Volume 5, Number 4, October 2007
This newsletter is published in cooperation with the ISM Chemical Group.  


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In This Issue ...
  • Chemical Industry News
    • EH&S Compliance: For biotech companies, even the most basic environmental health and safety (EH&S) compliance programs involve keeping a variety of permits up-to-date, performing regular employee training, conducting inspections, complying with a myriad of chemical storage and handling requirements, and keeping a number of contingency plans current and complete. A new whitepaper from environmental engineering and consulting firm EH&E identifies the most common pitfalls, plus four simple steps to keeping current.   Read more.
    • America's Debt Dilemma and the Chemical M&A Market: According to ICIS Chemical Business magazine, the growing U.S. debt market crisis has slammed the brakes on what editors call a "white-hot" global chemical mergers and acquisitions (M&A) market.   Read more.
    • Pharmaceutical Manufacturing Quality: With safety issues making headlines, pharmaceutical and medical device manufacturers face a rugged regulatory landscape. Many are relying on their quality function to navigate regulatory difficulties that could affect production. Proper staffing of quality roles is just one to optimize their quality function.   Read more.
    • Chemistry Lessons Made Fun, Easy: A pair of weekly and monthly podcasts from BASF — The Chemical Company bring chemicals down to an informative, entertaining level.   Read more.
  • Feature Article
    • New DHS Regulations Encompass Wider Range of "Chemical" Facilities: On April 9, 2007, U.S. Department of Homeland Security regulations imposed new risk-based standards on high-risk chemical facilities. Facilities not traditionally characterized as "chemical plants" will have to implement a comprehensive site vulnerability assessment taking into account threat scenarios developed by DHS.   Read more.
  • Market Report: No longer new and novel, a recent study of 600 executives released by the National Center for Manufacturing Sciences shows in the last five years the increased significance of nanotechnology to both traditional and emerging fields.   Read more.
  • Announcements: The Institute for Supply Management™ presents its 8th Annual ISM Services Conference November 29-30, 2007 at the Pointe South Mountain Resort in Phoenix.   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

EH&S Compliance

A Four-Step Process for Biotechnology Companies

A free white paper devoted to environmental health and safety compliance in biotech companies highlights the fact that environmental health and safety (EH&S) programs are complex and not easily maintained — and aims to simplify the process in four steps.

Environmental Health and Safety Compliance in Biotech Companies: Common Deficiencies Encountered During Audits is based on an analysis of numerous program audits. It offers small and midsize biotechnology companies strategies to avoid costly oversights.

"All biotechnology firms are required to meet complex regulatory compliance requirements from a variety of governing sources," says Jack McCarthy, president and co-founder of EH&E, an environmental engineering and consulting firm based in Newton, Mass. "Larger firms employ full-time professional staff to manage their responsibilities. Small and midsize firms often cannot afford the expense or dedicate the manpower to fully meet these requirements, and are therefore more at risk of violations and sanctions."

Compliance areas covered in the white paper include: environmental compliance (air emissions, wastewater and waste management); permitting and plans; employee training; biosafety; occupational health and safety; and general documentation deficiencies. The white paper zeroes in on each of these compliances to spotlight the most common violations encountered during routine audits. It also summarizes a list of recommendations for maintaining a continually high level of compliance using limited manpower.

For more information on EH&E, visit www.eheinc.com or call 800.825.5343.


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U.S. Debt Crisis

U.S. Debt Crisis Puts Chemical M&A Market At Risk

Joseph Chang, global editor of ICIS Chemical Business, spots trouble ahead for the chemical M&A market. "What started with higher defaults in U.S. subprime residential mortgages has now spread to the wider credit market, choking off capital to finance deals," he says.

Other industry experts say the debt issuance crisis that developed in July will have a significant impact on all M&A activities in the second half of 2007, but in particular the activities of private equity buyers. "This will really stop the show," says Peter Young, president of New York-based investment bank Young & Partners. "Some deals may not go through, and others won't be announced."

Young & Partners' data shows that private equity players had a strong first half of 2007, capturing 28% of the total number of deals and 36% of the dollar volume — up sharply from 15% and 17%, respectively, in 2006. Private equity buyers accounted for five of the top 10 deals in the first half.

"One major impact will be on the level of leverage companies will be able to take on in a deal," forecasts Telly Zachariades, global head of chemicals at Bear Stearns. "You might still be able to get transactions done, but they won't be able to take on as much debt. That will bring M&A valuations down, which may result in a potential seller not being willing to sell."

Whereas many buyers were able to get an average of six to seven times earnings before interest, taxes, depreciation and amortization (EBITDA) in debt financing before mid-July, they will now only be likely to get five to six times — if at all, says Zachariades.

The middle market is also affected for deals less than US$500 million, but to a lesser extent, notes Jean Cayanni, senior managing director at Cosa Mesa, Calif.-based investment bank RSM EquiCo. He predicts the available leverage will drop from an average of four times EBITDA or more to about three to 3.5 times.

"That will have a negative impact on M&A valuations if private equity firms do not increase their percentage of equity," Cayanni adds. "However, this is not likely to happen, given the abundance of funds they need to put to work."

Private equity casualties
Peter Young says the debt crisis will throw cold water on new M&A activity, with 2007 proving to be a "two-act play with dramatically different acts" due to the severe debt and liquidity crisis.

"The debt crisis that started in the mortgage market has thrown a high degree of uncertainty around many of these deals," he explains. "The biggest potential casualties are the private equity deals that depend heavily on debt financing — in particular, high-yield public debt."

Bear Stearns' Zachariades says he sees a clear opportunity for corporate buyers with existing unused credit lines or more readily available access to credit to regain the upper hand — at least temporarily — from the private equity community.

Furious negotiations
For those leveraged deals already announced, furious negotiations are underway between investment banks and buyout firms as the banks try to convince buyers to walk away from their deals.

"Many investment banks are trying to get borrowers to cancel their deals and are offering to pay the borrowers' break-up fees and expenses," Young explains. "But it's unlikely that the borrowers will agree to do this due to the damage to their reputations if they back out of a signed deal."

With more than US$300 billion of financing commitments backed by investment banks for deals in all industries in the face of a deteriorating credit market, the available financing capacity to support new debt financings has become severely impaired, he adds.

Peak of the market?
Zachariades and other experts suspect the debt market crisis could signal the peak of M&A activity in chemicals and across the board. "We won't see as high leverage or as easy credit terms for a long time, and transaction multiples will decline," he explains.

Back in March, Zachariades called the easy credit situation "unsustainable" and said there would eventually be a "rapid deterioration in the debt markets."

Read related stories about the chemical industry on the ICIS Web site.


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Quality in Pharmaceutical Manufacturing

Optimizing Your Internal Process for FDA Compliance

Best-in-class companies boast quality personnel-to-total manufacturing employee ratios between 1:4 and 1:7, according to a recent study by pharmaceutical benchmarking leader Best Practices, LLC.

The Quality Function: Structure, Staffing and Execution reveals strategic best practices in quality harnessed from survey responses and in-depth interviews with seven top pharmaceutical and medical device company leaders.

Executives from Abbott, Lilly, J&J, GlaxoSmithKline, Wyeth and others shared wisdom and key insights for honing elite quality functions within their organizations. A sampling of their tactics and best practices includes:

Heighten intra- and intercompany transparency.
Disseminate information about weak areas within the company and competitor companies among quality staff, as reflected in regulatory consent decrees and warning letters obtained from FDC publications and Gold/Green/Pink Sheets.

Establish action-triggering metrics.
Develop reporting mechanisms that bring performance measurements and deviation reports before the eyes of senior management.

Focus quality personnel on activities/results, not measures. Employ integrated improvement charts to effectively communicate important measures to focus actions by responsible parties.

A complimentary excerpt is available online.


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Entertaining Chemicals Podcasts

BASF Podcasts Bring Chemistry to Life

BASF — The Chemical Company has moved into the next generation of education with two free, informative podcasts. Chemistry of Innovations, a monthly podcast, discusses the ways in which chemistry will design our future. The Chemical Reporter, a weekly podcast intended for "the curious," answers questions about chemistry in our everyday lives. Recent episodes include:

What Is Concrete Made of?
The history of concrete begins in ancient Rome. The Romans found a way to produce artificial stone, which they used to build the Coliseum and the famous Pantheon Dome. Thousands of years later, its composition remains essentially the same.

What Does the Gasoline Octane Rating Represent?
Contrary to popular belief, it is not always best to drive with 100-octane fuel. This podcast tackles the real meaning behind the octane number at the gas pump.

World's Longest Railway Tunnel Thanks to Construction Chemicals
Under construction in Switzerland, the Gotthard Base Tunnel will be the longest train tunnel in the world. For this project, concrete must not harden while being transported through the mountain for several kilometers, or harden in an instant when sprayed onto the tunnel walls. Additives — accelerators and plasticizers in particular — make this possible.

A direct subscription via RSS feed or iTunes can be obtained online.


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Feature Article

New DHS Regulations Encompass Wider Range of "Chemical" Facilities

By Neal Drawas

On April 9, 2007, the U.S. Department of Homeland Security (DHS) issued new regulations that establish a comprehensive regulatory program to improve the security of facilities storing hazardous chemicals. The regulations impose new risk-based standards on high-risk chemical facilities, which are defined as any facility "that possesses or plans to possess, at any point in time, a quantity of chemical substance determined by DHS to be potentially dangerous or meet other criteria identified by the department."

DHS has issued a proposed list of 344 Chemicals of Interest (COI) and their threshold quantities in Appendix A of 6 CFR 27. Of the 344 Chemicals of Interest, 105 (such as carbon monoxide and ethylene oxide) have a screening threshold of "any quantity," while many commonly used chemicals (such as anhydrous ammonia, propane and ammonium nitrate) have low threshold quantities. The new regulations will become effective once the final Appendix A list is published by DHS. Unless amended, not only will high-risk chemical manufacturing facilities have to comply with the complex set of rules and risk mitigation requirements, but so will many academic institutions, agricultural facilities, pharmaceutical manufacturers, food processors, chemical distributors, storage warehouses, research laboratories and hospitals. The DHS has issued a broadly encompassing threshold, as it currently lacks sufficient information to determine the universe of covered facilities and which of those facilities pose the highest level of risk.

While a basic overview of a complex time schedule, the new rules require all covered facilities to identify if they possess hazardous Chemicals of Interest, and, if so, to provide background information on the facility. DHS will then assign a risk level to each responding facility and all high-risk facilities would then be required to prepare Security Vulnerability Assessments (SVAs), which identify facility vulnerabilities and mitigation measures, utilizing DHS-created Threat Scenarios to determine overall risk for the facility. Additionally, these facilities must develop and implement Site Security Plans (SSPs), which include measures that satisfy the risk-based performance standards to be identified by DHS.

Preliminary Screening Assessment

DHS will require owners of chemical facilities housing certain quantities of specified chemicals to complete a preliminary screening assessment ("Top Screen") within 60 days of the final issuance of the Appendix A list that allows DHS to apply a preliminary classification of risk to the facility. Based on the Top Screen information, the DHS will classify a regulated facility into one of four (1-4) risk tiers. If a chemical facility preliminarily qualifies as high-risk (tier 1 or 2), its owner or operator will be required to prepare and submit an SVA within 90 days of written notification from DHS. In addition, submission of an SSP will also be required within 120 days of notification by the department. Submissions will be validated through DHS audits and site inspections.

Compliance Exclusions

Although the DHS indicated it does not intend at this time to request information from railroad and long-haul pipeline entities, the only facilities that are officially excluded from compliance are those currently regulated under the Maritime Transportation Security Act, Public Water Systems, Treatment Works, DOD or DOE facilities, and facilities regulated by the Nuclear Regulatory Commission.

Some states have existing laws for regulating chemical facilities. Only state laws and requirements that conflict or interfere with these regulations, or the purpose for the regulations, will be preempted. Currently, DHS has stated that there are no existing state laws that would impede the federal rule. However, new federal legislation is currently being developed that could supersede the DHS regulations.

Submission of Security Vulnerability Assessments

If the DHS determines that a facility is high-risk, the facility must complete and submit an SVA through the Chemical Security Assessment Tool (CSAT) process within 90 calendar days of receiving written notification from DHS. The SVA must include:

  • Asset characterization
  • Threat assessment
  • Security vulnerability analysis
  • Risk assessment
  • Countermeasures analysis

The DHS will review and approve in writing all SVAs that satisfy the technical requirements or will provide a clear explanation of any deficiencies to be corrected. Facilities determined by DHS to be high-risk will have to develop and implement risk-based SSPs that include 19 performance elements such as: perimeter and critical asset controls; sabotage; cybersecurity; background checks; facility monitoring; training; significant incident response; and auditing. In addition, the regulations impose new requirements for training, drills and exercises, maintenance and testing of security equipment.

Although DHS has indicated that it will provide technical assistance to facility owners and operators, the new rule also gives DHS authority to seek compliance through the imposition of civil penalties of up to $25,000 per day.

Regulation Implications

The implications of these sweeping regulations are that all covered facilities will have to assess if they exceed the threshold quantity for any Chemical of Interest and collect background information to sufficiently address the Top Screen registration requirements. For many facilities that are typically perceived as low-risk, such as universities, hospitals and distribution facilities, this effort will be labor-intensive and costly. Under the current regulation, facilities not traditionally characterized as "chemical plants" will have to implement a comprehensive site vulnerability assessment taking into account threat scenarios developed by the DHS, and develop a site-specific security plan that includes physical, operational, personnel and IT security controls that may not already exist. Many facilities will need to review their storage requirements and, if possible, implement alternative supplier operations to decrease on-site quantities and avoid classification as a covered facility.

Companies should engage early on this issue to ensure that all relevant management is aware of the implications of these regulations and can make informed decisions about the compliance impacts and strategies for their operations. A strategic plan should be developed that meets the objectives of the regulation in a manner that is balanced with operational, financial and business objectives.

For more information about the Department of Homeland Security Chemical Facility Anti-Terrorism Standards, visit the DHS Web site.

Neal Drawas is the managing director, Health Safety & Environment, Risk Consulting Practice for Marsh Inc., Boston. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.


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Market Report

Supply Chain Shrinking With Nanotechnology

By Jeff Wacker

Quick, what's the smallest car you can think of? Your mind might leap to the MINI Cooper™ or the Mercedes-Benz SMART car. Or perhaps even a Matchbox toy car? But these vehicles are gargantuan compared to Rice University's single-molecule car, the world's first tiny nanocar. The entire nanocar measures just three to four nanometers across, making it slightly wider than a strand of human DNA. A human hair, by comparison, is about 80,000 nanometers in diameter.

Nanotechnology is a fundamental materials technology where structures are created and manipulated at the molecular level of one to 100 nanometers. Manufacturing at this ultrasmall scale, the resultant products have unique and novel properties that cannot be achieved through conventional technologies.

No longer new and novel, a recent study of 600 executives released by the National Center for Manufacturing Sciences shows in the last five years the increased significance of nanotechnology to both traditional and emerging fields. In 2000, one could identify only a handful of companies with nanotechnology programs. In 2005, 18 percent of the surveyed industries were already marketing products, about 80 percent expect to commercialize nano-products by 2010, and nearly everyone expressed confidence their organizations will be involved with nanotechnology in the future. Products containing nano-particles already pass unnoticed through the supply chain of many businesses.

But the current uses of nanotechnology are still in the first or early second of four stages as defined by the Joint Economic Committee of Congress. In a report titled Nanotechnology: The Future is Coming Sooner Than You Think, it defines those stages as: 2000-2005, passive nanostructures; 2005-2010, active nanostructures; 2010-2015, systems of nanosystems; and 2015-2020, molecular nanosystems. There's a tendency to reduce these into three waves called simply: mild, wild and magical. Each will have an effect on the supply chain.

Mild Wave — Packaging and Counterfeit Prevention

The Mild Wave is characterized by utilizing nanotechnology to improve existing capabilities. For the supply chain, one result will be packages and packaging that ensure their quality of products from initial packaging through transport to ultimate consumption.

  • Ultrastrong materials resist tearing or even bending (carbon nanotubes are 400 times stronger than steel).
  • Ultralight materials reduce added weight (aerogel are solids with the feel of styrofoam, but are nearly as light as air).
  • Ultraefficient materials provide superior insulation and protection from chemical or UV effects (polymer nanocomposites show significant improvement over conventional materials).
  • Ultraclean materials battle microbiological effects (25nm silver particle antibacterial and antifungal coatings are being used on some cell phones).

Designer packaging that meets specific requirements of manufacturers and transporters will have a major impact on the supply chain.

A second area of impact is the use of nanotechnology to provide protection from counterfeiting. According to Industry Week, the cost of counterfeiting and piracy to the world economy is anywhere from $500 billion to $650 billion. Nanotags built into unit products can be used to verify authenticity. Nanobarcodes™ are being developed for paper, plastic, metal and textiles that allow for trillions of unique codes. Surface enhanced Raman (SERS) nanotags give a unique fingerprint when interrogated by lasers. Pharmaceutical companies are particularly interested in these capabilities because their products are highly targeted for counterfeiting.

Wild Wave — Sensors and Robotics

The Wild Wave of nanotechnology moves beyond enhancements to the creation of new capabilities for the supply chain. Some of the most interesting will require significantly more advanced stages of nanotechnology that will emerge over the next five to 10 years. One of these capabilities is the creation of nanoelectromechanical systems (NEMS). NEMS devices are part electronic and part mechanical allowing for the creation of ultrasmall, ultraefficient sensors. NEMS sensors will sample the quality, temperature and other characteristics of products throughout the supply journey and signal for action should any degradation occur. A primary difference with today's sensors, aside from their ultralow size and cost, will be their ability to be parasitic powered by harnessing the energy in motion, ambient temperature or even radio waves in the atmosphere.

Another element of this Wild Wave will use nanotechnology to enable the economic creation of high-capability robots — in other words, it will move robots from isolated usage into nearly every aspect of the supply chain. One primary difference in these robots is that they will have capabilities similar to human beings. For example, they will have artificial muscles powered by chemical sources, similar to human muscles fueled by glucose and oxygen in our blood. They will utilize NEMS sensors mentioned above and will be controlled by computers built ultracapable with nanotechnology, as well.

Magical Wave — Way Out There Wave

Arthur C. Clark coined as one of his three laws, "Any sufficiently advanced technology is indistinguishable from magic." Indeed, scientists and engineers are now seriously pursuing capabilities that we would consider magical, or at least the stuff of science fiction. If built, the space elevator would expand the supply chain to off-of-this-world products as materials glide up to and down from earth's orbit on a 24-inch ribbon.

Contemplated nanomovers, with ultrasmooth surfaces lubricated by adaptive nanites, may move cargo from one location to another without friction. But the ultimate and most controversial potential application of nanotechnology is the elimination of finished goods from the supply chain. NanoFactories, facilitated by nano-assemblers, would assemble molecules of raw materials into finished products on demand. But current companies needn't lose sleep just yet about these last capabilities, as they are most likely in the 15- to 20-year timeframe, if at all.

Caveat

Nanotechnology is not without its problems or downsides. Organizations dedicated to controlling or eliminating research on nanotechnology point out many of the unknowns that are yet to be discovered and addressed. How do nano particles interact with our environment? How do we control engineered nanomachines? Even, how do we measure what we can't see (one of the biggest challenges of proving that Rice University's nanocar is really the world's smallest car, was to prove that its wheels actually turn)? Their voices alongside the advocates will help create a safe and sane exploration of this remarkable technology.

While we can't yet haul cargo in the world's smallest car, the fact that it exists is proof that the miniscule world of nanotechnology holds huge potential to transform the supply chain and virtually every aspect of our lives.

Jeff Wacker is the futurist for Electronic Data Systems, Plano, Texas. To contact the author or sources mentioned in this article, please send an e-mail to author@ism.ws.

For more information about nanotechnology, visit the following Web sites:


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Announcements

Attend ISM's 8th Annual Services Conference

The Institute for Supply Management™ presents its 8th Annual ISM Services Conference November 29-30, 2007 at the Pointe South Mountain Resort in Phoenix.

The 8th Annual Services Conference offers lessons learned and real-time accomplishments from some of the world's most visible and successful organizations. After attending these sessions, you should have a better understanding of how to develop and maintain your strategic plan. Avoid pitfalls, minimize weaknesses and leverage your strengths by learning from the leaders in the field.

For more information or to register online, please visit the ISM Web site.


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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:

  • Organizations need to ask themselves an important question. Where are our revenue streams? Many will identify products or services as their primary, or only, source of revenue. However, there is one area that companies often overlook, but that holds significant earning potential — investment recovery. In the article Earn More From Dispositioned Assets, learn how companies are protecting the environment while earning revenue by exploring profitable avenues for dispositioning recovered assets.

  • Shifts in the corporate workplace are afoot as the nearly 70 million young faces of Generation Y enter the workforce with a sense of empowerment and confidence that cannot be ignored. How is your company adapting to this changing dynamic? The article Corporations Should Know "Y," examines the characteristics of Generation Y employees. How has their environment shaped who they are and how they view the corporate setting? Even more important, however, is how do organizations manage this unique group? As the article indicates, there must be a proactive approach, which ultimately translates into managers becoming effective leaders.

  • At International Paper, an innovative training program exposes new management associates to many key roles in the company's global sourcing organization. In the article A Standout Training Operation, Larry H. Simmons, manager of sourcing initiatives and development, discusses the company's internship and associates program. The internship program is six months in duration. Interns must be a junior, senior or post-graduate student. The associates program is a 28-month, entry-level program designed to give new hires exposure to supply management functions and distribution operations at the company's manufacturing facilities. Check out this unique training program.

  • Are organizations doing what they need to in order to support green practices? Recently, 25 Fortune 100 companies across North America, representing a variety of industries, were part of a study conducted by A.T. Kearney in conjunction with ISM. In her article, The Future Is Looking Green, Lisa Cooling reveals some surprising results of the study. For example, a majority (nearly 60 percent) of the companies in the survey has a documented corporate-level sustainability strategy, yet just more than one-third (36 percent) have a formal sustainability strategy for the supply management organization. Find out the tough questions companies must face within the next 12 months.

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Contact Us

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