Volume 7, Number 2, April 2009
This newsletter is published in cooperation with the ISM Chemical Group.  

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In This Issue ...
  • Chemical Industry News
    • North American Plastic Industry Performance Trends, Revealed: Highlights from the 2008 North American Plastics Industry Study.  Read more.
    • Sustainable Chemistry Principles Pick Up Speed: Experts say interest in green chemistry has expanded beyond organic synthesis in recent years.  Read more.
    • What's in Store for the Chemicals Industry? Predictions that will affect chemical producers and buyers across the world through 2010.  Read more.
  • Feature Article
    • Managing Toxins and Chemicals in the Supply Chain: The 100,000-plus chemicals and toxins present throughout the supply chain pose a major threat to people's health, safety and the global environment. As supply management professionals, you can do a lot to advance sustainability by addressing how your organization manages its chemicals procurement, use, storage and transport.  Read more.
  • Market Report
    • Inside Indian Pharmaceuticals: A new report highlights the top 10 considerations for pharmaceutical manufacturers looking to compete in this market.  Read more.
  • Announcements: In recent months, Merck's $41-billion acquisition of Schering-Plough and Pfizer's $68-billion acquisition of Wyeth have made negotiation skills even more crucial for chemicals sourcing professionals. To this end, ISM's "Power Negotiations: Unlock Your Powers of Influence and Persuasion" — one of the institute's most executive-level seminars — comes at an ideal time.  Read more.
  • Additional Resources: Check out these links to additional resources from the ISM Web site.  Read more.
  • Contact Us about ISM eDigest: Chemicals

Chemical Industry News

Plastics Performance Trends

Benchmarking Study of North American Plastic Industry Identifies Performance Trends

Analysts at the consulting firm of Plante & Moran, PLLC have released their 2008 North American Plastics Industry Study, which focused on more than 172 chemicals companies and 244 facilities throughout North America, including the United States, Canada and Mexico.

According to their findings, plastics industry employee productivity continues to climb, but this has not spurred higher profits. Also, they found, continued price pressures and rising material costs are dramatically impacting profits.

"The results show there's hope, and perhaps prosperity, ahead for those industry participants who persevere and have a well-thought-out strategy," says Jeff Mengel, Plante & Moran partner and plastics industry practice leader. He and colleagues consider "successful" organizations as those with:

  • Greater than 10-percent earnings before interest, taxes and owner's compensation
  • 30-percent return on net capital employed
  • At least 5-percent sales growth

"These companies are few and far between," Mengel adds. "Of the 172 companies in this study, only 15 met all these thresholds, while up to 55 met one of the three variables for success."

3 Key Findings

Continued price pressures — According to the study, about 10 percent of respondents lost more than 15 percent of 2007 sales through the resourcing of jobs by the customer consistent, which is consistent with prior years. Almost one in four were subject to e-bidding on existing programs, resulting in contract losses or reduced sales dollars (60-percent retention with a 3.1-percent price reduction).

Rising material costs — Not being able to pass along rising resin costs has hurt some organizations' bottom lines, according to the study. In 2008 alone, polypropylene resin prices rose 36 cents per pound — a 42-percent increase for many molders.

"Assuming 50-percent material content, this represents a 20-percent increase in expenses," Mengel points out. "Since the average plastics company's net earnings are only 6 percent, most companies are losing 30 percent every month in profits."

Successful company performance comparison — According to the study, highly successful companies invest more in sales and marketing and have a broader diversification of customers. Likewise, successful companies have addressed how to reduce the "noise" that plagues the manufacturing environment.

"Complexity is managed through compartmentalization or extreme flexibility, and quality issues are managed to meet customer expectations," Mengel explains. "Most importantly, successful companies' new sales possess a higher value proposition than the current sales, so margins are improving year after year, even with negotiated price reductions."

The study also found that successful companies maintain excellent pricing disciplines, with very few sales returning margins less than 10 percent, and retain slight superiority in just about every cost category. The cumulative impact this has on the bottom line is positive, Mengel concludes.

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Green Chemistry Gains Momentum

According to ICIS.com, the principles of sustainable chemistry are finding acceptance throughout the wider industry.

"Numerous cost-saving implementations of green chemistry have shown that reducing the environmental footprint of production processes goes hand in hand with improving the bottom line," writes Cynthia Challener, Ph.D., principal of C&M Consulting and a technical writer, editor and researcher for the chemicals industry. Challener contends that environmentally friendly chemistry has moved to the mainstream of chemical manufacturing, and many organizations, regardless of size, are becoming more efficient and productive with high-performing products.

John Warner, president and CTO of the Warner Babcock Institute for Green Chemistry, has also noticed this trend. He says interest in green chemistry has expanded beyond the initial focus on organic synthesis in recent years: "Today, research in [green] chemistry, biochemistry and materials science is taking place in all industry sectors that employ chemistry and in locations around the world."

To this end, the Pharmaceutical Roundtable of the American Chemistry Society Green Chemistry Institute (GCI) is researching greener approaches to the 12 most commonly used transformations. The group has likewise characterized the most-used solvents and has begun a search for alternatives to those that are not ecologically sound.

Success with these efforts has led GCI to establish a Formulator's Roundtable focused on cleaning and cleansing products. The Institute is also assembling training materials for students through the post-doctoral level and plans to set standards for green chemistry processes.

"One of our goals is to craft ANSI [American National Standards Institute]-based, multi-attribute green process technology standards against which companies may be certified by an independent third party," says GCI Director Robert Peoples.

In the meantime, companies still face the challenge to prove that the potential return on investment can justify upfront costs. But changes are taking place to address this issue.

"Firms are taking a more global approach to cost determination and are now considering hazardous material handling, energy and water consumption, waste processing and other operational costs," says Richard Engler, program manager for the Environmental Protection Agency (EPA)'s Green Chemistry Program.

To read more on this topic, visit the ICIS Web site.

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Chemicals Industry Outlook: 2009 and 2010

What's in Store for the Chemicals Industry?

Sizing up their prospects at the beginning of 2008, chemical companies knew a recession was immenent. However, according to Europe's Royal Society of Chemistry (RSC), the swiftness of the year's global downturn took many by surprise.

Sean Milmo, an Essex, UK-based freelance writer for the RSC, says chemical companies in Europe and North America will record their biggest declines in output in over two decades in 2008 and 2009 as they struggle with a sharp drop in demand for their products. With the threat of a prolonged downturn, he adds, Dow and Dupont have already announced permanent job losses.

However, forecasters expect the decrease in chemicals production will be relatively short-lived in key regions of North America, Western Europe and Japan, Milmo adds: "After diving steeply in the fourth quarter of 2008, output is likely to start to pick up again in the second half of 2009. But it will take much longer before the industry starts to grow at the rate it has in recent years."

David Thomas, a chemicals and consumer goods economist at UK-based consulting firm Oxford Economics, told the RSC this decrease won't be the same as in the early 1980s — the last time there was such a big drop in chemicals output.

"Then, demand took off and chemicals output went up by 10 percent in one quarter after government controls to curb inflation were lifted," Thomas said. "This time, there are big structural problems."

Among these is the fact that governments have borrowed to the point that their huge debt loads will slow economic growth. "We believe world GDP — which will be going up by around half a percent next year — will not reach 2007 growth levels (4 percent) until 2012," Thomas predicted. "Even the fast-expanding economies of China and India have seen dramatically slower growth in industrial production, a marker of chemicals output."

Global chemicals output is likely to follow a similar path to world trade, according to the Organisation for Economic Development and Co-operation (OECD), a Paris-based think tank for the world's wealthiest nations. The OECD predicts that after dwindling through most of 2009, world trade growth will almost double between the end of 2009 and the last quarter of 2010.

In similar vein, the American Chemistry Council (ACC), which represents U.S. chemical producers, predicts global chemicals production will only dribble upward next year before growth almost doubles to 3.3 per cent in 2010.

A Downward Spiral

Even so, the ACC's assessment of chemicals output in the United States is bleak. A moderate recession is the minimum the country can expect, it says, but a more severe recession "of longer duration and depth and higher unemployment" is possible.

The ACC predicts that U.S. chemicals output (excluding pharmaceuticals) will fall by 3.1 percent in 2008 against the previous year, and by an additional 3.6 per cent in 2009, before clawing back 1.2 percent in 2010.

Nobody's Buying

A more immediate concern for the chemicals industry — particularly in North America and Europe — is the current bout of destocking, where customers use up their stores of chemicals and hold off on buying more. According to the RSC, this has made the fragile state of demand far worse than the recession might suggest.

Chemical customers had been building up inventories through most of 2008 as chemicals got more expensive, the group explains. Price increases were designed to compensate for increasing energy and feedstock prices, many of which were derived from expensive crude oil.

When crude oil prices started to collapse in the fall, feedstock prices followed suit, according to the RSC. The cost of benzene and styrene nosedived by 50 percent, and low-density polyethylene fell by 40 percent in about a month. With prices dropping so rapidly, customers stopped buying, deciding to use up the chemicals they had bought at higher prices.

"Destocking should begin to stop in the second quarter of 2009," Thomas says. "But the underlying demand will still be weak, so there will be no reason to restock again." Instead, he contends that chemicals buyers will buy only in response to demand: "There will be so much spare capacity around that there will be no need to start restocking."

To read more about chemicals industry forecasts in Europe, China, India and more, visit the RSC Web site.

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Feature Article

Managing Toxins and Chemicals

Managing Toxins and Chemicals in the Supply Chain

By Robert W. Kuhn

While most of the buzz in the supply chain related to sustainability revolves around energy or waste, another major threat to the global environment comes from the more than 100,000 chemicals and toxins present throughout the chain. Many chemicals can pose a health and safety threat to workers, and a threat to the environment if they are incorrectly managed.

As a supply management professional, you can do a lot to advance your organization's sustainability by addressing how it manages its chemicals procurement, use, storage and transport. In this article, we present a synopsis of the major environmental sustainability issues, provide some tips to get you started and offer additional resources you can tap into to tackle this important issue.

The Major Concerns

From a sustainability perspective, it is important to eliminate toxins whenever possible because they present a serious threat to environmental health and biodiversity when improperly emitted, spilled or discharged. Whether liquid, gas or solid, toxic chemicals damage land, water and air when left unchecked, and this damage threatens all living organisms. Correctly managing chemicals in the supply chain is plainly the right thing for your organization to do as part of its responsibility as a good global citizen.

Damage is done as a result of everyday mismanagement, not just incident-related mistakes such as Union Carbide's 1984 gas leak disaster in Bhopal, India, which, according to some estimates, killed as many as 8,000 people. Investigations into the tragedy cited improper storage of hazardous chemicals, corroding material in pipelines and safety systems failure as potential causes.

Sustainability concerns about chemicals also include economic and regulatory risks to your organization, which can be lessened by prudent action. Economic risks include environmental lawsuits, costs of reporting and compliance, and other "hidden" costs associated with poor management practices. Regulatory risks abound: federal, state and local U.S. jurisdictions all have laws and regulations relating to the use, storage and transportation of chemicals. Additionally, many foreign jurisdictions — particularly in Europe — have enacted strict laws regarding the labeling and possible prohibition of certain chemicals.

Practical Tools

When thinking about what you, as a supply chain management professional, can do to manage the chemicals in your supply chain, think of the "Three Rs" of chemicals:

  • Regulatory compliance is the baseline standard — not the endgame — for a chemicals management program.
  • Risks to local and global biodiversity should be reduced as much as possible by your chemicals management program.
  • Replacement of toxins with environmentally friendly alternatives represents supply chain best practice.

When you think about your chemicals management program in this way, you realize that the place to start is by getting visibility into the chemicals in your organization and in your supply chain. Get a team together and inventory all chemicals in all your organization's facilities, including both production and MRO/indirect chemicals. Analyze that inventory for its toxicity characteristics; it is best to enlist professional help at this point. Also, to whatever degree is consistent with your organization's policies regarding supply chain partners, you will also want to have an inventory and toxicity analysis of chemicals associated with your supply chain partners — what toxins are present among your suppliers, distributors and third-party logistics providers' supply chains that might negatively affect your organization and/or the environment?

Once you have an inventory of chemicals and information regarding toxicity, your next task is to eliminate toxins whenever possible. This usually requires collaboration with engineering and other technical personnel to ensure that products and processes remain acceptable. If elimination is not possible, then search out environmentally friendly alternatives (aka "biosubstitutes"). Believe it or not, this task is actually quite achievable, thanks to commercially available software that can take chemical analysis one step further and seek out biosubstitutes. The very best software even takes into account cost-per-ounce considerations.

Your chemicals management program is not complete until you develop a comprehensive method to ensure regulatory compliance for any remaining toxins. Your first task is to get a handle on all applicable U.S. and foreign chemicals laws and regulations. This might be the task of your organization's legal department. If it is your job, however, you have two choices: outsource this task to an environmental regulatory professional, or use the Internet and other resources to build your own database of applicable laws and regulations. If budget allows, the first option is much better because ensuring regulatory compliance is very complex and dynamic. Laws and regulations are changing rapidly, and you will eat up substantial internal resources trying to keep abreast.

Resources to Take You Further

A multitude of resources are available to help you develop, implement and maintain a good chemicals management program. Besides professional consultants and solutions providers, help can come from your local college or university, local and federal regulators, trade associations and think tanks. Here are a few to get you started:

The Triple Bottom Line

You really can manage the chemicals in your organization's supply chain — and even in many of your supply chain partners' — in an environmentally sound way. Taking a well-reasoned approach to chemicals management not only reduces risks to your organization and its people, it helps it gain leadership in the area of sustainability, and protects the environment.

That's the triple bottom line — people, the planet and profits, all improving at the same time — at work!

Robert W. Kuhn is a New York-based independent management consultant. He is also a former manufacturing CEO with extensive experience in process re-engineering, including Lean and TQM initiatives. To reach this author, please send an e-mail to author@ism.ws.

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Market Report

Inside the Indian Pharmaceuticals Market

A New Report Details the Top 10 Things Pharma Manufacturers Should Know About Competing in India

By RaeAnn Slaybaugh

It's with good reason that analysts at Decision Resources, Inc. (DRI) zeroed in on India as a promising pharmaceutical market in their recent report, Top 10 Things Pharma Should Know About India. As they note, India has experienced robust economic growth of nearly 8 percent over the past decade, and its middle class — an estimated 700 million people — enjoy increasing access to private healthcare facilities. These factors, among others, make India a compelling business case for any major pharmaceutical player.

However, analysts warn that Western brands face tough competition from generics manufacturers in India. To this end, before attempting to break into this market, the analysts outline 10 truths about the country's pharmaceutical market that will be integral to any manufacturer hoping to establish a presence there.

1. Alternative medicine will be your biggest competition; it is widely used and promoted by the Indian government. As the analysts point out, the government plays an active role in the education, popularization and administration of alternative therapies, even though their scientific basis is highly disputed. Prescribing herbal/ayurvedic treatments is especially common among patients suffering certain chronic ailments, such as rheumatism.

2. Promote your brand by building relationships with private and public healthcare facilities. Regardless of geographic dispersion — urban or rural — the majority of Indian households (65 percent) access private hospitals, clinics and doctors. Also, 35 percent rely on government-sponsored institutions and doctors.

3. Regional variations will impact projections and expectations for your drug. Because India is vast and has highly diverse populations and practices between its northern and southern regions, practices, therapy choices and future trends can be miscalculated, analysts warn. As such, basing projections and expectations on a national level would be misguided.

4. Increasing need for treatment of chronic diseases creates more opportunity for your brand. Even though Indians are living longer on average, analysts say hypertension, coronary artery disease and type-2 diabetes are on the rise as their lifestyles change and they age. Growing incidents of cancer are also increasing in the country, particularly breast cancer and lung cancer.

5. Urbanization contributes to economic development, which fosters a better money market for your brand. Analysts predict steady urbanization of India for the next two decades, which will increase the overall population with access to quality healthcare facilities. They also point out that urbanization provides greater potential for higher household income and the desire — and ability — to pay for costlier therapies.

6. Be prepared to "significantly" reduce the price of your drugs. As DRI explains, most Indians pay for healthcare expenses out-of-pocket, given limited health insurance coverage. Also, government-sponsored hospitals must negotiate on the cost of medicines to ensure healthcare is available to the lower economic tiers. Progress has been made toward more and better healthcare; however, as analysts point out, providing quality, affordable healthcare remains an elusive goal.

7. Relationships with the downstream supply chain — point-of-sale pharmacies in particular — will be crucial. In India, patients take the advice of pharmacists almost as seriously as their doctors', the analysts explain. In fact, within lower economic tiers, a patient might avoid seeing a doctor altogether for financial reasons, deferring instead to a pharmacist's advice.

8. Your true commercial opportunity should be estimated based on more than population alone. Although India is home to hundreds of millions of individuals at risk for or diagnosed with chronic diseases, analysts warn that their ability and willingness to pay for branded Western medicines is difficult to gauge.

To this end, they recommend thorough research of Indian epidemiology studies because applying rates from other populations is often futile in determining an accurate estimate. Next, projecting the growth of that disease population involves modeling any existing trends in disease prevalence with demographic shifts and other external influences, such as urbanization and lifestyle changes.

The analysts also advise accounting for physician preferences, patient preferences and monetary influences — household income and insurance reimbursement schemes, for example — when attempting to determine the proportion of the disease population willing and able to pay for branded Western medicine.

9. Enforcing and defending patents will not be easy. Early legal precedents and cases before the Indian courts do not bode well in terms of building trust in the legal system to uphold the patent protection afforded by law, analysts warn. This is despite positive moves enacted by the Indian government in 2005 to become more compliant with the World Trade Organization's (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights.

10. Indian brands and generics will present massive competition. Due to weak patent law regime, manufacturing generic versions of formulations still under patent protection in the West is common in India. Despite the Indian government's aforementioned WTO patent-law compliance efforts in recent years, enforcement of these laws is inadequate at present, and the population continues to grow. Given these factors, Indian manufacturers of generic formulations can leverage low production costs with price discounts to the consumer. This means a Western pharmaceutical entrant into the India market must expect fierce competition from a range of extremely low-cost generics, according to the report.

For more information on entering high-growth emerging markets, visit Decision Resources, Inc. online.

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Negotiation Skills Are Crucial

Amid Massive Pharmaceutical Mergers, Negotiation Skills Are Key

Last month, Merck's $41-billion acquisition of rival Schering-Plough created of the world's biggest drugs companies. And in January, Pfizer acquired Wyeth to the tune of nearly $68 billion, creating another pharmaceuticals goliath. Now more than ever, negotiation skills will be crucial for chemicals sourcing professionals hoping to make the most beneficial bottom-line impact.

"Power Negotiations: Unlock Your Powers of Influence and Persuasion," one of ISM's most executive-level seminars, is scheduled for Nashville, Tennessee, on June 1-3, 2009. Attendees will learn a step-by-step process for preparing, planning and conducting a successful negotiation through exercises and real-world examples. They will even develop a negotiation strategy and conduct an actual negotiation, followed by a negotiation simulation and a debriefing to clarify the learning points.

Skills attendees can expect to walk away with include:

  • Identifying the underlying interests of all parties and developing solutions to meet their interests
  • Assessing positions of strength for all parties and establishing objective standards for determining the fairness of solutions
  • Taking advantage of windows of opportunity
  • Incorporating these skills into a negotiation strategy and conducting an effective negotiation
  • Identifying the techniques for effective communication
  • Identifying the elements of a difficult negotiation
  • Recognizing negotiation tactics and responding appropriately
  • Learning about the strategies and tactics to break through negotiation roadblocks

Complete details and registration are available online.

ISM Launches Knowledge Center Offering — CPSM® Bridge Online Review

Institute for Supply Management™ (ISM) now offers a CPSM® Bridge Exam Online Review Course through the ISM Knowledge Center. A special introductory member price of $99 is available through May 6, 2009. Regular cost is $195 for ISM members and $295 for nonmembers. As with all ISM Knowledge Center online courses, supply professionals have access to their desired courses for one year, starting from the date of purchase.

The CPSM® Bridge Exam Online Review Course is for current Certified Purchasing Managers (C.P.M.s) with a bachelor's degree who are preparing for the CPSM® Bridge Exam. C.P.M.s in good standing who meet CPSM® requirements have the advantage of taking a single CPSM® Bridge Exam instead of the CPSM® Exam, which is comprised of three separate tests.

Participants get an in-depth review and assessment of the material in the CPSM® Study Guide by tailoring their course to their specific study needs. The course includes sample test questions, case studies and bonus supplemental content developed by subject-matter experts.

CPSM® Bridge Exam candidates can register for the online review course at the ISM Web site. For questions on the CPSM® qualification, contact ISM Professional Credentials.

ISM Finds Firms Plan to Reduce Capital Spending, Production Capacity in 2009

Capital spending and production capacity is likely to lessen in the coming year, according to a special survey conducted by the Institute for Supply Management™ (ISM). ISM surveyed members with senior-level job titles on how the financial market turmoil has affected their firms' plans for capital spending and production capacity. Of all respondents, 57 percent indicated their firm's primary line of business was a manufacturing industry, while 43 percent selected a nonmanufacturing industry.

The survey identified:

  • Seventy-seven percent of respondents indicated that their organizations plan to reduce substantially or reduce slightly planned capital spending in 2009. Thirty-five percent indicated they would substantially reduce capital spending while 42 percent would slightly reduce capital spending.

  • Among respondents indicating reduced capital spending plans, 79 percent selected at least one or more of five options as factors. The options indicated as most important factors in the decision were: worsening sales prospects; economic uncertainty; high cost of financing; difficulty obtaining financing; and high cost of inputs.

  • More than 42 percent of respondents indicated that their organization plans to reduce substantially or reduce slightly production capacity for 2009.

  • Among respondents indicating plans to reduce production capacity, 90.1 percent indicated that the reduction is expected to be temporary. Also, 9.9 percent responded that the reduction is expected to be permanent.

  • Respondents were also asked to rank items in order of significance to their operations. The factor that was reported as having the most significant effect on their operations was reduced demand for the organization's products/services.

From time to time, ISM conducts surveys of its members and other audiences to measure the impact of issues or events on the business community and supply management in particular. For the just-released survey results on the impacts of financial market turmoil, responses were collected for several weeks in late November and early December 2008, which resulted in 304 completed responses — a response rate of 14.3 percent.

A PDF version of the survey report is available online. ISM also offers fee-based customized research through the Research on Demand service of the ISM Resource Center.

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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:

  • The weak economy and unprecedented credit crisis have combined to cause problems for many suppliers. At stake is their ability to maintain necessary lines of credit and finance the working capital necessary to run daily operations.

    To compound the situation, high-priced material inventory is still in the market, delaying badly needed price relief. Most of the cost of raw materials has not been successfully passed on to the final customers, forcing more economic pressure to the bottom lines of suppliers across the globe.

    Given today's turbulent economic waters, the number-one priority for many CPOs is managing supplier risk and making every effort to assure a steady supply chain to final customers. Fred Heegan, vice president of purchasing for Takata Corporation in Auburn Hills, Michigan, tackles these issues and more in his March 2009 Inside Supply Management® article, CPOs' Priority: Manage Risk.

  • Not long ago, A.T. Kearney partners John Blascovich and Mike Hales set out to document the CPO evolution — which skills and traits make some rising supply management professionals stand out over others as possible future CPOs.

    They relied on the career and management experiences of two well-respected procurement executives: David Nelson, whose résumé includes TRW, Honda of America, Deere & Company and Delphi, and Maureen Corcoran, CPO of State Street.

    In spite of their divergent career paths, Nelson and Corcoran have similar advice for supply management professionals who hope to eventually evolve into the CPO role. To read their thoughts, check out this January/February 2009 eSide Supply Management article, The Road to CPO — and Beyond, online.

  • Globally dispersed teams are a fact of life in international supply management. But why do so many virtual teams underperform at best and fail miserably at worst?

    According to Jeremy Solomons, president of Jeremy Solomons & Associates in Austin, Texas, this does not need to happen if global supply management professionals build and maintain successful virtual teams. To this end, he offers 15 best practices — split up into three key areas: leadership, organization and communication — in his February 2009 Inside Supply Management® article, Leading Global Teams.

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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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