Volume 6, Number 1, January 2008
This newsletter is published in cooperation with the ISM Chemical Group.  

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In This Issue ...
  • Chemical Industry News
    • Sustainability Gains Ground in Paint and Coatings: For nearly five decades, the global paint and coatings industry has made advancements toward environmentally advanced technologies. These efforts — and those still on the horizon — were spotlighted at the most recent Brazilian Paint Manufacturers Association.   Read more.
    • Natural Gas Prices Heat Up: According to the U.S. Energy Information Administration, more than half of U.S. households can expect to pay an average of $78 more this winter in fuel expenditures. In its Short Term Energy and Fuels Outlook for 2007-2008 report, the Arlington, Virginia-based organization showed natural gas heating costs have more than doubled since 2002.   Read more.
    • Top-Notch Pharmaceutical Brand Teams: Successful pharmaceutical products rely on the savviest brand teams. Recent research from benchmarking organization Best Practices, LLC, uncovers what these teams have in common, from structure to composition to responsibilities.   Read more.
    • Candle Companies See Opportunity, Not a Setback: As petroleum-based wax supplies continue to erode on a global scale, major wax end users are using the transition to vegetable-based and synthetic waxes as a marketing opportunity.   Read more.
  • Feature Article
    • Mergers and Acquisitions: As the chemicals business has become mature and largely commoditized, many CEOs see organic growth alone as inadequate to achieve the double-digit growth rates they desire. The result is an ever-increasing number of global mergers and acquisitions   Read more.
  • Market Report
    • What's Fueling the High Price of Oil?: Between January and November last year, a barrel of the benchmark West Texas Intermediate crude oil cost rose by 70 percent, from $58 to $98. This article examines the factors behind this increase and forecasts what supply managers can expect in 2008.   Read more.
  • Announcements: As a part of the 93rd Annual International Supply Management Conference and Educational Exhibit in St. Louis, ISM is hosting its fourth Conference Career Center. Here, attendees can explore career opportunities, and companies can attract top-notch talent.   Read more.
  • Additional Resources: Check out these links to addition resources from the ISM Web site.   Read more.
  • Contact Us about ISM eDigest: Chemicals.

Chemical Industry News

Sustainability Gains Ground

Growth in the Paint and Coatings Industry Is Fueled by Social Responsibility

Sustainable development was high on the agenda at ABRAFTI 2007 — the 10th-annual international congress hosted by the Brazilian Paint Manufacturers Association — in Sao Paulo, Brazil. The global paint and coatings industry appears to be doing its part to build a safer, greener and more sustainable world, according to presenter Luis Fernandez, vice president and global business leader for Rohm and Haas' $2-billion paint and coatings materials business.

Fernandez says the term "sustainable development" is seen and heard about everywhere these days — and rightfully so. Industrial activity has a significant impact on economic development, social development and the environment around the world, Fernandez explained.

For more than 50 years, the global paint and coatings industry has been making the shift to more environmentally advanced technologies, beginning with the introduction of water-based, acrylic emulsions by Rohm and Haas for use in house paints. Today, clean water-based technologies account for about 70 percent of the total U.S. paint and coatings market. In Asia, that figure is 30 percent and growing.

The one thing consumers will not sacrifice in the name of sustainability is product quality. In fact, they expect new, greener products to provide equal or better performance. Fernandez notes that cutting-edge technologies — nanotechnology, bio-based and more — are on the way. "Water-based-acrylic technology has advanced to the point that it is increasingly used in some of the toughest industrial applications, where less desirable, solvent-based products have been traditionally used," he says.

Sustainable development is also the motivation behind extensive community outreach and education programs being organized by paint and coatings companies and material suppliers across the globe. These include outreach and help in rebuilding after natural disasters and ongoing training programs that help build a strong network of professional painters and contractors.

"Sustainable development is about social responsibility, environmental protection and healthy economic growth — too often called 'triple bottom lines,'" says Fernandez. "We're making the world look better — and making a better world for ourselves and our children at the same time. This is what will make our industry sustainable for many years to come."

Additionally, ABRAFATI is launching the Brazil Coatings Care Program, developed in conjunction with the U.S.-based National Coatings and Print Association (NCPA) and the International Paint and Printing Ink Counsel (IPPIC). Coatings Care helps those in the paint industry manage operations and processes in ways that are environmentally responsible and promote safety, occupational health and the community. The association also fights unethical practices, including fake paint and tax evasion, with awareness programs and training campaigns.

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Natural Gas Prices Heat Up

Natural Gas Costs Expected to Climb 10 Percent This Winter

This winter, U.S. families will pay a pretty penny to stay warm. Households heated primarily with natural gas can expect to pay 10 percent more — about $80 on average — while electricity users will ante up an additional 4 percent per household, according to a report issued by the U.S. Energy Information Administration, Short-Term Energy and Winter Fuels Outlook for 2007-2008.

Additionally, the report finds fuel expenditures per family have more than doubled since 2002. At that time, it cost an average of $465 to heat a home in the winter; this year, it exceeds $1,000.

American Chemistry Council (ACC) President and CEO Jack N. Gerard says on top of costs more than doubling in the past six years, a 10-percent one-year increase in natural gas heating costs is "simply unacceptable" when federal policies are largely behind the increases. In an issued statement, he cites the demand for natural gas for electricity generation, which rose 42 percent from 1997 to 2005, as an example: "This demand pressure will only increase as the United States strives to reduce greenhouse gas emissions."

Gerard predicts large amounts of natural gas also will be needed for renewable fuels production, cleaner transportation fuels and as a raw material for energy-saving materials contributed by the business of chemistry. "Meanwhile, decades-old policies prevent us from accessing the domestic energy supplies we need," he adds.

Gerard says this connect is striking in the energy legislation that was passed this summer and will soon be taken up in a House-Senate conference. "While the House bill (H.R. 3221) contains welcome new proposals to improve energy efficiency and diversity, Title VII of the bill rolls back existing supplies of domestic energy just as they were beginning to do some good," Gerard explains. "Conferees must drop harmful Title VII provisions, and Congress must support new domestic energy supply legislation, such as the Nation Environment and Energy Development (NEED) Act (H.R. 2784)." The Act provides domestic natural gas supply for a lower-emission economy and dedicates resources to critical environmental programs.

Finally, Gerard urges lawmakers to establish a stable foundation for the future. "To get climate policy right, they will need a foundation in sound energy policy," he says.

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Effective Brand Teams

Success Strategies from the Best-in-Class

Top-level branding teams in the pharmaceuticals industry are not born — they are built. And, according to Best Practices, LLC, many use similar prototypes.

The benchmarking group's recent study, Best Practices in Designing Effective Brand Teams: Brand Governance and Brand Team Management, determined that most best-in-class core teams consist of three to 10 people. The vast majority (86 percent) reported that their teams concentrated around the marketing function, regularly handling tactical matters and "organic problem-solving." An extended team — usually of six to 22 members — augment representation from core-team membership and add other critical areas ranging from sales to customer service.

The study includes insights gleaned from survey results from brand team managers and executives representing 22 brands in 26 different companies, including Abbott, Amylin, Bayer, Genentech, GSK, Roche, Novartis and Wyeth.

Common characteristics among best-in-class brand teams include meeting frequency and decision-making strategies. The study showed 75 percent of these teams meet on a weekly or biweekly basis. (Surprisingly, however, 28 percent do not use standing agendas.) Also, the most common decision tools for reaching consensus on brand decision is senior decision rights, which 41 percent of the best-in-class teams prefer, while majority vote (33 percent) was a close second.

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Candle Makers See Opportunity, Not a Setback

Making the Most of Dwindling, Mineral-Based Wax Supplies

The candle business consumes nearly 50 percent of the global wax supply, despite slow growth in this mature sector of the market. This is just one of the findings in a recent study by worldwide consulting and research firm Kline & Company, Global Opportunities and Threats in the Wax Business, 2006-2020.

"To keep pace in a sluggish market, candle companies are taking advantage of the opportunity to market candles from vegetable and other plant-based waxes as cleaner-burning and more environmentally friendly," says Geeta Agashe, a director of the petroleum and energy practice at Kline. "So, rather than lamenting the somewhat higher costs of alternative waxes, they are actually turning the challenge into a unique selling proposition for their products."

Mineral-based waxes — a byproduct of the Group I solvent extraction lubricant base refining process — still account for 87 percent of waxes on the market. However, growing demand for higher-performance Group II/III/GTL lubes has sent the global supply of crude-based waxes into a slump. The report indicates vegetable, palm and synthetic waxes are all set to expand over the next 15 years as declining petroleum wax supplies and specialty applications make room for alternatives.

"The shortfall we predicted two years ago has actually given rise to new opportunities for alternative suppliers," Agashe continues. "There will always be a need for petroleum-based waxes, but significant growth in the market over the next 10 to 15 years will come from nonpetroleum waxes," which Kline expects to grow to nearly one-fourth the total supply by 2020.

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Feature Article

Mergers and Acquisitions: Avoiding Disappointing Results Through Supply Chain Planning

By Jane Lee

Mergers and acquisitions are planned at stratospheric levels based on financials, shareholder value and the like — considerations far removed from the day-to-day questions of, "How are we going to operate the combined supply chain?" Those charged with the latter are left to scramble to figure out after the fact how to make the new, larger, more complicated supply chain work, frequently over much longer distances and in more complex production environments.

Unfortunately, in many merged chemical companies, the supply chain is viewed at the C-level merely as a place to show immediate results from the merger by cutting cost through "reducing duplication." Cutting cost — which usually means people — without carefully considering the institutional memory and expertise that will be lost results in decreased productivity, which leads to more cuts and a downward spiral for the now-dysfunctional supply chain.

Smart chemical companies realize that their supply chains are (or can be made) a competitive advantage rather than just a "necessary evil" source of costs. Outstanding customer service breeds loyalty and the ability to maintain or increase profitability in a world of downward price pressures. The opportunities afforded by a merger or acquisition to improve customer service by combining the best of the two supply chains is an opportunity the new organization cannot afford to miss.

The new company often believes its first operational task must be to migrate to a common ERP system. While this will certainly be necessary eventually, it is a long, painful process. First priority should go to establishing full visibility to the combined supply chain through a common supply chain database — inventories, production capabilities, forecasts, product specs, customer masters, bills of materials, warehouses and the like. Visibility is the first prerequisite to finding real synergies and savings. A supply chain team comprised of members from both pre-merger companies should then examine this data in detail.

In many cases, the team will discover that similar chemical products are offered and could be combined into one, which now has many more potential production locations than before and requires less total inventory to support. Cost savings can also come from optimizing what is made where for which customer, minimizing transportation costs, reducing the number of warehouses, and taking advantage of economies of scale. A mechanism for combined demand management and production planning will be necessary to realize these benefits, but this can be implemented far more quickly and easily — based on the combined supply chain database — than can the migration to a common ERP platform. The benefits of this visibility and combined planning will far outweigh the cost and effort of putting such planning in place.

Reductions in supply chain personnel will inevitably occur. The key is to capture the required data and expertise first, so that cuts are made with a scalpel rather than with a meat cleaver. The more institutionalized an integrated planning process becomes, the fewer people it ultimately requires to keep it functioning in world-class form.

Why is this not obvious to more chemical organizations?

There are at least two primary reasons. The first is that few chemical companies are even considering the impact on their supply chains when they enter the merger/acquisition process, so they fail to recognize the critical importance of immediate attention to this key part of the business.

The second is that headcount (and salaries) is one of the easiest "big hits" to implement immediately to show "cost savings." While this might be appropriate in other areas of the business, as we have seen, it is not the appropriate first step to be taken in the supply chain arena.

The supply chain is the backbone of any chemical company's delivery of product to customers. Earlier consideration of how two different supply chains should be combined — or at the least, a joint effort to combine data and planning — should always precede any cuts based on "duplication." The benefits will far outweigh the costs.

Jane Lee is the vice president of supply chain solutions for Supply Chain Consultants. To contact the author, please send an e-mail to author@ism.ws.

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Market Report

A Look Back — And Ahead — in Petroleum

By Jim Williams

I often joke about the three rules for oil price forecasting:

  • Never mention a price and a date in the same talk.
  • If you can't forecast well, forecast often.
  • If you are ever lucky enough to get it right, don't let anybody forget it.

There is a lot of truth in the jokes we tell. If there wasn't, they just wouldn't be funny. However, when energy cost is a major component of your budget with an impact on the cost of transportation, materials, processing and general overhead, it isn't a joking matter.

On January 3, a barrel of the benchmark West Texas Intermediate crude oil cost $58.33 per barrel at Cushing, Oklahoma. Eleven months later on November 20, the price was almost 70 percent higher at $98.83. The obvious question is, why? Will it hit $140 before next Thanksgiving?

Retracing High Price Of Oil

Weak dollar. One of the factors behind the increase in price was the weakness of the dollar. At the beginning of the year, it took $1.32 to buy a euro, but it took $1.48 by November 20. If we measured to price in euros, the price was up 51 percent compared to 69 percent in dollars.

Production cutbacks. That leaves a 50-percent increase to explain. In the fall of 2006, OPEC cut back on production and did not reverse that decision until this September. As a consequence, petroleum stocks in the Organization for Economic Co-operation and Development (OECD) countries fell by 87 million barrels since the beginning of the year. Put another way, inventories are lower by one day of world consumption and 1.8 days of OECD consumption. This puts upward pressure on prices.

Spare capacity. The largest contributor to the price increase is the lack of spare oil production capacity. Five years ago, the world had more than 6 million barrels per day of spare oil production capacity. At that level, there was sufficient surplus to cover the loss of exports from any two OPEC members except Saudi Arabia. This year spare capacity averaged 2.1 million barrels per day and is currently about 1.5 million barrels per day.

Putting Spare Capacity Into Perspective

The impact of low spare capacity is easier to understand if we put it in terms of the manufacturing industry. On average, the worldwide crude oil production industry operated at 97.5 percent of capacity during 2007. Any industry with that percentage of capacity utilization experiences upward pressure on price.

The lack of spare capacity also opens the market to speculators. The limited spare capacity combined with real and imagined risks of supply interruption (for example, hurricanes, Iraq, Iran, Nigeria and Venezuela) increased.

Outlook 2008

All of the increase in demand in 2007 can be traced to the non-OPEC countries. Fully 50 percent came from Asia. If this growth continues, it is unlikely that prices will fall dramatically, as production capacity will be hard put to stay even. However, if the United States enters a recession and, especially if it spills over into the world economy, oil prices could plummet.

A graph of oil prices and U.S. recessions is often used to argue the point that high oil prices cause recessions. However, that same graph also shows that recessions cause low oil prices. In the absence of recession, look for prices above $85 for most of the year. If the United States enters into a recession, oil prices will likely break toward $60 per barrel.

U.S. Recessions and Imported Oil Price

Jim Williams is president of WTRG Economics, London, Arkansas. To contact the author, please send an e-mail to author@ism.ws.

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ISM Conference Career Center: Come Check It Out

This year's International Supply Management Conference and Educational Exhibit will feature ISM's fourth Career Center, where attendees can explore their career options — and participating companies can take the lead.

ISM Manager of Professional Development Services Toni Caserta expects more than 2,500 supply management professionals to attend the 2008 Conference. Of these, more than half hold the title of manager or above, and 80 percent possess bachelor's or graduate-level degrees.

Career Center participants receive a posting of current job openings on the center's Web site, access to an exclusive résumé database before and after the Conference, and a company profile in the April 2008 edition of the Program Guide & Navigator distributed to all Conference attendees and 45,000 supply management professionals. Also included is the use of private interview booths and complimentary lunch for two recruiters a day.

All attendees are invited to submit their résumés to the Conference Career Center database. Participating organizations have exclusive access to this information so they can schedule in-person interviews during the conference.

The Career Center will be open Sunday, May 4 through Tuesday, May 6. It is custom-designed for the conference and supported by ISM staff.

For details and pricing information, contact Toni Caserta at 480/752-6276, extension 3095, or by e-mail at acaserta@ism.ws.

ISM Pharmaceutical Forum and CAPS Research Help Scholars in Supply Chain Management Degree Programs

Preparing tomorrow's supply management professionals by ensuring solid educational foundations continues to be a joint mission of CAPS Research and Institute for Supply Management™'s Pharmaceutical Forum. In the past year, the independent research organization and the ISM industry networking group have added $13,000 to endowments at Arizona State University (ASU) and Bowling Green State University.

"The most recent awards bring the total value of financial support to more than $100,000 over the past several years," says ISM Pharmaceutical Forum Secretary/Treasurer Christopher Silva. "These universities have exhibited leadership in developing leading-edge education programs advancing the supply management profession."

ISM Pharmaceutical Forum Chair Bill Stirling says today's supply management students need crucial education and skills development to succeed in any organization or business sector. "We share a strategic interest with these universities in ensuring that graduates are ready to handle key supply management responsibilities in their organizations," Stirling says. "We not only want them to be able to navigate complex business paths, but to lead the way."

According to Phillip L. Carter, D.B.A., executive director for CAPS Research and Harold E. Fearon Chair of Purchasing at Arizona State University, both organizations remain committed to supporting the ISM Pharmaceutical Forum through key research activities that are tailored to their specific needs. "The Forum's continued financial support is greatly appreciated by the students who are majoring in supply chain management," Carter says. "Our goal is to maximize the opportunities presented by the scholarship funds."

ISM Forums are comprised of members who are employed in a specific sector and come together for the sole purpose of exchanging information and ideas about supply management in that specific sector. Pharmaceutical Forum membership is comprised of members having supply management responsibility within the research-based pharmaceutical and biotech industry.

For more information about the ISM Pharmaceutical Forum, visit the ISM Web site.

CPSM and Pilot Testing

ISM's brand-new designation, the Certified Professional in Supply Management (CPSM), reflects the expanded education, skills and experience needed to be a successful supply management professional.

The internationally relevant program has just begun pilot testing. Internationally, affiliates and companies sponsoring pilot testing are scheduled and have begun conducting exams.

For those interested in participating, ISM is sponsoring pilot testing at the 19th Annual North American Research and Teaching Symposium on Purchasing and Supply Chain Management in Phoenix on Saturday, March 29, 2008. Attendance at the symposium is not necessary to be involved in CPSM pilot testing.

Save More Than 60 Percent on the CPSM Pilot Study Package

The CPSM Pilot Study Package is available for $99, including the new CPSM Study Guide and ISM Professional Series. Exam registration is not required to receive this special price. The discounted package will be available until March 31, 2008, with standard pricing beginning April 1, 2008.

The CPSM Study Guide is applicable to both pilot and bridge exam candidates. It provides information on test specifications, examples of the testing format and question styles.

The ISM Professional Series focuses on challenges, goals and skill sets managers need to be successful in strategic supply management. With methodologies to investigate and strategies to pursue, the ISM Professional Series is an essential resource for every supply professional.

CPSM and C.P.M. Exams Offered at Reduced Rates at ISM's Annual Conference

Testing will take place for both the new CPSM and the C.P.M. at ISM's 93rd Annual International Supply Management Conference in St. Louis. C.P.M. testing will be held on Saturday, May 3, 2008; CPSM testing will be held on Wednesday, May 7, 2008. Registration for the entire Conference — or for a two- or three-day pre-Conference seminar — lets attendees take up to two exams at a significantly reduced rate.

The Debut of the CPSM Bridge Exam

Current C.P.M.s with bachelors' degrees from regionally accredited universities have a distinct advantage in obtaining CPSM certification: one bridge exam instead of three.

The CPSM Bridge Exam will be offered for the first time at ISM's 93rd Annual International Supply Management Conference in St. Louis on Wednesday, May 7, 2008.

Registration Details

To register for pilot testing at the symposium, call Customer Service at 800/752-6276, extension 401, or e-mail certification@ism.ws. New dates and locations might be added.

To order the CPSM Pilot Study Package, visit www.ism.ws or call Customer Service at 800/752-6276, extension 401.

Registration for testing and the annual Conference is available online at www.ism.ws or by calling Customer Service at 800/752-6276, 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:

  • Breach prevention is a necessary prescription for organizations seeking to eliminate old data and keep it from falling into the wrong hands. A recent Inside Supply Management® article, Data's End Game: Risk Prevention, explains why the expense related to a data breach is so enormous — and why increasing number of states are enacting privacy regulations, making the legal compliance landscape even trickier to traverse. Businesses that rely on customer trust also suffer brand damage and loss of business from a breach, which might be the costliest blow of all.

  • Many organizations today take active steps to be environmentally friendly, from the adoption of sustainable practices in manufacturing and services to recycling office paper. In Spread the Carbon-Neutral News, you get an inside look at the latest and greatest green effort by New York-based News Corporation — one initiative with the potential to impact millions of people around the world.

  • Walking up and down your supply chain to get a hands-on understanding of how it works adds sustainable value to all supplier relationships. In his article, The Collaborative Journey, Coors Brewing Company's Ronald D. Schnur details how the organization has done just that since 2003 in an effort to create value, grow business and build a winning culture. Key elements include the introduction and use of integrated teams, quality management systems, ERP, strategic sourcing and lean manufacturing.

  • Today's energy markets continue to be extremely volatile and pose an incredible challenge to supply professionals who need to manage these costs. At last year's ISM Conference, EnergyGateway, LLC's Rob Barkley explained how the price volatility and risk exposure associated with purchasing energy are tremendous compared to most other commodities. His presentation, Energy Buying, illustrates why companies that fail to understand and manage the three areas of price risk associated with purchasing electricity and natural gas in deregulated markets are subject to pricing exposure that could significantly and unnecessarily impact the bottomline.

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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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