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Volume 10, Number 2, April 2012
This newsletter is published in cooperation with the ISM Chemical Group.  


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2012 ISM Conference Brochure

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2012 ISM Spring Educational Resource Catalog

In This Issue ...
  • Chemical Industry News
    • Precious Metals Lead Commodities Rally: According to ProcurementLeaders.com, the commodities rally evident in January was led by precious metals. Moreover, market experts point out that many commodities reversed the slump seen in the second half of 2011.

      "It's starting to look more likely that the global economy has been more resilient than many had expected," said Nelson Louie, global head of commodities in Credit Suisse's Asset Management division. Louie noted that some of the downside risks have decreased, "which could be supportive for global commodity consumption in 2012."  Read more.

    • Water Scarcity in China Affects Plastics Firms: China's thirst for cleaner water is creating opportunities for some plastics firms, as it pushes others to adopt cleaner manufacturing practices, according to PlasticsNews.com.  Read more.

    • Pharma Cargo Theft Dropped Off in 2011: A recent FreightWatch International report on cargo theft shows that the number of thefts of pharmaceutical shipments declined significantly in 2011, as evidenced by fewer incidents and a much lower average value per theft.  Read more.

  • Feature Article
    • Reexamining Your Chemical Supply Chain Transportation Practices — Transportation is an area which chemical supply management professionals need to be reviewing right now, for a few reasons. First, this year might be the first one in a long time when carriers gain the upper hand in pricing negotiations with shippers. Second, many organizations have undergone change over the past several years, due to the struggling economy. Combined, these factors impact our chemical transportation decisions. The timeline/horizon is more compressed, which necessitates us, as chemical supply management professionals, to be able to respond quickly to orders from customers.

      So, the question is this: What can we do to address transportation strategies in the face of rising costs and changes in our own organizations?  Read more.

  • Market Report
    • Impact of Shale Gas Development on U.S. Ethylene and Propylene — The rapid development of the vast U.S. shale gas reserves has been nothing short of a savior for the U.S. petrochemical industry. Just four years ago, we were writing the industry obituary and being asked, "What's the next plant to be shut down?" Now, we talk about a new wave of investment not duplicated in the past.

      However, a key question arises: If something like shale developed so quickly, does it then have the potential to disappear just as fast? To answer it, we must take a brief look far back into the history of the natural gas industry in the United States.  Read more.

  • Announcements: If you couldn't make it to the 2012 ISM Chemical Group Conference last month in Las Vegas — and you're a current ISM member — presentations and sessions from the event are now available for download on the group's homepage. Topics include conflict minerals, "fracking", sustainability, energy and the supply chain and more.  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

Precious Metals Lead Commodities Rally

Precious Metals Lead Commodities Rally

According to ProcurementLeaders.com, the commodities rally in January was led by precious metals. And, market experts point out that many commodities reversed the slump seen in the second half of 2011.

"It's starting to look more likely that the global economy has been more resilient than many had expected," said Nelson Louie, global head of commodities in Credit Suisse's Asset Management division. Louie noted that some of the downside risks have decreased, "which could be supportive for global commodity consumption in 2012."

Fundamentals for key commodities remain positive, but the commodity markets continue to be susceptible to global supply shocks, Louie added. "For example, ongoing tensions with Iran have led to U.S. and EU sanctions. While the evolution of this process is unpredictable, the potential for a reduction in supply of crude oil is elevated."

Credit Suisse pointed out that Dow Jones-UBS Commodity Index Total Return was up by 2.47 percent in January. Overall, 14 out of 20 index constituents increased in value. Precious metals was the best performing sector — up 12.69 percent — with both gold and silver delivering double-digit returns after the Federal Reserve announcement. Industrial metals increased by 10.92 percent for the month, supported by an improved macro-economic backdrop and continued draws in London Metals Exchange warehouse inventories.

Over the same period, livestock also increased — up 2.3 percent — as live cattle benefited from tighter than expected inventory levels. Both lean hogs and live cattle continued to be supported by strong export demand.

Agriculture was relatively unchanged, (down .67 percent). The USDA's January corn inventory estimates were much higher than the market anticipated; however, strong export sales helped lead to a recovery. The estimate for winter wheat seedings was higher than last year and also much higher than expected.

Energy, however, ended the month down 3.47 percent, led by natural gas. Petroleum products and brent oil posted positive returns following the announcement of the proposed EU embargo on oil imports from Iran. Petroleum demand continued to soften compared to last year, as unprecedented warm weather in the U.S. and Europe weighed on heating-related demand.


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Water Scarcity in China Affects Plastics Firms

China's Water Scarcity Problem Pushes Plastic Firms' Sales, Pollution Control Efforts

China's thirst for cleaner water is creating opportunities for some plastics firms, as it pushes others to adopt cleaner manufacturing practices, according to PlasticsNews.com staff writer Steve Toloken.

Addressing water scarcity is a top priority of the government, with analysts at the Hong Kong-based China Water Risk (CWR) project noting it got "heavy mention" in the country's latest 12th Five Year plan, reflecting worries over long-term problems from water scarcity and pollution.

Based on interviews he conducted at the Water China 2012 show — held Feb. 23-25 in Guangzhou — Toloken says all that attention has plastics pipe manufacturers, makers of filtration systems and others expecting more demand, even as they face more pressure to clean up their manufacturing processes.

"It is a big opportunity," Scott Wu, general manager for Glynwed Pipe Systems (Shanghai) Co. Ltd., told Toloken. Further, Wu says he believes foreign manufacturers have some advantages: "Today in China and Asia, there are lots of local players. Their weakness is technology and systems."

Glynwed — which has a joint venture pipe extrusion factory with more than 40 production lines in Zhongshan, Guangdong province — sees cities using more plastic pipes in water systems, even as steel remains preferred for cost reasons. Still, according to Wu, governments in smaller cities like Zhongshan are now investing more in waste water treatment, following the lead of the bigger cities such as Shanghai, Beijing and Guangzhou.

And, he adds, Glynwed is putting more focus on Asia generally; in January, it opened its first Asia headquarters in Malaysia. "It moved a top executive from its Belgian headquarters to Kuala Lumpur to look at investment opportunities and oversee what had been separately-managed subsidiaries in Asia."

"With climate change exacerbating water scarcity, water risks clearly are here to stay and businesses are starting to take notice as water, or rather the lack of it, affects their bottom-lines," CWR analysts explain. They also note that last year saw a meeting of the State Council, China's top administrative body, just to discuss water issues.

The meeting's "principal concern was China's ability to meet demand for water in the future, given current levels of water resources and pollution," the analysts concluded.


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Pharma Cargo Theft Dropped Off in 2011

Cargo Theft in the Pharma Sector Declined Significantly Last Year, According to Report

A recent FreightWatch International report on cargo theft shows that the number of thefts of pharmaceutical shipments declined significantly in 2011, as evidenced by fewer incidents and a much lower average value per theft.

Last year, 36 shipments-related thefts (28 of them trailer thefts) were reported — down from 49 in 2010. Even more significant, the average value of a lost shipment was US$585,000, versus $3.78 million in 2010.

The report also pointed out that 2011 marks the first year the pharmaceutical industry didn't have the highest value per theft incident; the electronics industry did.

In 2011, only two thefts exceeded $1 million in value, whereas previous years' average loss per pharmaceutical theft ranged from $3.5 million and $4 million.


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Feature Article

Reexamining Your Chemical Supply Chain Transportation Practices

A five-step transportation review process enabled one chemical supply chain organization to achieve service improvements, strengthen partner relationships — and even avoid price increases.

By Matt Francis, CPSM

Transportation is an area which chemical supply management professionals need to be reviewing right now, for a few reasons.

First, this year might be the first one in a long time when carriers gain the upper hand in pricing negotiations with shippers. Continued economic growth (albeit slow), driver shortages, regulatory changes and carriers' hesitancy to add equipment will result in capacity issues. I suspect these complications will allow carriers to be successful in implementing 10 to 15 percent rate increases later this year.

Second, many organizations have undergone change over the past several years, due to the struggling economy. For one thing, as a result of the credit crunch, many have reduced their inventories. Additionally, market uncertainty has prevented many companies from confidently forecasting as far into the future as they once did.

Combined, these factors impact our chemical transportation decisions. The timeline/horizon is more compressed, which necessitates us, as chemical supply management professionals, to be able to respond quickly to orders from customers.

So, the question is this: What can we do to address transportation strategies in the face of rising costs and changes in our own organizations? To answer it, I'll share the process we conducted at my own organization, Doe & Ingalls (D&I).

A 5-Step Process, Defined

A robust transportation strategy is very important at my organization, where we handle inbound transportation of materials into our regional service centers and outbound delivery to our customers.

In 2010, we reviewed Doe & Ingalls' transportation and logistics activities and decided to shift our strategies. The result is a program which has improved service levels to our customers and provided long-term pricing stability to our organization. These steps allowed us to maintain pre-pay and add rates to our customers in 2011 — even in an environment in which rate increases were being implemented and fuel surcharges were rising. We've also solidified our relationships with partners who can offer the high-caliber, professional services that our customers require.

Here's a step-by-step breakdown of our process.

Step 1: Kickoff. We began by revisiting our transportation objectives — namely, safety, service and cost. While we agreed these objectives should continue to drive our decisions, we felt there were opportunities to improve service and price.

At the time, we saw evidence that rates would be increasing between 10 and 15 percent in the near future. And, we recognized that we were making 100 percent of our decisions at the local level, without leveraging our national presence. Wanting to achieve stability and create a win-win with our partners, we thought that entering into a more collaborative, long-term relationship with carriers might help us achieve both objectives.

Step 2: Select transportation partners. After we examined our transportation spend and carrier delivery and safety performance history, we agreed on the carriers we wanted to engage. Because transportation is such a key part of chemical distribution, we had a good idea from the start about partners with whom we wanted to do business.

We chose a core group of national carriers for the company, as well as a select number of regional carriers for each D&I service center. This dual strategy was important to meeting the high standards of our customers for quality, consistency and on-time delivery.

Step 3: Create a win-win. Our next step was to ensure our potential partners' buy-in for the program. As we worked with our carriers, we communicated a consistent, win-win message:

1)  We would be implementing a core carrier program to reduce our total number of carriers from more than 30 national carriers to three, as well as one or two regional carries at each site. Transportation providers selected for the program would immediately benefit from increased volumes and secure future business.

2)  We expected a collaborative relationship with our transportation partners. This would result in costs being eliminated from the relationship, not just being pushed to the carrier.

3)  Price increases would be capped on a year-to-year basis. This would last for three years.

It's important to point out that our organization didn't force its transportation partners into rate agreements that wouldn't work for them in the long term. We communicated to our carriers that their ability to be profitable was important to building a long-term, true partnership.

Step 4: Execute. With our core carriers established, our organization needed to live up to its end of the agreement. To do so, we took two immediate actions.

First, we provided training to the employees making the carrier selection decisions. The training was fairly simple since it didn't require them to learn new skills, but to limit the number of carriers they used. So, we focused the training on the benefits to D&I — reduced activity at the dock, multiyear price stability, and to our transportation partners — no price negotiations for three years, increased business and commitment to mutual costs savings.

Second, we notified our non-core carriers that we no longer required every day pickup, and that we'd no longer be using their service.

The process of consolidating carriers went smoothly and had an immediate positive impact, reducing the number of daily pickups and deliveries by 20 to 40 percent, depending on the site. This process also made it easier to monitor the core carriers' performance.

Step 5: Monitor. The final step in our process was to establish monthly metrics to monitor the core carrier program. The monitoring process was comprised of two main components:

1)  A detailed shipment analysis provided to the people making transportation decisions on a daily basis. The report allowed them to review the decisions they made and look for opportunities for improvement. These opportunities included identifying when a different transportation mode should have been used, areas for inbound consolidation and identifying when noncore carriers were used.

2)  A monthly meeting of the transportation team to review high-level metrics. This monthly review helps assure our organization is adhering to its strategy and that carriers are continuing to meet their service and pricing commitments.

We continue to monitor our transportation decisions today and find ways to make improvements. So far, the program has been a success. Not only has our organization achieved its objectives for service and pricing improvements, but it has established stronger relationships with its transportation partners — and even avoided 2011 price increases.

Matt Francis, CPSM is Senior Manager, Supply Chain and Logistics, at Doe & Ingalls in Durham, North Carolina. To contact this author, send an email to author@ism.ws.


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Market Report

Impact of Shale Gas Development on U.S. Ethylene and Propylene

By John Stekla

The rapid development of the vast U.S. shale gas reserves has been nothing short of a savior for the U.S. petrochemical industry. From writing the industry obituary just four years ago and being asked, "What's the next plant to be shut down?", we now talk about a new wave of investment not duplicated in the past.

However, a key question arises: If something like shale developed so quickly, does it then have the potential to disappear just as fast? To answer it, we must take a brief look far back into the history of the natural gas industry in the United States.

In 1825, the first natural gas well was dug in Fredonia, New York. It was 27 feet deep and collected gas from what is today known as the Marcellus shale play. Colonel Drake dug his first oil well in 1859 in Titusville, Pennsylvania, so the birth of the natural gas industry actually predates the oil industry by 34 years. Because there was a more developed market for oil, energy explorers subsequently went looking for oil rather than natural gas.

As such, the boundary limits for many shale plays were outlined over the ensuing years. However, some limited natural gas production from shale deposits was established in New York, Pennsylvania and Michigan. As energy companies looked for oil, the extensive reach of the shale deposits became clear.

But, there were two primary problems with developing shale as an energy source. First, the deposits covered a broad area, but they were very thin — only 100 to 200 feet thick on average. Thus, typical direction drilling was an inefficient way to develop these hydrocarbon reserves. Second, the shale geology didn't give up the contained hydrocarbons very easily, and it didn't respond to the usual types of well stimulation techniques in use at those times.

Even so, the combination of horizontal drilling and hydraulic fracturing — which became commercially successfully in 1997 and is now termed "fracking" — was the key to unlocking the vast sources of hydrocarbons. As natural gas production increased, so did the production of natural gas liquids which are contained in "wet" natural gas. As these liquids provide additional uplift to the value of the natural gas itself, they became a target for production. This led to increased liquids availability for chemical feedstocks (especially of ethane) at low prices relative to crude oil-based feeds. Once crude oil and natural gas prices started to disconnect in the middle part of the last decade, the ethane advantage could only increase. Thus, the ethylene industry started maximizing the consumption of ethane for feed into their steam crackers to make the lowest cost ethylene possible. This has led to a rebirth of the U.S. petrochemical industry.

World Cash Cost Comparison Chart

In the above chart, a comparison of the cash costs of producing ethylene in the United States for January and February of 2012 is compared to other significant producing regions of the world. As shown, the cost of producing ethylene from ethane in the U.S. is very advantaged compared to production in most other regions of the world. Because of the low production costs, the U.S. market has been beautifully efficient over the past three years, with producers able to feed the domestic demand fully, but yet have the low-cost position to enable exports at whatever level is necessary to sell out their plants.

However, one of the truths that became apparent over the past two years is that low cost doesn't mean low price. Because of the tight supply and demand balance in the U.S., domestic prices have been quite high, which squeezes the non-integrated consumer of ethylene.

Global Monthly Ethylene Prices Chart

In the next chart, the recent U.S. ethylene price history and a two-year forecast is shown, compared to the European contract price (WEP) and the spot price in Asia (SEA CFR). Ethylene prices are expected to generally remain high in the United States as the price in other regions is set by higher cost naphtha based production, which has the influence of boosting domestic prices.

While the shale gas revolution has boosted the availability of cheap ethane to make low-cost ethylene, it has had an extremely negative impact on co-product production from steamcrackers, primarily propylene and butadiene. When ethane is used as a feedstock to make ethylene, the output is ethylene and a little fuel gas. To make propylene and butadiene, heavier feed — propane, butane or naphtha, for example — must be cracked. However, these feeds don't make cheap ethylene compared to ethane, and pursuing the lowest-cost ethylene production is the primary driving force for most producers. As such, with the switch to more ethane feed, the production of propylene and butadiene has fallen dramatically.

U.S. Propylene/C4 Volumes Decline Chart

In the above chart, the production level of ethylene, propylene and butadiene is indexed back to 2000 and projected out to 2016. While ethylene production levels have recovered close to the 2000 level, propylene and butadiene production has dropped around 30 percent. Adding the drop in steam cracker production to the declining propylene production due to the lower operating rates of refineries has resulted in a serious structural shortage of propylene. This has contributed to the higher propylene price relative to ethylene seen over the past few years, as well as to the recent increased propylene price volatility.

Likewise, the price of butadiene has jumped due to the declining production. It is projected that propylene and butadiene will remain in short supply for the foreseeable future, with elevated prices to match.

Over the next several years, a number of "on-purpose" propylene plants — mostly based on propane dehydrogenation — will be constructed. This additional production will be welcomed by the propylene consumers, but it will be several years before enough capacity is added to significantly loosen the tight propylene supply and demand balance and lower the propylene price relative to ethylene.

John Stekla is Director, Ethylene Studies at IHS Chemical in Houston. To contact this author, send an email to author@ism.ws.


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Announcements

2012 ISM Chemical Group Conference Sessions Now Online

If you couldn't make it to the 2012 ISM Chemical Group Conference last month in Las Vegas — and you're a current ISM member — presentations and sessions from the event are now available to download. They include:

  • Global Health, Safety, and the Environment (HSE) — Jim Vangeloff, Eli Lilly Global HSE, External Partners Program Operations Manager
  • Conflict Minerals — Bob Engel, C.P.M., Resources Global Professionals
  • 2012 Supply Chain Management Survey Results & Trends — Bob Engel, C.P.M., Resources Global Professionals
  • "Frack to the Future" North American Ethylene, Propylene Overview — John Stekla, Director-Ethylene Studies, IHS
  • The Global Recovery — Norbert J. Ore, CPSM, C.P.M., Former Chair, ISM Manufacturing Report on Business®
  • Developing an Effective Scope of Work: The First Step To Supplier Performance — Jim Haining, CPSM, CPSD, C.P.M., A.P.P., MBA, Purchasing Administrator, Clark County, Nevada
  • Sustainability, Energy & Supply Chain — David Rice, President/Founder, Dave Rice Consulting
  • Where Are We in the Chemical Cycle? The US shale boom, macro factors and outlook — Joseph Chang, Global Editor, ICIS
  • Lessons Learned from Sourcing in the Emerging Markets — Dix Weaver, Supply Chain Advisor, Chemical Procurement, Evonik Industries

To learn more about the ISM Chemical Group — including membership information, officer directory, activity calendar and newsletter — visit the Chemical Group's website.


CNN's Wolf Blitzer to Deliver Opening Keynote at ISM 2012 Conference

Emmy Award-Winning Journalist Wolf Blitzer will deliver the opening keynote at Institute for Supply Management™'s (ISM) 97th Annual International Supply Management Conference and Educational Exhibit. ISM's Conference takes place May 6-9, 2012 in Baltimore at the Baltimore Convention Center.

Blitzer is CNN's lead political anchor and anchor of "The Situation Room with Wolf Blitzer," as well as CNN's former senior White House correspondent. He brings a wealth of experience to the fast-paced political news program "The Situation Room with Wolf Blitzer." In addition to politics, Blitzer is known for his in-depth reporting on international news. His work has taken him to war zones, peace conferences, sites of natural disasters and countries around the world to cover a wide range of major breaking stories. He has interviewed some of recent history's most notable figures, including presidents and heads of state, politicians, candidates and observers.

ISM's Conference also attracts notable figures and key influencers for four days of supply management professional development, training and networking. Attendees can customize their educational experience by choosing workshops from one or more of nine learning tracks: Best Practices in Supply Management; Developing and Leading Impactful Supply Management Organizations; Essential Skills and Abilities; Global Trends in Supply Management; Manufacturing; Risk Management; Services Procurement; Supplier Development and Collaboration; and Talent Management.

Conference Registration

Member price for registrations received by April 13 is US$1,279, and member price for registrations received after April 13, is US$1,349. Visit the ISM website for online registration, to download the Conference brochure, and to book hotel reservations.

Educational Exhibit Hall

This year's Educational Exhibit Hall showcases more than 100 suppliers. The Exhibit Hall will be the setting for several breakfasts and networking sessions. Popular Industry Spotlights are back this year; these mini educational sessions will feature senior executives from some of ISM Conference's major sponsors.

Conference Career Center

World-class organizations will be on hand to conduct on-site interviews and recruit potential employees. Conference registrants can upload their résumés onto the confidential Conference Career Center database. Conference attendees who aren't looking for a new position can listen in on the Conference Career Center Special Sessions and come away with tools, tips and strategies to advance their careers.


ISM Announces Finalists in Awards for Excellence in Supply Management

Supply management departments at 13 companies are among the finalists in the Institute for Supply Management™ — Michigan State University Awards for Excellence in Supply Management. Finalists in the 2012 competition were selected from applications received in an online submission process held from July 1, 2011 to September 16, 2011. Multiple entries were welcomed in one or more of the following categories: Process, People, Organization/Structure, Technology and Sustainability.

The 2012 Institute for Supply Management™ — Michigan State University Awards for Excellence in Supply Management Finalists (and Categories) are:

  • Bank of America — (Sustainability)
  • Bombardier Aerospace — (Sustainability)
  • Boston Scientific Corporation — (Organization/Structure)
  • Cisco — (Process)
  • Delphi — (Organization/Structure)
  • Delphi — (People)
  • Hewlett-Packard Company — (Sustainability)
  • IBM Corporation — (Process)
  • IBM Corporation — (Technology)
  • Rolls-Royce — (Process)
  • Sodexo, Inc. — (Technology)
  • Symantec Corporation — (Process)
  • The American Red Cross — (Organization/Structure)
  • T-Mobile — (Process)
  • T-Mobile — (Sustainability)
  • Tyco International — (Process)

The Institute for Supply Management™ — Michigan State University Awards for Excellence in Supply Management are open to supply management departments of all sizes and geographic locations, both domestic and international.


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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:

Collaborating With the Competition — This March 2012 Inside Supply Management® article delves into the myriad ways supply management organizations are exploring collaboration. One such effort is turning traditional vertical collaboration strategies on their side and may change the way organizations view their supply chain — and their competitors.

Career ROI: Advice From the C-Suite — For Amit Marwah, director of global logistics & distribution operations at Atkore International, professional success has boiled down to a piece of advice his father gave him at 17: "Control your destiny, or someone else will." As Marwah details his career trajectory, he zeroes in on the biggest tools in controlling his fate in business: working smart, and being receptive to new opportunities.

How to Build a High-Impact Indirect Sourcing Organization — This March/April 2012 eSide Supply Management article zeroes in on what indirect sourcing strategies worked best for a supply chain executive at Terex, when the cost savings pressure was on. The process of ensuring the management team's expectations were met broke down into four steps: 1) Determine where you're spending money, 2) Conduct an opportunity assessment, 3) Plan adequate resources; ensure the capacity to achieve savings objectives, and 4) Shift the focus to ongoing supplier management.


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