--- To enhance the value and performance of procurement and SCM practitioners and their organizations worldwide ---

 
Volume 9, Number 3, July 2011
This newsletter is published in cooperation with the ISM Chemical Group.  


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In This Issue ...
  • Chemical Industry News
    • Renewable Energy Will Be a Major Investment Priority for Military Agencies During the Next 20 Years: According to a recent report by Boulder, Colorado-based Pike Research — Renewable Energy for Military Applications — global military agencies, including U.S. Dept. of Defense (DOD), plan to spend US$26.8 billion per year by 2030 on renewable energy technologies. This figure is up from US$1.8 billion per year in 2010. According to researchers, the focus will be on mobile power applications, as well renewable energy for facilities.  Read more.
    • Automotive Industry CEOs "Very Confident" About Growth: According to PricewaterhouseCoopers' (PwC) Autofacts Q1 2011 survey of 50 automotive CEOs in 20 countries, investments in injection-molding machines and other equipment have seen a sharp upturn in recent months. Looking ahead, PwC analysts predict that global light vehicle production will increase by 26.8 million units by 2017.  Read more.
    • Distributor Analysis of Pharmaceuticals Focuses On Key Southern African Development Community (SADC) Countries: Research and Market's new report, Distributor Analysis of the Pharmaceutical Industry in Key Southern African Development Community (SADC) Countries, offers an overview of the pharmaceutical distribution channels in Malawi, Mauritius and Zambia.

      It also examines the structure of the healthcare industry — in particular, the sources of healthcare funding, healthcare expenditure data, the process of pharmaceutical regulation and the distribution and procurement of pharmaceuticals.  Read more.
    • Responsible Electronics Recycling Act Introduced In Congress: A new bill has been introduced in the House of Representatives to combat the country's improper disposal of consumer electronics. The Responsible Electronics Recycling Act (HR.2284) was presented in the House by Representatives Gene Green of Texas and Mike Thompson of California.

      The bill would ban exporting certain types of hazardous E-waste to other countries. The two Democrats and the bill's supporters say they hope it will reduce health and environmental risks — and even boost the economy — by adding and keeping recycling jobs within the United States.  Read more.
  • Feature Article
    • "The chemical multiverse" — The Deloitte Touche Tohmatsu Limited (DTTL) Global Manufacturing Industry group developed The chemical multiverse: Preparing for quantum changes in the global chemical industry to help the global chemical industry through the extraordinary transition yet to come, and to help bring overall industry performance more in line with the successful minority.  Read more.
  • Market Report
    • India or China? — When choosing where to do your pharmaceutical manufacturing outsourcing, it helps to know each country's strengths — and weaknesses — in this area.  Read more.
  • Announcements: Join your colleagues at the 80th Annual Utility Purchasing Management Group (UPMG) Conference, September 18-20, 2011 at the Hyatt Regency in Louisville, Kentucky. The UPMG exists as a professional organization to implement industrywide programs focused on the education and personal development of its membership, the sharing and development of best practices with a special emphasis on the strategic contribution of the supply chain, and the support and advancement of the supply chain management profession in accordance with the policies and guidelines established by Institute for Supply Management™.  Read more.
  • Additional Resources: Check out these links to additional resources from the ISM website.  Read more.
  • Contact Us about ISM eDigest: Chemicals


Chemical Industry News

Military Invests In Renewable Energy

Renewable Energy Will Be a Major Investment Priority for Military Agencies During the Next 20 Years

According to a recent report by Boulder, Colorado-based Pike Research — Renewable Energy for Military Applications — global military agencies, including U.S. Dept. of Defense (DOD), plan to spend US$26.8 billion per year by 2030 on renewable energy technologies. This figure is up from US$1.8 billion per year in 2010. According to researchers, the focus will be on mobile power applications, as well renewable energy for facilities.

"Increased access to clean and reliable energy has become a leading priority for the DOD and military agencies around the world, both as a means of improving energy independence as well as for purposes of increasing the efficiency and performance of all aspects of operations across multiple domains including base and facility operations, transport and portable soldier power," states a press release Pike Research. "The various composite branches of the DOD, as an organization, combine to form the single largest consumer of energy in the world — more than any other public or private entity and greater than more than 100 other nations.

"Energy consumption is the lifeblood of the U.S. military — and the supporting governmental infrastructure that facilitates and controls it," the release continues.

The research indicates that in the facilities domain, the market opportunity is largest for solar energy, followed by wind power and geothermal. Military agencies are also using microgrids for distributed energy generation that can be "islanded" from the commercial power grid, and are ardent adopters of energy-efficiency techniques. In the Mobility domain, much of the focus is on biofuels and synfuels that can serve as replacements for petrofuels for vehicles ranging from tactical vehicles, trucks, and tanks to fighter jets and naval vessels. Portable soldier power is also a major priority, and the DOD in particular is pursuing a variety of fuel cells and advanced battery technologies in this area.

An executive summary of the report is available for complimentary download on the firm's website.


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Automotive CEOs Growth-Confident

Automotive Industry CEOs "Very Confident" About Growth

According to PricewaterhouseCoopers' (PwC) Autofacts Q1 2011 survey of 50 automotive CEOs in 20 countries, investments in injection-molding machines and other equipment have seen a sharp upturn in recent months. Looking ahead, PwC analysts predict that global light vehicle production will increase by 26.8 million units by 2017.

"Most believe the worst is over," explain report authors Rick Hanna, global automotive leader; David Breen, North American automotive leader; and Paul McCarthy, automotive strategy leader.

In fact, nine out of 10 CEOs surveyed are somewhat or very confident of achieving revenue growth over the next 12 months. "That includes 52 percent who are very confident — in marked contrast with the mood last year, when only 20 percent of automotive CEOs [said the same] about the short-term prospects for growth," the authors point out.

PwC analysts attribute this improved confidence to a handful of factors, including revived demand, greater efficiency and, most important, the promising future these automotive CEOs see in emerging markets.

For a copy of the summary or the complete report, visit the PwC website.


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Pharmaceuticals Outlook: South Africa

Distributor Analysis of Pharmaceuticals Focuses On Key Southern African Development Community (SADC) Countries

Research and Market's new report, Distributor Analysis of the Pharmaceutical Industry in Key Southern African Development Community (SADC) Countries, offers an overview of the pharmaceutical distribution channels in Malawi, Mauritius and Zambia.

It also examines the structure of the healthcare industry — in particular, the sources of healthcare funding, healthcare expenditure data, the process of pharmaceutical regulation and the distribution and procurement of pharmaceuticals.

"The demand for medicines to treat communicable and non-communicable conditions has spurred the growth of the pharmaceutical industry in [these regions]," the report states. "However, local pharmaceutical manufacturing in these countries is limited with a heavy reliance on imported medicines. As demand for medicines continues to increase in these key [SADC] countries, more lucrative opportunities are set to emerge for pharmaceutical importers."

The majority of pharmaceutical imports are generic medicines from India and South Africa. "Access to medical insurance in this region is limited with a significant proportion of the population paying for medicines out-of-pocket," the report explains. "As this market is price-sensitive, more consumers opt to buy generic medicines because they are more affordable."

However, remote areas often experience delays in the supply of imported pharmaceuticals due to the underdeveloped roads network. "Thus, it is important that distributors of pharmaceuticals have a presence in different geographic locations in each country to minimize such delays," the report explains.

For more details, visit the Research & Markets website.


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Responsible Electronics Recycling

Responsible Electronics Recycling Act Introduced In Congress

A new bill introduced in the U.S. House of Representatives — The Responsible Electronics Recycling Act — aims to combat the country's improper disposal of consumer electronics. The Act presented by Representatives Gene Green (D-Texas) and Mike Thompson (D-California) would ban exporting certain types of hazardous electrical waste, or "e-waste," to other countries. They and the bill's supporters say it will reduce health and environmental risks, and even boost the national economy, by adding and keeping recycling jobs within the United States.

"Developing countries — India, China and Nigeria — have few regulations concerning electronic waste disposal," according to GreenAnswers.com. "E-recyclers in these countries have workers burn large amounts of e-waste and the materials and components left behind are picked apart and sorted. Workers also use corrosive chemicals to melt away plastic."

According to Representative Thompson, in some countries, children are "picking through this stuff and exposing themselves to dangerous chemicals. It's just an absolute mess."

Additionally, lack of legislation continues to entice some countries to export their e-waste to other countries. "Despite the health risks and environmental damage it causes, some countries see the economic benefits of shipping out trashed electronics," the website explains. "Instead of disposing or recycling it themselves, sending e-waste to these developing countries is cheaper, for the most part."

Besides regulating the export of e-waste, the Act will allow the U.S. Department of Energy to research opportunities for recycling and recovering rare earth minerals from e-waste. "These minerals can be used to produce computers and cell phones and also contributes to sustainability," the website points out. "They can be used to manufacture components of clean energy systems, such as solar panels, hybrid cars and wind turbines."

Moreover, because China has 97 percent of the world's supply of rare earth minerals — and has raised prices and cut down on exporting them because the country itself faces increased demand for them — the United States stands to benefit from having a local source.

According to GreenAnswers.com, the bill is already gathering support from Democrats and Republicans alike, as well as from many leading consumer electronics companies. These include Apple, Best Buy, Dell, HP and Samsung.

To read more about the Act, visit GreenAnswers.com.


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Feature Article

"The chemical multiverse"

Quantum changes are on the way in the global chemical industry. Here's how to prepare.

By Tim Hanley, Duane Dickson, and Dwight Allen

Changing realities in the chemical industry over the last decade meant that many companies at times struggled to survive. Others, however, were able to grasp those realities, alter their strategies accordingly, and thrive.

The Deloitte Touche Tohmatsu Limited (DTTL) Global Manufacturing Industry group developed The chemical multiverse: Preparing for quantum changes in the global chemical industry to help the global chemical industry through the extraordinary transition yet to come, and to help bring overall industry performance in line with the successful minority.

Transition means opportunity for those companies that can align their capabilities with the evolving demands of new customers. Those companies that take action to capitalize on the new opportunities will be rewarded for their foresight, planning and hard work. The opportunities might appear wherever people aspire to a better life. And, whether in the high-growth developing world or in more mature economies, technology will be the vehicle for providing it.

Unrealized Consequences

Sixty of the companies studied failed to return the cost of capital over much, or not any, of the 12-year period analyzed. Conventional logic suggests that this underperformance should have led to more restructuring, consolidation and asset closures than actually occurred. The lack of negative consequences raises the questions of whether the industry is somehow immune to the normal penalties for underperformance and whether traditional industry segments — in other words, commodity, integrated and specialty — remain reliable ways to characterize companies.

The Case for a New Starting Point

To better understand the industry's future options and limitations, analysis by DTTL's Global Manufacturing Industry group established a company's "starting point," or initial conditions entering the next decade. By taking a broader look beyond simple valuation ratios and extending the analysis to consider strategic elements related to segmentation, more can be gleaned about each company.

The analysis indicates that not all options will be available to all companies. A starting point clarifies a company's opportunities, constraints and competitive implications, and is an important dimension in developing a winning strategy. Once executives of individual companies establish their starting points, the strategic paths and choices open to them become more obvious.

Seeking Opportunities in the Megatrends

The starting point is just that — a place to start. Where a company goes next can very well lead to the next success story. By choosing wisely and capitalizing on opportunities, companies can create footholds for future growth while developing and implementing plans using drivers of strategic change.

Those opportunities will largely come from megatrends. These forces — such as an increased focus on sustainability or the rise of the middle class in China and India — will drive changes in the chemical industry in the near future, creating both disruption and opportunity. They are generating growth in new markets up and down the value chain and prompting unprecedented shifts in the industry.

Uncertainty and the Industry's Strategic Drivers

While the industry is undoubtedly headed for far-reaching changes, certain factors will nevertheless always require consideration. Four strategic drivers that merit special attention are:

1)  Feedstock. Significant uncertainty will remain a factor as companies look to gain access to feedstocks and energy. Driving this uncertainty is a confluence of issues that are both controllable (such as capacity buildup, increased focus on carbon footprints and a lack of alternatives to carbon-based feedstocks) and uncontrollable (such as the decoupling of crude and gas prices, and global disparities in dealing with energy security issues).

2)  Talent. Chemical companies in the developed world have been downsizing for years, shrinking the talent pool, but have not yet been actively recruiting from universities. In some cases, entire teams with expertise in specific chemical or manufacturing processes are preparing to leave the work force in the next five years. The task is to identify and attract high-potential candidates earlier in their careers, as well as to be even more disciplined in developing and managing succession plans for high-potential leaders.

3)  End markets. Consumption patterns are diverging globally. The recent economic downturn reset spending in Western countries to lower levels. At the same time, spending in developing countries — with their growing middle classes — is rising. Responding to these trends will involve building marketing experience and discipline to make use of a company's wealth of customer data. In addition, shifting customer needs and behaviors in both developed and developing markets can be a basis for targeting product development.

4)  Innovation. Product and services innovation is still viewed as central to the mission of most chemical companies. In spite of the dearth of recent breakthroughs, declining yields, reduced budgets and low tolerance for trial and error, innovation should remain an essential strategic pillar, and a defining element of a company's culture.
Practical, Flexible Strategies

By understanding the opportunities created by megatrends and taking into account its starting point, a company can design a strategy that improves its industry position or monetizes some or all of its value before it erodes further. The typical chemical company comprises a portfolio of businesses. Disaggregating each of those individual business units into its product line/customer combinations, followed by an analysis of pricing and profitability, will help clarify the picture.

From there, a company can unlock value and increase potential by addressing negative value contribution, thereby freeing up resources and cash to reinvest in more promising opportunities.

The Road Ahead

Taking on these challenges will require leadership and multitasking. Within a single company, significant restructuring activities might need to occur in parallel with audacious new growth initiatives. Being prepared is hard work, but being unprepared can entail real risk. Companies inside and outside of the chemical industry have successfully navigated similarly tough circumstances.

Chemical companies that acknowledge their current position and adopt a flexible strategic approach stand the best chance of successfully reshaping themselves and their industry over the next decade.

Tim Hanley is Global Chemical sector leader for Deloitte Touche Tohmatsu Limited. Duane Dickson is a principal at Deloitte United States (Deloitte Consulting LLP). Dwight Allen is a director at Deloitte United States (Deloitte LLP). To contact these authors, send an e-mail to author@ism.ws.


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Market Report

India or China?

When choosing where to do your pharmaceutical manufacturing outsourcing, it helps to know each country's strengths — and weaknesses — in this area.

By Yingming Yue

Given the aging U.S. population and increased demand for better healthcare, the biopharmaceutical and biotech industry is poised to be a major growth driver for the global economy in the coming decade. Nevertheless, the industry is not without its challenges.

For one thing, it takes six to nine years — and more than US$1 billion — to bring a new drug to the market. Additionally, the rate of new-drug approval has significantly decreased over the past two decades. Under increased pressure to improve accountability and productivity, senior executives rank achieving effective and efficient operations very high on their agenda. Using contract manufacturing and research organizations to advance internal pipeline has become a very popular strategy when working toward that end.

Among all the chemicals manufacturing outsourcing (CMO) choices, India and China have become two leading destinations. They offer low-cost manufacturing, strong technical expertise and a better-than-average understanding of regulatory requirements in the Western market. Compared with other emerging economies, these two countries also have more developed domestic markets, as well as strong policy support from their respective governments.

From a strategy standpoint, Indian companies have made contract research and manufacturing services (CRAMS) a major growth strategy. Their success as second innovators has led to partnerships with multinational companies, or MNCs.

In contrast, China had a late start on contract manufacturing due to government restrictions prior to 1999. Since then — driven by the desire to better use excess capacity — contract manufacturing in China has been legalized by the State Food and Drug Administration.

Competitors and Collaborators

Together, China and India supply more than 40 percent of total active pharmaceutical ingredients, or APIs, to the U.S. market. They are also in fierce competition to gain market share from their U.S.- and EU-based competitors in the small-molecular and biological-pharmaceutical markets.

Meanwhile, there has been a growing engagement between India and China in the economic sphere, which has extended to the pharmaceutical and biotechnology sectors, as well. While several major Indian pharmaceutical companies have set up joint ventures and production facilities in China, China has emerged as a very important supplier of APIs and bulk drugs for the pharmaceuticals industry in India. As a source of India's imports of medicinal and pharmaceutical products, China's share is the highest- reaching 34.6 percent in 2005-2006 — having risen from 6.2 percent in 1993-1994. Correspondingly, as a destination for India's exports of drugs, pharmaceuticals and fine chemicals, China's share increased from 0.4 percent in 1993-1994 to 3.5 percent in 2005-2006.

Their Own Unique Advantages — and Disadvantages

Selection of a CMO destination should be based on a holistic approach that includes careful evaluation of factors — project management, technical collaboration, quality and regulatory compliance, to name a few. The table below compares the countries side-by-side using such an approach.

Graph 1: China and India - Advantages and Disadvantages

Given its huge excess capacity and better infrastructure, China has a cost advantage over India in the table above, particularly for compounds in high-volume production. For many pharmaceutical and biotech companies looking to outsource, communication is critical to ensure alignment of expectations. India scientists and engineers are, in general, more proficient in English communication than their Chinese counterparts. As such, they are often more adapted to the Western style of communication and problem-solving.

From a technical collaboration standpoint, both countries have strong expertise in "scaling up" — the ability to increase batch size without compromising product quality — and pharmaceutical process chemistry. Both have a large pool of talented scientists and engineers. India is believed to be stronger in small-molecular chemistry, while China is viewed as having an edge in biological chemistry.

India has a long history of working with Western pharmaceutical industries. For many years, Indian companies have adopted a very aggressive international strategy. The country has acquired generic firms in developed economies to create links with multinational corporations. By setting up facilities closer to its customers, India has enhanced its ability to bid on early-stage R&D and scale-up projects, as well as to alleviate concerns about IP protection. For these reasons, Indian companies have relatively deeper understanding of quality standards and regulatory requirements of regulated market, as evidenced below:

Graph 2: India and China - Comparison of the number of firms having quality standards and regulatory requirements of a regulated market.

Moreover, according to Thomason Research, there are 53 Indian companies with significant experience in developed/highly regulated markets, compared with 37 in China. However, if up-and-coming manufacturers with some outside experience are also counted, China has 143 companies — some of which have experience selling to developed markets — compared with 84 in India. This indicates stronger momentum in China.

Putting It All Together

In short, India currently has a slight advantage over China in the pharmaceutical manufacturing area, and it will likely maintain that lead for the next few years. India also will probably benefit from China's quality missteps in the short term, resulting from the Heparin and Melamine incidents. To avoid head-to-head competition with China in low-margin and high-volume products, India is moving up the value chain and focusing increasingly on high-margin, low-volume products.

The perceived gap in pharmaceutical manufacturing between China and India is small, and it's quickly closing. Over the past few years, a large number of Western-trained Chinese scientists and managers have returned to China, drastically closing the gaps in communications and understanding of regulated markets. As domestic market starts to saturate, major Chinese pharmaceutical companies are recognizing the importance of contract manufacturing as a growth driver, and venturing into international market.

It is likely that more prominent CMOs will emerge as the Chinese pharmaceutical industry continues the trend of consolidation. China's superior infrastructure and dominance in API production will likely position it as an attractive sourcing destination for long-term cost reduction.

Yingming Yue is associate director of supply management for Nektar Therapeutics in Huntsville, Alabama. To contact this author, send an e-mail to author@ism.ws.


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Announcements

80th Annual Utility Purchasing Management Group (UPMG) Conference Scheduled for September 18-20, 2011

Join your colleagues at the 80th Annual Utility Purchasing Management Group (UPMG) Conference, September 18-20, 2011 at the Hyatt Regency in Louisville, Kentucky. The UPMG exists as a professional organization to implement industrywide programs focused on the education and personal development of its membership, the sharing and development of best practices with a special emphasis on the strategic contribution of the supply chain, and the support and advancement of the supply chain management profession in accordance with the policies and guidelines established by Institute for Supply Management™.

This event offers a golf tournament, networking reception and guest/spouse program. Complete details are available on the UPMG website.

Leveraging Value: Strategies for Commodity Teams

In Philadelphia on September 15-16, 2011, ISM will host a seminar, "Commodity Teams: Leveraging Value Across the Entire Organization." This advanced educational offering will teach attendees how to organize and use commodity teams with a value focus. They will also learn effective team-building, participation skills and ways to measure and report value delivered.

This seminar was designed with supply management professionals — and others involved in a commodity team — in mind. It is also valuable to those who might become members of a commodity team initiative in their organizations.

Key strategies covered include:

  • How to form an effective commodity team for the purchase of goods and/or services
  • How successful commodity teams function
  • How to measure team success
  • How to effectively communicate value delivered.

Attendees will earn 14 Continuing Education Hours. For complete details, or to register, visit the ISM website.

Registration Open! ISM Sustainability and Social Responsibility Conference

Scheduled for November 7-8, 2011 in Lake Buena Vista, Florida, the 4th annual ISM Sustainability and Social Responsibility Conference is now open for registration online.

As in years past, attendees will learn how top leaders in supply management are implementing the numerous concepts of sustainability at the one-and-a-half-day program.


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Additional Resources

A Wealth of Information at www.ism.ws

Visit ISM's website, 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, as presented at the latest ISM International Supply Management Conference held in May:

  • Alcoa Procurement & Business Partnership Delivers Record Results — In this session, Christie Breves, C.P.M., CPO at Alcoa, showed attendees how the organization's procurement group delivered record spend reduction in response to the global financial crisis, which saw aluminum prices decrease 57 percent in five months. The crisis drove a new level of partnership with the businesses that led to record spend reduction and continues to deliver benchmark results.

  • Engaging Business Partners to Align Strategies and Fuel Results — In her session, Paula Tolliver, vice president, global procurement for The Dow Chemical Company, explains how the company's purchasing function moved from a buying organization to a strategic sourcing organization, increasing its value delivery more than 150 percent while improving client satisfaction from 75 percent to 94 percent. An important part of this successful journey to first quartile performance was the change in how Dow Purchasing engages key business and functional stakeholders.

  • Knowledge Management Services: "Evolving Procurement Practices to Deliver Business Value in Consulting and Legal Services" — Led by four Pfizer executives (Global Sourcing Managers Dan Carney, CPSM, MBA and Joanne Lupatkin, CPSM MBA; Senior Category Manager Lisa Khan, MBA, CPA; and Director Elena Kholodenko Polansky, CPSM, MS), this session shows how Pfizer's Worldwide Procurement Professional Services team developed and implemented a new set of processes in the areas of consulting and legal services. This new approach increased value and greater senior management engagement at Pfizer, as well as cumulative savings of more than US$370 million.

  • Collaboration: The Path to Maximizing the Quality, Service and Cost Equation — In this session, Arnaud Deshais, CPIM, CSCP, CPM, CPSM, head of global value chain for Novartis Vaccines & Diagnostics, talked about why impactful supply chains prioritize collaboration. The presentation includes plenty of examples of effective supply chains that deliver value to their organizations by partnering in sourcing, planning, manufacturing and delivering customer orders. It also offers best practices in relationship management beyond traditional contracts.

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