Volume 3, Number 4, October 2005
This newsletter is published in cooperation with the ISM Chemical Group.  



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In This Issue...
  • Chemical Industry News
    • Absorbing Energy Costs: Nearly half (46 percent) of the 315 CFOs surveyed in the third quarter indicated that when the price of oil was more than $70 a barrel, their companies absorbed most or all of the additional energy costs. Read more.
    • Dow CEO Voices Concerns: The persistently high price of oil and natural gas, exacerbated in the wake of Hurricanes Katrina and Rita, poses a severe threat to the long-term health of the chemical industry in the United States. Read more.
    • Mobile Fuel Cells: According to a report by NanoMarkets, 2006 will be the take-off year for mobile fuel cells, and by 2010 the report projects a market worth $1.6 billion and about $2.6 billion in 2012. Read more.
  • Feature Article:
    • Chemical Management Services: CMS is a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer's chemicals and related services. Read more.
  • Commodity Report: The effects of Hurricane Katrina have left the energy markets in extreme volatility. Read more.
  • Announcements: Attend ISM's Web seminar about the state of the law on electronic commerce. Read more.
  • Additional Resources: Check out these links to additional resources on the ISM Web site. Read more.
  • Contact Us about ISM eDigest: Chemicals.

Chemical Industry News

CFO Survey

CFO Survey: Higher Energy Costs Largely Absorbed by Companies

Corporate America is taking the increased cost of oil on the chin, according to results of the "CFO Outlook Survey," conducted by Financial Executives International and Baruch College's Zicklin School of Business. Nearly half (46 percent) of the 315 CFOs surveyed in the third quarter indicated that when the price of oil was more than $70 a barrel, their companies absorbed most or all of the additional energy costs. Thus far, only 7 percent of all CFOs surveyed say their companies are passing most of the cost along to customers.

A significant minority of the surveyed respondents (29 percent) say they are not directly affected by high oil prices. These companies were predominantly from service businesses, including communications, technology, banking/finance, healthcare and consulting. Probably hardest hit by rising oil prices are companies in the manufacturing sector, where 60 percent say they are absorbing the cost, and another 28 percent are absorbing half and raising prices to cover the other half.

Burton Rothberg, assistant professor of accounting at Baruch College in New York, says the corporate cost of higher oil, so far, is being borne predominantly by the companies themselves. "As a result, we can expect corporate earnings or capital spending to be affected, at least until prices to customers are increased," he says. "Consumers, who are already bearing the brunt of high oil prices at the gas pump and bracing for higher home heating costs, will have more bad news down the road if and when companies decide to pass along more of the costs."

For more information about the "CFO Outlook Survey," visit the Baruch College Web site.


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Dow CEO Speaks Out

Dow CEO Voices Concern About Impact of Escalating Energy and Feedstock Costs on the U.S. Chemical Industry

The persistently high price of oil and natural gas, exacerbated in the wake of Hurricanes Katrina and Rita, poses a severe threat to the long-term health of the chemical industry in the United States, warns Andrew Liveris, chief executive officer for the Dow Chemical Company in Midland, Michigan.

He says that for two and a half years or more, the chemical industry has done all that it can to mitigate the impact of escalating feedstock and energy costs, which have been particularly severe in relation to U.S. natural gas. "We've been sharply focused on reducing operating expenses, improving energy efficiency, increasing productivity and generally controlling those things we are able to control in an effort to address this unprecedented challenge," says Liveris. "But right now, with oil and natural gas prices at astronomically high levels and showing no signs of receding, the U.S. chemical industry faces the very real risk of being unable to invest in its own future in this country."

Liveris underscored the industry's efforts to heighten government's awareness of the issue, and he acknowledged the benefits that will be derived over time from the recent passage of the Energy Policy Act of 2005. "Although the legislation makes progress toward reducing demand and increasing the availability and the diversity of fuel sources in the United States, it needs to go further — particularly in relation to closing the projected gap between natural gas demand and available supply," he says. "In the near-term, focusing on energy efficiency and conservation can help — but this alone cannot resolve the nation's energy needs. We absolutely must drive toward environmentally sound production of our nation's vast offshore energy reserves. Only then can we ensure that industry in this country endures in the face of ever-tougher competition from other parts of the world."

Liveris also said that Dow would continue to focus on managing price and volume in a way that would allow it to reinvest in its existing facilities and to grow the business into the future. As an immediate measure, the company will seek price increases across its entire portfolio of chemical and plastic products. "At Dow, much has been done — and will continue to be done — to manage our own cost structure and to offset the impact of ever-higher energy and feedstock costs," he says. "At this point, however, we have no choice but to ask our customers to pay more for our products in order to safeguard their supplies into the future."

For more information about this and other chemical issues, visit the Dow Chemical Company Web site.


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Mobile Fuel Cell Market

Mobile Fuel-Cells Market to Reach $1.6 Billion by 2010

While the fuel cell has long been touted as a long-lasting power supply for mobile devices, it has proved to be a promise unfulfilled. However, according to a new report, "Micro Power Sources: Opportunities from Fuel Cells and Batteries for Mobile Applications," by market researcher NanoMarkets LC, in Glenn Allen, Virginia, developments in the marketplace will make 2006 the take-off year for mobile fuel cells, and by 2010 NanoMarkets projects a market worth $1.6 billion and about $2.6 billion in 2012.

The report identifies four significant developments as reasons why industry watchers should take the mobile fuel cells market seriously:

  • Burgeoning power requirements. The absence of a power source that can supply power for many hours between charges is now the single biggest obstacle to the dream of ubiquitous computing and smart phones. One telecom company has actually cancelled a smart-phone product because its numerous features drained the battery too fast. Meanwhile, Japan's mobile phone makers will add power-hungry digital broadcast tuners to their mobile phone models. Fuel cells are seen as a way to meet increasing demands.

  • The new "complementarity." In the past, batteries and fuel cells have been seen as locked in a battle for the future of mobile computing and communications. Today, a new paradigm is emerging. Fuel cells will be introduced initially as portable rechargers for batteries, or used in hybrid fuel cell/battery combos in which fuel cells provide long-lasting power and batteries are used to deal with power spikes. Even in 2010, NanoMarkets claims that more than 80 percent of fuel cells will be used in conjunction with batteries.

  • Big backers. With the fate of ubiquitous computing at stake, the heavyweights of the electronics and computing industry are backing fuel cells. IBM and Sanyo have announced plans to produce a direct methanol fuel cell (DMFC) for the IBM ThinkPad. Other big names that see opportunities in the budding mobile fuel cell market include 3M, Cabot, Casio, Fujitsu, Hitachi, Johnson Matthey, Motorola, NEC, Samsung, Sony and Toshiba.

  • Advances in technology. The emergence of more efficient DMFC fuel cells that operate at lower temperatures has made fuel cell technology much more viable for mobile applications. In the future, nano-catalysts and new polymers, as well as nano-materials for membranes, are likely to make for even better energy density in mobile fuel cells.

The report also reviews the evolving strategies of companies in this market and pinpoints just when and where the main opportunities are for both mobile fuel cells and mobile batteries. Data for this report was collected from extensive interviews of leading companies throughout the entire value chain from materials providers to fuel cell manufacturers to mobile device companies.

For more information about the report, visit the NanoMarkets Web site.


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Feature Article

Chemical Management Services: Innovation In The Chemical Supply Chain

Chemicals pose unique challenges in supply management. They are a heavily regulated product that requires a multitude of activity and information to support. These enterprise costs are often not tracked or actively managed. An emerging trend in chemical purchasing and management is called "chemical management services," or CMS. It is a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer's chemicals and related services. The provider's compensation is tied primarily to quantity and quality of services delivered, not chemical volume sold. Thus, CMS utilizes a performance-based contracting approach where suppliers optimize processes and continuously reduce chemical lifecycle costs, risk and environmental impact.

Since General Motors spearheaded the concept nearly 20 years ago (reducing their total chemical costs by one-third and starting a quiet revolution in the chemical supply chain), CMS has become well-established in the auto, aerospace, air transport and electronics sectors. It has recently been applied in university and research labs and power generation companies. Increasingly, more companies in a diversity of industry sectors are investigating the potential for CMS (see chart below).

CMS: A Growing Trend

Why CMS?

One of the unique aspects of chemicals is the relatively high total cost of ownership. In research conducted by the non-profit Chemical Strategies Partnership, they have found that for every $1 of chemicals purchased, companies may spend from $1 to $7 to manage them. For every step in the chemical lifecycle (see chart below), there are associated costs and impacts for a company (www.chemicalstrategies.org/cms_defined.htm).

CMS: Managing the Chemical Lifecycle

Many companies are realizing that although chemicals are a critical component of their manufacturing process, buying and managing chemicals is not a core competency. Chemical management's needs tend to gain attention due to the high costs and risks associated with chemical use. However, many companies do not have the dedicated resources and management attention to focus on reducing costs, improving efficiency and reducing potential exposure to liabilities associated with chemical use.

Can CMS Benefit Your Company?

In a 2004 survey of the CMS industry, customers reported several benefits to implementing a CMS program (see chart below). At the top of the list was the improvement in information management and inventory management. In the first year of a CMS contract, customers see costs savings from the reduced amount of chemical used, price reductions of chemicals purchased and improved manufacturing processes (www.cmsforum.org/industry_report_2004.html).

CMS Benefits

Driving a major change to the chemical supply chain may appear daunting to many supply management professionals. However, the trends toward supplier-managed inventory, more performance-based contracting and metrics to track improvements in supply chain activity are all part of a CMS program. Companies have the flexibility to design a program that fits their particular needs. However, some baselining evaluation of current systems is necessary to determine the scope of the CMS program and prepare a useful request for proposals (RFP) to solicit a CMS provider.

Below is an outline of the steps needed to develop a CMS program. It is adapted from the Chemical Strategies Partnership's manual, Tools for Optimizing Chemical Management, which provides sample team workplans and presentations, a simple spreadsheet tool for calculating current management costs and suggestions for contract structures.

Step 1 — Determine Objectives and Build a Team

If supply managers are thinking about CMS, they first need to consider their company's objectives, their available resources and the interest by top management. Then, assemble a multifunctional team — bring together colleagues in supply management, engineering, operations and environmental, and health and safety to determine their interest — and see if it makes sense to seriously evaluate implementing a CMS program. If the answer is "yes," then it is time to identify a champion in upper management. Once a team and champion are in place, then develop a workplan and begin to document baseline data on current chemical use and management costs.

Step 2 — Establishing Total Cost of Ownership (TCO)

The team will next need to evaluate the total cost of using chemicals in its facility or company. This cost analysis, coupled with a characterization of the team's chemical management needs, plays a pivotal role in establishing a successful CMS program. The data serves multiple functions:

  • To estimate the true, lifecycle costs of current chemical management practices
  • To identify specific data deficiencies and management information system needs that a CMS program may fulfill
  • To provide a baseline of chemical costs and use that can be used to evaluate CMS provider proposals

A four-step process can be used to assess the TCO for chemicals:

  1. Map the flow of chemicals and identify the responsible internal departments at each stage of the chemical lifecycle. This illuminates an often surprisingly complex path, showing just how many people and resources are involved in each stage of the chemical lifecycle. The entire team must be involved — all perspectives are valuable and vital to understanding the total picture.

  2. Assign the costs of chemical use to each lifecycle stage. This is accomplished by determining the resources specific to chemical management within each organizational function — labor, equipment, inventory and waste management are all part of this equation.

  3. Analyze the nature of the costs and verify them. Understanding the differences in cost drivers can help determine where systematic changes are needed, what savings are possible when chemical use is better managed and what the cost structure of a CMS contract may be.

  4. Finally, determine what activities could be transferred to a CMS provider. Consider which cost savings may result in actual bottomline savings (hard savings) versus those that will free up resources for other uses (soft savings).

After conducting this analysis, a decision must be made. Does it make sense to solicit a CMS provider to help develop a program? If so, the next step is to determine the scope of a program and develop an RFP.

Step 3 — Basic Decisions in Designing a Program

Determining the scope of a CMS program involves:

  • Deciding which chemicals (direct, indirect, maintenance) should be included
  • What aspects of management are likely to be more effectively handled by an outside provider

The wider the range of services, the more opportunities for cost savings — CMS programs with a larger scope of services have generally realized greater cost savings and environmental and safety benefits. However, supply managers may want to consider the staged rollout of a program by facility, division or business unit.

Other Issues

The logistical, procedural and organizational changes that CMS may bring pose several potential obstacles. Issues such as collective bargaining units, proprietary processes and the "we can do it better internally" argument can prematurely kill a program that ought to be investigated. All of these issues have been successfully addressed in companies that are now using CMS.

Step 4 — Developing an RFP and Selecting a Provider

Once the team has evaluated its cost data, determined the scope of the program and addressed the logistical and managerial issues involved in making the transition to CMS, the team is ready to develop an RFP to recruit a CMS provider. The RFP will serve two purposes:

  1. To provide information to the prospective chemical service supplier — the team's requirements and objectives, the scope of work it is requesting and performance metrics.

  2. To solicit a description of the CMS provider's capabilities and experience in order to assess its capacity to provide the requested services.

The key in developing an RFP is to clearly articulate the chemical management activities, goals and metrics that the company is seeking — do not indicate how they should be done, but rather what the company's end goals are. The CMS provider will respond with its best suggestions for meeting those needs.

Performance-based relationships involve contracts with aligned incentives to drive down customer costs over the long term and reward superior suppliers that meet specific performance requirements. They are the future in creating a supply chain that is aligned with the goals of a manufacturer prepared to compete in the global marketplace — CMS is already a proven example.

By Lauren Johnson, communications manager, and Jill Kauffman Johnson, executive director for Chemical Strategies Partnership, San Francisco. To contact the authors or sources mentioned in this article, please send an e-mail to author@ism.ws.


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Commodity Report

Katrina Adds Uncertainty to Heating Oil Price Outlook

Most everyone in the chemical industry is aware of the volatility of the energy markets. And the recent effects of Hurricane Katrina have only complicated matters. As companies move into the fall and winter seasons, what is the outlook for heating oil? While the price of heating oil is affected by refining, distribution and marketing, it is the cost of crude oil that really drives the heating oil market. Thus, it is important to concentrate on refining and crude oil components related to heating oil costs.

Refining Factors

The difference between the price of wholesale heating oil and crude oil is the refiner margin. Typically, the refiner margin is greatest in the winter when the demand for heating oil is at its peak and lowest in the summer when demand is low. Heating oil prices have shown wide swings this year and have at times even driven the price of crude oil (see chart below).

Heating and Crude Oil Spot Price

In the spring, analysts stated that heating oil was in short supply and that there would not be enough to meet winter demand. The ability to build sufficient inventory to weather the winter would be difficult, if not impossible. As a result, heating oil prices remained high relative to crude oil throughout the summer. Because of high margins and cheaper costs to make heating oil versus gasoline, refiners produced more heating oil than normal. Stocks of heating oil increased to the point where they were far above normal at the end of August. Distillate inventories (heating oil and diesel) are over 7 percent higher than normal, adding to the downward pressure on the refiners' margin for heating oil and diesel prices (see chart below).

Refiner Margin of Heating Oil

Crude Oil Production

Just prior to Hurricane Katrina fears of a heating oil shortage were abated. However, temporary price rebounds occurred due to concern over damaged refineries in Louisiana and Mississippi. Katrina has changed the outlook of the energy markets. Because of the damage to production in the Gulf of Mexico, there will be less crude oil produced this year. As of September 13, the pace of recovery had slowed and nearly 850,000 barrels per day of oil remained to be returned to production.

Pre-Katrina estimates of spare production capacity worldwide were 1.0 million-1.5 million barrels per day. However, current shut-in production in the Gulf equals half of the total world excess capacity. This will tend to support high oil prices until production is restored. The United States and other governments have taken steps to dampen the price impact of Katrina by releasing crude oil as well as petroleum products from their strategic reserves. Recent reports forecasting slower economic growth have also helped reduce the effect on price.

Due to the release of strategic petroleum reserves (loans and sales amounting to 25 million barrels so far in the United States) and increased imports of crude and heating oil, prices for both heating oil and diesel could be lower in the winter than they are today. However, the timing of recovery of refineries and Gulf of Mexico oil production makes this less than certain.

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


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Announcements
New ISM Web Seminar — State of the Law on Electronic Commerce

This one-hour Web seminar is a "must-attend" for all professionals who are involved in supply chain decisions. In the past five years, several laws governing electronic commerce have passed through Congress. Join ISM for this session and learn how these laws are interpreted by the courts and applied in the real world.

Date: October 13, 2005
Time: 10:00 a.m. Pacific/1:00 p.m. Eastern
Presenter: Helen M. Pohlig, J.D.
Price: $99 per individual or $179 for two or more attendees per connection.

For more information or to register click here.


New ISM Satellite Seminar — Tools for Negotiations Success

As an essential core competency of any supply manager, negotiating is one of the most complex and sophisticated tasks to master. This four-hour program introduces tools and resources that reduce the apprehension and stress associated with effective negotiating. Improve your negotiation process with efficient planning and be as well-prepared as the person on the other side of the table. Participate in this session and walk away with solutions that you can use immediately.

Date: October 20, 2005
Time: 7:00 a.m. Pacific/9:00 a.m. Eastern

For more information or to participate, contact your local affiliate or click here.


The Future of Purchasing and Supply Chain Management: Making a Strategic Contribution

A half-day forum hosted by Economist Conferences and supported by ISM will be held November 10, 2005, at The Metropolitan Club, Chicago.

Join Tony Milikin, member of the Board of Directors, Institute for Supply Management™ and senior vice president - global supply chain for MeadWestvaco Corporation at this invitation-only event for senior executives. Thought-leaders from H.J. Heinz Company, PepsiCo, RadioShack and more will attend.

To view the agenda and request a complimentary invitation click here.


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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:

  • On July 1, 2006, the European Union will begin enforcing its Restriction on Hazardous Substances (RoHS). In her article, "The Lead-Free Deadline Is Fast Approaching ... Are You Ready?," Jill Schildhouse examines compliance management, how to minimize the financial impact on your company, what green efforts countries outside of the EU are taking, as well as a 10-step implementation plan.

  • Want to know how your company compares to others in the chemical industry or companies in other industry sectors? CAPS: Center for Strategic Supply Research, a non-profit, independent research organization co-sponsored by the W.P. Carey School of Business at Arizona State University and the Institute for Supply Management™ , has published its "Report of Cross-Industry Standard Benchmarks." The report shows the survey outcomes for 18 different industry sectors, including chemical.

  • Organizations in manufacturing and services sectors are having success outsourcing their tactical functions and improving performance. However, applying an outsourcing initiative to strategic functions such as logistics, manufacturing and distribution can be detrimental to an organization if poorly pursued. In his 2005 Conference Proceeding article, "Outsourcing: Solution or Setback?," James A. Tompkins, Ph.D., president of Tompkins Associates, explores the three types of business functions and their candidacy for outsourcing.

  • In today's global marketplace, organizations must leverage value from their suppliers in order to be competitive. However, achieving added value and innovation will be difficult without solid supplier relationships. In the article, "Leveraging Value From Supplier Relationships," find out the levels of communication that lead to collaborative supplier relationships and the importance of collaborating with multiple tiers.

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