications Tool for Optimizing Supplier Selection," Lorrie K. Mitchell, C.P.M., A.P.P., discusses developing a project timeline, defining the solicitation process, creating appropriate supporting documentation and customer guidelines and how they assist in identifying roles and responsibilities.

  • As hurricanes Katrina and Rita slammed into the Gulf Coast, the nation watched as parts of Louisiana and Mississippi were decimated by flood waters. When it was over, plants were inoperable, supply lines were cut and employees were displaced. However, the loss of so much gave room for the aid and generosity that followed. In her article "Hurricanes Can't Ground Coffee Plant," Jill Schildhouse chronicles how the Procter & Gamble Company resurrected its facilities with the help of the company's employees and suppliers.

  • A successful strategic alliance goes well beyond the typical buyer/seller contractual relationship and is easily measured and validated by using the 1 + 1 = 3 benchmark, which means the net gain of the two organizations is much greater than what could be derived by working in traditional buyer and seller roles. In his 2006 Conference proceeding, "Strategic Alliances: How to Make 1 + 1 = 3," Michael G. Patton discusses how to establish a formal program to develop and implement strategic alliances with best-in-class suppliers to maximize a company's cost and operational effectiveness.

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Contact Us

If you have editorial suggestions or would like to participate in upcoming editorial, contact RaeAnn Slaybaugh.

If you would like to sponsor this e-newsletter, contact Trish True or Kathy Braase, or call 800/888-6276.

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