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

 
Volume 1, Number 1, July 2003
This newsletter is published in cooperation with the ISM Chemical Group.  
 
In this issue...
  • Chemical Industry News: A new piece of legislation could impact chemical plants in the name of Homeland Security. Read more.
  • Research: The chemical industry appears well-stocked with purchasing professionals, at least compared to some other industries, according to cross-industry benchmarks. Read more.
  • Feature Article: It's not always the price of the chemicals that drives up costs. If you're looking for ways to save money, misuse and waste are two areas to target. Read more.
  • Commodity Report: Stretch your knowledge of the plastics industry and the current dynamics impact the resins and plastics products supply chains. Read more.
  • Announcements: The ISM Chemical Group announces its Fall Meeting & Programs for 2003. Read more.
  • Additional Resources: : Looking for more online supply management information? Read more.
  • Contact Us about ISM eDigest: Chemicals

Chemical Industry News

Proposed Act Addresses Homeland Security

According to the May 2003 issue of Capitol Connection, "Senator James Inhofe (R-OK), chairman of the Senate Environment and Public Works Committee, has introduced legislation to improve security at U.S. chemical plants." The legislation, called the Chemical Facilities Security Act, follows last year's version of the bill that was introduced by Senator John Corzine (D-NJ). The Capitol Connection reports that in this recent version, the Department of Homeland Security (DHS) would require plants currently covered by the Clean Air Act to go through vulnerability assessments and site security plans and imposes stiff penalties for companies that fail to comply. The Act also provides for the DHS Secretary to certify the ongoing industry voluntary safety efforts. In other words, adherence to the American Chemical Council's "Security Code" would be deemed equivalent to adherence to the DHS regulations.

However, contention is rooted in the issue of requiring "inherently safer technologies," as suggested in Corzine's bill. In that bill, the argument was that the best way to save lives was to use safer technologies -- including substituting less toxic substances or reducing storage quantities. However, by its allowing for voluntary efforts in lieu of following DHS regulations, the more recent Act is being criticized for showing not enough concern about public safety and too much concern for industry needs. The industry has been concerned by the costs of implementing safer technologies, as well as the availability and improper application of such technologies.

Whether from voluntary industry guidelines or from government-mandated regulations, supply managers will be increasingly involved in chemical safety initiatives - particularly in decisions about substitutions, inventory levels, security technology and its costs, and even the security of the physical sites. For more information, see the American Chemical Society's Capital Connection article or the U.S. Senate's Committee on Environment and Public Works press release.

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Research

Chemical Industry Benchmarks

In the chemical industry, compared to other industries, the number of purchasing employees as a percentage of company employees is relatively high -- 1.72 percent. CAPS Research released its report of Cross-Industry Standard Benchmarks in May and among the 24 industries surveyed, the chemical industry ranked fifth (along with electrical equipment) in this category. The average of all industries was 1.13 percent, with the highest percentage belonging to the engineering/construction industry, at 2.4 percent.

In another benchmark category, purchase operating expense per purchasing employee, the chemical industry also ranked well above average - fourth-highest among the 24 industries, with $129,680. The petroleum industry topped the list at $146,459 in operating expense per purchasing employee. The average of all industries was $97,918. For more information about the Cross-Industry Standard Benchmarks, or to see the latest Purchasing Performance Benchmarking Report for the Chemical Industry, visit CAPS Research.

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Featured Article

Reduced Misuse and Waste = Reduced Costs

Supply managers who procure or manage chemicals are always looking for ways to reduce costs. One option is to negotiate lower prices, but according to experts, price reductions can pale in comparison to another major culprit of excessive cost: chemical misuse and waste. Michael Spillman, C.P.M., CPIM, supply chain manager, and Steve Marshall, director of operations, both for Henkel Corporation, a chemical management company based in Nashville, Tennessee, say that they often see organizations not taking advantage of relatively simple ways to reduce usage and avoid waste.

"Many times, chemicals appear to be relatively inexpensive, if you're just looking at acquisition cost," says Spillman, "so someone might not target it as an area for cost reductions. But, when you add the use and disposal costs, there is huge opportunity." Here are some common ways in which they've seen chemicals misused or wasted. These can serve as a starting point for identifying improved processes that will ultimately reduce costs.

Know the Correct Proportions

Oftentimes, when chemicals are mixed with water to produce a cleaning solution or a bath, people tend to disregard the correct proportions. If a solution requires a 3 percent concentration of the chemical, then twice that amount must make it work even better, right? Wrong. The fact is many chemical products are designed to be used at very specific concentrations for particular jobs. There is no advantage to overloading what has already been determined to be the optimum recipe. "It's the same mentality that causes an average person to use three squirts of window cleaner when one squirt works just as well," says Marshall.

Ironically, using a chemical at lower-than-specified amounts can also create overuse problems. If that same 3 percent solution uses only 1 percent of chemicals, it might not adequately do the job, requiring a second application or expensive quality adjustments later on. Marshall says that these types of problems stem from a lack of training or just a lack of attention to detail. Automatic controllers, which regulate chemicals or mixtures, can help, but still require someone knowledgeable to monitor the operation.

Are You Using What You're Paying For?

Another way to optimize chemical use is to ensure that the grade or quality of chemical you're paying for is really necessary. Marshall cites the example of one company that was purchasing a top-of-the-line hydraulic oil. The distinguishing feature that made this oil more expensive than others was its extended-life capabilities. While leveraging this longevity might have saved money, in this situation it didn't -- the oil was being used in a machine that leaked (not an uncommon situation). The company was replenishing and replacing the oil so frequently that its viscosity strength never came into play. They would've been just as well off to purchase the less expensive brand because they didn't need the extended-life feature -- the feature that drove the cost up. Knowledge about the factors that distinguish one brand from another helps drive smart, cost-saving decisions.

Volume Discount or Too Much of a Good Thing?

All supply managers recognize that leveraged volume can often equate to deeper discounts. However, when the shelf life of a chemical is taken into account, more is not always better. Many specialty chemicals have a shelf life, ranging from nearly no time to two years. "People have been taught that it's cheapest to buy the biggest container, but if you have a chance of not using the entire container, then the cost to dispose of the excess may be more than if you'd purchased in smaller sizes and not paid the disposal costs," says Spillman.

This issue becomes more complicated if the chemicals are used in an indirect capacity. When volumes are not linked directly to product forecasts or manufacturing schedules, there may not be the same focus on purchasing just-in-time quantities. "Ordering gets done on a just-in-case basis and you can end up with large amounts of unused product," says Spillman.

Get Educated

In addition to identifying some of these common ways chemicals are misused or wasted, subsequently increasing overall costs, supply managers need to know what causes these problems and how to fix them. Marshall and Spillman say that most of the above instances can be avoided with solid product knowledge and training. When initially sourcing or purchasing the chemical, rely on the person or company that is selling the product for information about correct concentrations, appropriate uses, or differences between available products. They should be experts and work closely with the chemical users to determine the optimum specifications. However, beware: This is always where an unscrupulous company can be more concerned with selling additional product than teaching you how to not misuse or overuse chemicals. A consultant or chemical management group can help with unbiased advice if the expertise is not available in-house.

Remember, even if your chemical purchases make up a small percentage of spend, misuse, overuse, and waste can send the total costs skyward. Take the time to examine your processes for these common -- yet relatively easy to solve -- pitfalls.

By Roberta J. Duffy, editor at the Institute for Supply Management™. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.

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Commodity Report

Stretching Forward in Plastics Trade

While plastics is one commodity group among hundreds purchased by supply managers, it has a presence in nearly every product that supply management organizations procure. Whether it's tubing, electronic hardware, or simply the protective material surrounding parts and products, the chemical industry's impact and importance is obvious. With several economic factors affecting the plastics trade industry, it's critical to recognize the factors, the industry's response, and the future outlook of plastics trade.

The Trade Deficit and the Impact of the Dollar

In the last year, there has been a major trade deficit in U.S. manufactured goods. One cause was the value of the dollar increase, driven by foreign investment. The higher dollar increased the migration of U.S. manufacturing to lower-wage countries. However, since the end of last year, the euro has risen about 30 percent against the dollar, creating a more competitive atmosphere for U.S. manufacturers in 2003. While previously, supply managers and suppliers were sourcing offshore, the domestic front is now becoming more appealing for purchasing goods.

This is important whether it's plastics or other materials. Fred Peterson, president of Probe Economics in Millwood, New York, says that one of the fears other countries have is that the United States will export deflation abroad by allowing the dollar's value to decline. This creates a number of effects such as loss of pricing power for foreign countries, a decline in profits for foreign businesses, and a need for them to retain U.S. production capacity. "The message is that your overseas suppliers are now feeling some economic strain, and some of your domestic suppliers have become more competitive. Some of the latter that couldn't offer competitive prices last year can do so this year," Peterson says.

Effects on the Plastics Industry

To gain a more specific picture of the plastics industry, Peterson says the industry can be divided into two main components:

  • Resins
  • Plastics products

Resins. These are the raw materials for plastics. They are made from gas and petroleum feedstocks, primarily by chemical companies. The United States continues to have a large surplus in resin. Despite resin plants being built abroad, the United States retains a strong position in resin. This segment has operated at an approximately $7 billion per year deficit over the last three years.

Plastics products. This segment includes everything made from resin, such as molded parts, shrink wrap, and piping. Because this segment must be near the point of use, it remains mostly in balance with the manufacturing sector. If a manufacturer relocates, the plastics processor must either move with the manufacturer or lose the business to a local supplier.

While the plastics products segment has a trade deficit, it's not large when comparing the total size of the segment. Peterson says the deficit is only 1 percent of total plastics products shipments, but it's a larger deficit than in recent years. Why the deficit increase? Plastics imports from China are becoming more diverse and arriving in greater quantities, especially for the retail and home construction sector. "The U.S. big box retailers are able to import shipments of plastics items that were routinely purchased domestically," says Peterson. "It's too difficult for small hardware companies to arrange plastics imports from China, but for a major home improvement retailer, several loads per week can be imported at a low price."

Upcoming Changes in Plastics Industry Structure

There's a supply chain for plastics that begins at the oil well, goes to the chemical company, on to the resin maker (which is often the same company), to the plastics processor, and ends at the manufacturer of finished goods. With so many products moving along the chain and a variety of competitive supplier strengths involved in the process, it is important to know where the strengths and weaknesses lie. They might lie with one of your suppliers. Two primary groups appear to have the most strength right now. As Peterson puts it, the rest are "caught between the W's" (the wellhead and the Wal-Marts). In other words, the oil companies and the big box retailers are strong. Many of the companies caught in between are being squeezed. "According to government statistics, there are approximately 18,000-19,000 plastics products-producing establishments in the United States," he says. "Most of these are operating somewhere in the middle where margins are being squeezed and pricing power is nearly nonexistent."

This trend does not bode well for the small plastic processor establishments. Watch for several industry sectors consolidating the plastics processing operation. For example, "tier-one" automobile parts suppliers are back-integrating into molding, thus removing molding companies from the supply chain. Some chemical companies, the manufacturers of plastic resins, are trying to ensure their place in the plastics supply chain by forward-integrating into plastics products. They want to keep their resin moving through the chain.

The plastics products industry is highly fragmented with certain segments thriving on economic changes, while others are struggling to hold their own in a competitive industry. Buyers should develop an understanding of how their suppliers are faring in this battle.

By John Yuva, senior writer at the Institute for Supply Management™. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.

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Announcements

Upcoming Event

Fall Meeting & Programs 2003
Seaview Marriott Resort, Absecon, New Jersey - Minutes away from Atlantic City!
September 24 & 25, 2003

Sustaining Sourcing Results Today and Tomorrow

A program presented through a partnership between the Pharmaceutical Forum and the Chemical Group of the Institute for Supply Management™, and the Supply Management Committee of the Drug, Chemical & Allied Trades Association (DCAT).

As strategic sourcing efforts in many companies begin to mature, continued growth of the value contribution from these efforts becomes a greater challenge. Simply reporting savings is not enough. Supplier relationship management and supplier partnering efforts are generating results that are often difficult to manage and measure. The current economic environment has reinforced the need for effective and efficient sourcing efforts. This program features experienced sourcing professionals and managers who will present their outlook and expertise in an open discussion with participants.

Speakers will include: Philip Carter, DBA, CAPS Research; Norbert Ore, C.P.M., Georgia-Pacific Corporation; Zondra Brown, C.P.M., FedEx; and Laura Birou, Ph.D, University of Tampa.

This joint ISM/DCAT program is administered through the DCAT organization. For additional information on these programs, registration, e-brochure and hotel information, call 1-800-640-DCAT or visit www.dcat.org.

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Additional Resources

A Wealth of Information on www.ism.ws

Visit ISM's Web site, www.ism.ws, for more supply management resources. Several published articles, Conference presentations, and reference materials pertain to supply managers in all industries. Here are some items that might be of interest:

  • Involved in e-procurement? Over the last decade, new products, the technology industry, and e-procurement capital investments have had their highs and lows. What are organizations doing today in terms of e-initiatives? Inside Supply Management®, ISMs monthly magazine, discussed this issue in a recent article, "Thoughts on E."
  • Tactical to strategic. Many supply management organizations want to get there, but it's easier said than done. Learn the steps for a transition plan from Allegheny Technologies, Inc., Director of Strategic Sourcing Ernest G. Gabbard, C.P.M., CPCM. He gave this presentation (PDF document) at ISM's 88th Annual International Conference in Nashville.
  • When you're purchasing everything from pencils to PVC, classifying suppliers can go a long way toward an effective supply management strategy. You can learn about the "As," "Bs," and "Cs" of segmenting in this ISM article, "Supplier Classification Systems."

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