Volume 5, Number 1, January 2007
This newsletter is published in cooperation with the ISM Chemical Group.  


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In This Issue ...
  • Chemical Industry News
    • Biodiesel Building Up in Brazil: Brazil has the potential of becoming one of the world's leading suppliers of biodiesel fuel, a fuel which has gained a competitive edge over other fuels from an environmental standpoint.   Read more.
    • Pharmaceuticals Losing Billions: Patient non-adherence costs the pharmaceutical industry more than $30 billion in lost revenues, forcing companies to refocus their attention on the growing issue of adherence and disease management programs.   Read more.
    • EU Renewable Energy Market Awareness: The European renewable energy market earned 8.89 billion euros in 2005 and it is estimated that it will reach 14.54 billion euros in 2010.   Read more.
  • Feature Article
    • Greenhouse Gas Regulations Are Coming to Chemicals: Clearly, regulations on emissions of CO2 (plus, to a lesser extent, on the other greenhouse gases of CH4, N2O and various fluorocarbons) are coming to the chemical industry — in Europe by the end of this decade and in the United States probably sometime thereafter.   Read more.
  • Commodity Report: Benchmarking can provide a snapshot of tactical performance, and benchmarking outcomes can act as an early warning system when trending performance data over a specific period of time.   Read more.
  • Announcements: The ISM Chemical Group will hold its spring conference - "Procurement: Driving the Corporation into the 21st Century" - March 1-2, 2007 at the World Golf Village Renaissance Resort in St. Augustine, Florida.   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

Biodiesel Building up in Brazil

Brazil Poised to Become Biodiesel Leader

Brazil has the potential of becoming one of the world's leading suppliers of biodiesel fuel, a fuel which has gained a competitive edge over other fuels from an environmental standpoint, according to an analysis from Frost & Sullivan about the Latin American biofuels market.

While Latin America as a whole has not taken advantage of the biofuels market, Brazil has taken the lead in the market, with the Brazilian bioethanol market earning revenues of $5.41 billion in 2005 and the Brazilian biodiesel market earning revenues of $54.5 million in 2005. It's estimated the bioethanol market in the country will reach $9.99 billion in 2012, and the biodiesel market will reach $1,831 million by 2012.

Tamara Dvoskin, Frost & Sullivan research analyst, says Brazil's ethanol production is fueled by its increasing capability to supply the fuel to international customers. "Of the total ethanol output production, Brazil consumes around 80 percent to 85 percent internally and exports the balance." She adds that Brazil produces 35 percent of the worldwide ethanol supply and also is the largest exporter.

The report points out that Latin America has resources such as soil, weather, available land and low-cost labor for the production of biofuels, but Brazil is the only country taking advantage of the resources to become a player in the market.

For more information about the report, visit the Frost & Sullivan Web site.


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Pharmaceuticals Losing Billions

Drug Companies Focus on Patient Adherence

Patient non-adherence costs the pharmaceutical industry more than $30 billion in lost revenues, forcing companies to refocus their attention on the growing issue of adherence and disease management programs, according to a study on the issue by Cutting Edge Information.

The study found that the average pharmaceutical brand forgoes 38 percent of its sales to adherence issues. Beyond costs, programs that offer guidelines about adherence and disease management help improve patients' health and help reduce skyrocketing healthcare costs. However, the study points out that it can be challenging to get buy-in from key stakeholders for adherence and disease management programs.

Amanda Zuniga, research analyst at Cutting Edge Information, says such programs offer pharmaceutical companies an opportunity to gain significant revenue streams while focusing on patients' well-being: "If executed properly, these programs can experience amazing results in patient outcomes while simultaneously boosting the industry's public image."

The study, Pharmaceutical Patient Adherence and Disease Management: Program Development, Management and Improvement, contains budget and staffing metrics for patient adherence and disease management programs as well as case studies.

For more information about the study, visit the Cutting Edge Information Web site.


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EU Renewable Energy Market Awareness

Awareness, Legislation Driving EU Renewable Energy Market

Awareness about renewable energy and legislation by various European Union countries is giving a boost to the European renewable energy market, according to a new analysis from Frost & Sullivan entitled European Renewable Energy Market — Investment Analysis and Growth Opportunities. The market earned 8.89 billion euros (11.7 billion USD) in 2005 and it is estimated that it will reach 14.54 billion euros (19.18 billion USD) in 2010.

One of the drivers in the renewable energy market is the 2001 Directive on Renewable Energy Sources (RES), which introduced different national targets for each European Union country, explains Saranya Sundaram, financial analysis with Frost & Sullivan. "The RES established indicative targets for the consumption of electricity generated from renewable energy sources, with the overall EU target set at 22 percent in 2010," she says. The government support is "timely," Sundaram notes, because the market is at an important stage of development and "requires continued support from consumers and investors."

The analysis points out that energy companies will have to take into account several issues when developing strategies for the renewable energy market, including huge initial capital outlays, development of new transmission and distribution lines, rising export demands and high prices for raw materials.

The solar energy segment also faces high prices and short supplies of raw materials. However, the wind energy segment is going strong, claiming 69.4 percent of the total renewable energy market in 2005. European wind energy companies also are expected to increase sales to Asian countries in the future.

For more information about the study, visit the Frost & Sullivan Web site.


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Feature Article

Greenhouse Gas Regulations Are Coming to Chemicals

When, in 1997, a United Nations' conference at Kyoto, Japan, called into being the Framework Convention on Climate Change (UNFCCC), it seemed that greenhouse gas emissions regulations were just around the corner. Not so fast, was the world's answer. The United States — after originally supporting the so-called Kyoto Protocol — turned around and rejected the treaty, which denied the majority it needed to enter into force. Nearly a decade passed without much action, then in 2005 the Kyoto Protocol finally was ratified. Although scientists took some years to reach consensus about global warming and lawmakers also took some years to decide what to do about it, suddenly the action phase is now underway. Not all decisions are yet final, but in many countries, regulation of greenhouse gas emissions has already started.

To date, the rules apply rather indirectly to chemical processes, but this is about to change. Probably in 2008 the European Union will regulate greenhouse gas emissions of several chemicals, and controls most likely will be widened again in 2013. It took longer than expected, but at least in Europe, greenhouse gas regulations are coming to chemicals.

The Terminator Takes Aim at Global Warming

Most likely, regulations also are coming to chemicals in the United States. Across a broad range of industries, senior managers are concluding that emissions rules are inevitable. Their common refrain: "That greenhouse gas regulations will be enacted in the United States is not a matter of if, but of when."

For the U.S. State of California, the "when" turned out to be August 2006. Governor Arnold Schwarzenegger signed into law Assembly Bill 32, the Global Warming Solutions Act, which will cap Golden State global warmer emissions at 1990 levels by 2020 — the equivalent of a 20 percent to 25 percent reduction. Broadly speaking, California's legislation is similar to that of the European Union's, and it sets a precedent for the rest of the United States. According to Van Ness Feldman, a law firm specializing in the field, "A.B. 32 is likely to have a significant influence on the national debate on establishment of a federal mandatory GHG emissions reduction program."

Impact on Chemical Companies

Clearly, regulations on emissions of CO2 (plus, to a lesser extent, on the other greenhouse gases of CH4, N2O and various fluorocarbons) are coming to the chemical industry — in Europe by the end of this decade and in the United States probably sometime thereafter. Should chemical companies and their supply managers be happy, worried or indifferent? Probably all of the above, we suggest, depending on three main factors.

  • "Greenhouse intensity" of a company's products (that is, the amount of CO2 emitted in production). For some products, GHG caps could significantly harm cost competitiveness, while for others, it could significantly help. Moreover, this help or harm can be strongly influenced by a manufacturer's technical and commercial choices.

  • Likelihood of GHG caps being applied. Caps will not be applied to all products or processes. For instance, the European Union explicitly rejected caps for hydrofluorocarbons (HFCs), because their emission sources are so numerous and diverse. Caps are unlikely to be placed on chemicals deemed to be either relatively insignificant or difficult to administer.

  • Specifics of GHG caps. The value of carbon allowances is highly susceptible to manipulation by national governments that define GHG caps. No, this is not about cheating as such, but rather about completely legal options that can dramatically shift the costs of compliance.

These factors will combine differently for each chemical process. For some they will constitute a significant cost penalty, for others a major benefit and for many a minor impact. One angle of regulation, however, will affect almost all chemicals: benchmarking.

Winners and Losers

As with any regulation, the pain will not be evenly distributed. One major subgroup of chemicals that will be impacted is that which requires significant amounts of electricity, such as chlorine. Other products such as carbon black or acetylene, which are produced via oxidation, will also be negatively impacted. In contrast, some products which consume CO2, like urea, will benefit.

To illustrate how large this impact could be, let's take the case of acrylonitrile. The manufacture of acrylonitrile has a carbon intensity of 1.4 tons of CO2 per ton of acrylonitrile. Based on SRI Consulting's estimate of cash cost and prices for mid-2006, we calculate the gross margin for acrylonitrile of about $126 per ton. At $30 per ton of CO2, the cost of credits needed per ton is $42, roughly one-third of the gross margin.

While it remains unclear how regulation on the chemical industry will evolve, most major chemical companies have already begun benchmarking their various facilities and have begun setting targets for reducing their overall energy needs, which in turn reduces the amount of GHGs that they emit.

Why Benchmark GHGs?

Perhaps one of life's most misery-inducing experiences, for most people, is the process of filling out income tax declarations. But there is a positive side to them: At least one is able to figure out how much is due. Imagine if the government simply demanded payment according to its private, inflated estimates of what one earned and owed?

This then, is also the rationale behind benchmarking greenhouse gas emissions. Rather than letting a government hold all the cards (or emissions figures), benchmarking allows companies, regulators and verifiers to estimate emissions — rapidly, at a modest cost and in a standardized way.

To provide an independent, authoritative set of benchmarks, SRI Consulting has developed the 2006 Greenhouse Gases Handbook. Greenhouse gas emissions factors for 100 chemical processes are presented. The selection of processes and products emphasizes three areas: basic petrochemicals, processes with significant carbon intensities and the ethylene supply chain. For details, visit:
http://www.sriconsulting.com/GHG.

Russell Heinen is vice president of SRI Consulting and oversees the Greenhouse Gas Estimation program, The Woodlands, Texas. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.


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Commodity Report

Chemical Industry Benchmarking — Measurements for Success

One of the key benefits of benchmarking chemical industry purchasing performance is the opportunity to look at the same benchmarks over time. Benchmarking can provide a snapshot of tactical performance, and benchmarking outcomes can act as an early warning system when trending performance data over a specific period of time. But the ability to compare information is predicated on the willingness of companies to provide data.

Over the past three years, 35 different chemical companies have contributed to one or more cross-industry surveys, and provided data for the last chemical industry purchasing performance benchmarking report. There isn't sufficient data from the last industry-specific reports to conduct a comparative analysis, but there is some very good data in the cross-industry reports that was collected over three successive years.

Examining Benchmarks 2 and 3

While there isn't room in this article to look at all 20 benchmarks published in the last three cross-industry reports, there is room to look at a few of the most popular ones. Benchmark 2 shows purchasing operating expense (POE) as a percent of sales dollars, and benchmark 3 shows POE as a percent of purchase spend. Box 1 shows how the chemical industry participants compare with all industry groups in reports published in 2006, 2005 and 2004, which reflect financial data from years 2005, 2004 and 2003, respectively.

Purchasing Operating Expense

Box 1

POE as a percent of sales dollars and purchase spend. When looked at as an average of averages across all industry groups, benchmark 2 by itself is not of significant value. But when specific industries look at this benchmark in conjunction with benchmark 3, a certain pattern can be expected in that the operating expenses are going to be a larger percent of spend than revenue. Over time, tracking the delta between these two benchmarks can show the impact that operating expense has on sales and spend, and industry groups frequently use this information as a barometer against which they can gauge their performance. When calculating POE, many organizations use data from their operating budgets, including salaries and wages, benefits, supplies, travel, facility expenses, overhead costs and the like. However, each company calculates its POE differently.

Examining Benchmark 4

Because we're looking at POEs, let's take a comparative look at the cross-industry reports for benchmark 4, which is POE per purchasing employee.

POE per purchasing employee. In the 2006 report, the chemical industry participants reported an average POE of $107,100 per person. The average of averages for all industry groups is $107,500. Data provided by 11 of the 20 industry groups that comprise the cross-industry report show an average POE higher than the overall average (and the chemical industry group), and the other eight industry groups reported their POEs were lower.

Box 2 shows benchmark 4 data from the 2006, 2005 and 2004 cross-industry reports. The data shows that operating expenses for chemical industry employees assigned purchasing responsibilities have increased steadily over the past three years. It's fair to assume that the increase can be attributed to salary increases as well as a repositioning of responsibilities from transactional activities to more strategic functions.

Purchasing Operating Expense per Purchasing Employee

Box 2

The bottomline is that benchmarking can be a valuable tool for all industries, and CAPS Research does encourage companies that belong to the chemical industry sector to participate in our next round of benchmarking activities which will start in spring 2007. Contact the benchmarking team at benchmark@capsresearch.org and ask how you and your company can participate.

To review previous industry benchmarking reports, visit www.capsresearch.org and select the Benchmarking tab on the top menu bar.

D. Steven Wade is the director of benchmarking programs at CAPS Research, a global research organization jointly sponsored by ISM and Arizona State University, Tempe, Arizona. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.


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Announcements

ISM Chemical Group to Hold Its Spring Conference

The ISM Chemical Group will hold its spring conference — "Procurement: Driving the Corporation into the 21st Century" — March 1-2, 2007 at the World Golf Village Renaissance Resort in St. Augustine, Florida.

This year's conference features supply management professionals with expertise in the economy and chemical industry who will take a glance into the future of the profession.

The cost for conference attendees is $500.

For more information, contact:
Pat Hurd
Chair, ISM Chemical Group
404/652-2029
pghurd@gapac.com


Prepare to Celebrate 2007 Supply Management Month

ISM will be participating in 2007 Supply Management Month and invites Chemical Group members to participate as well. The theme will remain unchanged from the past two years, "Supply Management: Maximizing Opportunity, Managing Risk." The Supply Management Month theme is remaining consistent with the key message being promoted in ISM's national image campaign, which is now in its third year. The image campaign is designed to run for several years in order to make a memorable impact on the perception of supply management.

A unique pullout poster designed specifically for Supply Management Month will be included in the February 2007 issue of Inside Supply Management®.

Limited quantities of the 2007 Supply Management Month poster are available upon request. Please contact ISM Public Relations via e-mail at jmchale@ism.ws or call 800/888-6276, extension 3143.


ISM Expands Online Course Offerings

Visit the Knowledge Center today and gain access to ISM's expanded class offerings, which now include Accenture's Supply Chain Academy (SCA) courses. Global in scope, these courses were developed by experts from more than 30 leading organizations, professional associations, industry consortia and educational institutions.

ISM is dedicated to your success. We've designed the Knowledge Center for you and your organization to give you access to a comprehensive curriculum that addresses all areas of the supply chain. Whether you're looking to improve your skills or want to expand the capabilities of your organization, ISM is your total education resource for achieving your goals.

And, we understand that everyone has a unique learning style. These expanded offerings provide you with a multitude of delivery formats and more continuing education opportunities.

Enroll today and earn Continuing Education Hours (CEHs).

To access the Online Course Guide, go to www.ism-knowledgecenter.ws/customcontent/course_info/comp_catalog.pdf.

To register for a course, visit the Knowledge Center at www.ism-knowledgecenter.ws.

For more information, contact ISM Customer Service at 800/888-6276 or 480/752-6276, extension 401.


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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:

  • Change is a natural part of sustaining a business, but what often separates a successful initiative from an unsuccessful one is an effective change management strategy. The article Simple in Logic, Complex in Execution examines the steps that should be taken once a decision is made to initiate change in an organization. By following some basic principles, companies can attain not only long-term compliance but also the desired outcomes and business values of the change initiative. Some of the principles detailed in the article include identifying impacted stakeholders, developing sponsorship networks and determining key milestones.

  • Tracing the evolution of corporate strategy over the years helps today's business leaders better understand how their companies have made the transition — and continue to make the transition — to compete in today's global marketplace. In their article Change is Constant, John Yuva and Fariborz Ghadar, Ph.D., the William A. Schreyer Chair of Global Management and director of the Penn State University Center for Global Business Studies at Pennsylvania State University, explore business trends and global economics by examining how corporate strategy has changed and evolved since World War II.

  • As offshoring of services takes its place as an accepted business practice, supply management professionals are examining how they fit into the offshoring picture and how they can be a more valuable resource when a company decides to send some of its services overseas. The article What Lies Beyond examines the reasons why companies today are sending some service functions to India and other countries, especially the cost savings potential. It also looks at the challenges associated with sending services overseas, including language and cultural differences. Supply management's role as an advisor and facilitator in offshoring services, especially IT services, also is examined.

  • Collaborative sourcing and SRM software are two distinct approaches to managing suppliers, and supply managers should know when to keep them apart and how to bring them together. In the article Mind the Gap, Mary Rollman, senior manager for Accenture, points out that understanding what SRM software and supplier collaboration have in common, what sets them apart and when to use them both is the first step toward reaping the benefits. The article details the distinction between SRM software programs and supplier collaboration. It also examines three steps that should be taken to make supplier collaboration work effectively.

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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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