Volume 7, Number 3, July 2009
This newsletter is published in cooperation with the ISM Chemical Group.  

Institute for Supply Management

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In This Issue ...
  • Chemical Industry News
    • What Price Energy Efficiency? According to a recent survey, 53 of energy regulators believe their customers would be willing to pay more — about 5 percent on average — for green energy. Another 17 percent suspect consumers in their states would pay as much as 10 percent more.  Read more.
    • Plastic Bag Recycling Shifts Into High Gear: An aggressive recycling goal aims for 40 percent recycled content in all plastic bags by 2015; 470 million pounds of recycled plastic for the manufacture of new bags; and enough energy conserved to heat 200,000 homes for a year.  Read more.
    • Use of Bio-renewable Chemicals On the Rise: A recent report documents the change from a nonrenewable to renewable feedstock base in the chemical industry, fueled by rising prices of nonrenewable feedstock and the growing ability of certain microorganisms to yield higher productivity of the desired chemicals.  Read more.
    • European BPA and Polycarbonate Outlook for 2010: Ever since funding for new construction projects in Europe came to a halt in the second half of 2008, European polycarbonate (PC) and bisphenol A (BPA) markets have seen plummeting demand.  Read more.
  • Feature Article
    • Chemical Negotiations: Regardless of country, service or commodity, chemical sourcing professionals must possess three key areas of understanding with regard to negotiation preparation in foreign countries: understanding the supply base, cost components and drivers, and "the international factor."  Read more.
  • Announcements: Winter 2009 will be a busy time of year for ISM educational opportunities! In November, the Institute hosts a Pharmaceutical and Chemical Forum-sponsored Strategic Sourcing Summit & Showcase in New Brunswick, New Jersey. At the same time, the ISM Sustainability and Social Responsibility Conference will be underway in Adelphi, Maryland. Then, in December, ISM will present its 10th Annual Services Conference in Phoenix.  Read more.
  • Additional Resources: Check out these links to additional resources from the ISM Web site.  Read more.
  • Contact Us about ISM eDigest: Chemicals

Chemical Industry News

What Price Energy Efficiency?

Green Energy Comes at a Price — One That Consumers Seem Ready to Pay

Even though energy regulators agree that reducing greenhouse gas emissions will increase the costs of electricity, a recent survey shows that the public is willing to pay more — about 5 percent — for green energy.

Conducted in March and April 2009 by Washington, D.C.-based Deloitte Center for Energy Solutions, the survey gauged the opinions and predictions of 60 state regulators. Deloitte found that 70 percent expect the cost of energy to increase next year, mostly driven by consumer demand for environmental compliance. Even more (80 percent) predict the Obama administration's proposed cap and trade system for carbon dioxide emissions will drive higher electricity costs.

Fortunately, these regulators also believe the public is willing to pay more for greener energy. More than half (53 percent) believe users would pay as much as 5 percent more to mitigate greenhouse gas emissions, and 16.7 suspect consumers in their states would pay up to 10 percent more.

Regulators also showed increased support for renewable power sources: 42.4 percent ranked them "extremely effective." Clean coal, on the other hand, polarized the energy regulators surveyed. While only 25.4 percent felt it was "extremely effective," almost as many — 23.7 percent — viewed it as "not effective at all."

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Plastic Bag Recycling

Plastic Bag Manufacturers Set Aggressive Recycled-Content Goal

Earlier this year, Progressive Bag Affiliates (PBA) of the American Chemistry Council set an aggressive goal with its Full Circle Recycling Initiative: 40 percent recycled content in all plastic bags by 2015, including at least 25 percent postconsumer recycled plastic. The landmark effort was applauded by Walgreen Co., the nonprofit Keep America Beautiful, and numerous retailers and retail associations.

PBA will work with major grocery and retail chains to increase at-store programs that allow shoppers to bring back their used plastic bags and wraps. Overall, industry is expected to invest nearly $50 million to overhaul manufacturing processes. Annually, grocery and retail chains will collect 470 million pounds of recycled plastic for the manufacture of new bags in an effort to reduce greenhouse gas emissions by an estimated 463 million pounds, conserve enough natural gas energy to heat 200,000 homes, and reduce waste by 300 million pounds.

"This is a significant commitment by the plastic bag industry to reduce waste," says Matthew McKenna, president and CEO of Keep America Beautiful. "A greater commitment to recycling by consumers and businesses will ultimately prevent litter and beautify our communities, while at the same time conserving energy and natural resources."

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Bio-Renewable Chemicals

Bio-Renewable Chemicals Emerge as Building Blocks of the Chemical Industry

According to Frost & Sullivan's recent report, Strategic Analysis of the Worldwide Market for Bio-renewable Chemicals, the change from a nonrenewable to renewable feedstock base in the chemical industry is accelerating. Behind the trend are increased prices of nonrenewable feedstock, as well as the growing ability of certain microorganisms to yield higher productivity of the desired chemicals.

Analysts found that the market — including applications for lactic acid, succinic acid, glycerol and 1,3 propanediol in bio-plastics, bio-composites and green chemicals — earned revenues of US$1.63 billion last year. By 2015, they estimate revenues will exceed US$5 billion in 2015.

Companies are also evaluating the environmental benefits of using bio-renewable feedstock. For instance, emission levels are reduced with the use of bio-based feedstock in chemical manufacture. The manufacturing process of sorona bio-plastic from renewable feedstock lowers green house gases by up to 50 percent, compared to the manufacturing process of Nylon 6 from nonrenewable feedstock.

Between 2004 and mid-2008, crude oil prices rose spectacularly from $30 per barrel to $145 — a 350 percent increase per barrel. Today, the cost hovers around $45 per barrel. As Frost & Sullivan analysts point out, this fluctuation is impacting the price of the feedstock necessary for chemical production. "This variation is not evident in the renewable feedstock industry covering wheat and sugar," they add.

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BPA and Polycarbonate Outlook for 2010

Construction Downturn Hits BPA and Polycarbonate Hard

According to ICIS, the slowdown in the construction industry has been evident across Europe since the second half of 2008. In the U.K., government figures show that almost 50,000 construction jobs were lost during this period, and both the European polycarbonate (PC) and bisphenol A (BPA) markets have seen demand plummet as funding for new construction projects comes to a halt.

However, the gravity of the situation varies across different European markets, according to Truong Mellor, who covers BPA, PC, xylenes, toluene, butanediol and engineering plastics for ICIS pricing. While housing, civil engineering and commercial construction in the U.K. saw record declines in activity by December, Mellor says the construction industry in Germany has proven "remarkably buoyant."

"One reason for this is that the order books for the construction industry in Germany are already filled for the first half of 2009," Mellor writes. "Ongoing large-scale projects that were commissioned in mid-2008 have ensured that there has been no dramatic slump in orders as seen in the manufacturing sector."

The Polycarbonate Outlook

Market participants say the downturn in Europe's consumer spending on appliances and the continued slump in the automotive industry are more pressing concerns affecting industry demand for PC. Winter has traditionally seen a trailing off of activity in the construction sector due to the weather, they explain. Also, Europe had a particularly cold 2008-2009 winter, so they suspect the slowdown in orders for both PC and BPA was seasonal.

Even so, some niche markets — medical supplies, for example — seem to have weathered the downturn with little to no discernable effect. "But these markets are minuscule in terms of overall volume," Mellor points out. "For an alternative market sector to be sustainable, it will need to be able to absorb the quantity of material that the construction industry traditionally consumes."

What's Ahead for Bisphenol A

According to Mellor, the BPA market is now showing initial signs of stability after plummeting toward the end of 2008. Undoubtedly, however, it has suffered from the drop in construction industry activity: The main market for BPA is in the production of PC, which has slowed down since Q4 2008, while the other key application is in the epoxy resins sector, which has taken a "huge hit" in sales with the slump in the automotive industry.

According to one trader, the foremost driver of BPA and epoxy resin sales in 2008 was the shipping sector, as it is used to coat cargo containers. The wider downturn in global commerce that the current economic challenges have fostered will make it difficult for BPA to maintain sales volumes.

For an in-depth look at ICIS' findings, log on to the ICIS Web site.

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Feature Article

International Chemical Negotiations

Chemical Negotiations: Key Considerations When Contracting With Local Suppliers, Internationally

By Justin Burnett

Given the current economic downturn, category management and negotiations have gained even more popularity in the chemical sourcing profession lately. To help foster both, I'd like to talk about chemical supply negotiating — mainly with local suppliers — in an international environment.

Regardless of country, service or commodity, I consistently deal with three key areas of focus in my international sourcing and negotiation preparations: understanding the supply base, cost components and drivers, and "the international factor."

1. Understanding the Supply Base

When sourcing in a foreign location, understanding the local chemical supply and service base is critical. Often, local suppliers are joint ventures or branches of international suppliers trying to break into a new market. In a few cases, truly local companies have developed the expertise and commodity supply to compete in the market.

Tax benefits, government support, and lower labor and inventory holding costs are just a few of the potential incentives you might receive by using local sourcing. On the other hand, it is a challenge in most countries to find local suppliers that can truly deliver the same quality at a competitive price compared with their international competitors. Also questionable are the security of the supply and the quality of the suppliers' personnel.

One of the key factors in selecting a supplier on an international level is how it delivers the service performance piece, and with what key personnel. If the supplier relies entirely on local labor, you must be certain that the workforce is qualified and has the proper training and certifications to do the job. An area of opportunity to lower overall personnel costs is a nationalization program whereby expatriate staff members are on a time frame to educate their lower-total cost national staff to become competent and reliable in higher-cost jobs, which lowers staff overhead and enables lower cost for the service or commodity provided.

In the case of chemical sourcing, local suppliers might offer benefits that larger international suppliers cannot, including lower inventory holdings costs and reduced customs fees, taxes and so on.

2. Understanding Cost Components and Drivers

Chemical supply can be done as supply-only (wherein chemicals are bought as a product, delivered and that is where the supplier relationship ends) or provided as a service with performance and commodities accounted for in the price. A provided-as-a-service type of agreement means that the supplier provides the chemicals, but also mixes, measures, tests and reports back on the efficiencies and performance of the chemicals in your operation. This arrangement is a common approach among companies that lack the capabilities to do this type of measuring and testing themselves.

The key to negotiating provided-as-a-service types of agreements is to unbundle the costs of the services and supplies to understand what factors are driving the final price. By unbundling the items from the labor costs and raw materials that make up the final components, you can understand what pricing factors, indices, benchmarking and market drivers will affect your bottom line.

As mentioned before, local suppliers can offer a myriad of benefits. However, additional components — transportation/logistics, permits and local "tariffs" that might apply, depending on the area — can add to cost and drive price increases. The only way to truly avoid additional costs is by conducting a line-item analysis of these components. If you do not ask the supplier to unbundle the total rate, then you will never truly understand what you are actually paying.

3. The International Factor

Although it is solid practice to unbundle costs to determine if all the components are legitimate and unavoidable, bribery and other forms of illegal payment are common in many countries. Often, these are culturally understood and accepted behaviors with regard to business agreements. Your challenge, then, is to ensure that this corruption does not make its way into your contracts, whether for chemicals or a different commodity or service.

The only way to do this is by understanding the supply base, the cost components and the local culture. Genuine understanding in these areas and well-defined terms and conditions, including clauses on bribery and corruption, will ensure your company gets the best value for its money when sourcing chemical managed services and commodities in other countries.

As chemical sourcing professionals who have negotiated across cultures and countries can attest, each encounter is different, and something valuable is learned each time. Among all the valuable lessons, however, the three I have discussed in this article have emerged as the most critical.

Justin Burnett is the strategic procurement manager for BP in Azerbaijan, Georgia and Turkey. He holds an MBA in supply chain management from the W. P. Carey School of Business at Arizona State University and has an associate member accreditation from the International Association for Contract & Commercial Management (IACCM). To reach this author, please send an e-mail to author@ism.ws.

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Strategic Sourcing Summit/Showcase Planned for November 2009

The ISM Chemical and Pharmaceutical Groups will host a Strategic Sourcing Summit & Showcase on November 4-5, 2009 at the Hyatt Regency Hotel in New Brunswick, New Jersey. For upcoming details, keep an eye on the Chemical Group forum or send an e-mail to Bill Stirling or Christopher Silva.

ISM Announces Doctoral Grants and Research Fellowship

Institute for Supply Management™ (ISM), with the support of the ISM Board of Directors, has awarded Doctoral Dissertation Grants to three doctoral candidates across the United States. At its May 2009 meeting, the ISM Board approved the ISM Educational Resources Committee's recommendations for ISM Doctoral Dissertation Grants in amounts ranging from $6,000 to $12,000 to:

  • Yusoon Kim — Arizona State University
    Reframing Buyer-Supplier Relationships: Adoption of Network Embeddedness

  • Delvon B. Parker — Michigan State University
    Modularity and Complexity: An Examination of the Effects of Product Structure on the Intricacy of Production Systems

  • Yoon Hee Kim — University of Wisconsin
    The Effect of Operations Strategy on Supplier-Customer Relationships and the Suppliers' Financial Performance

The objective of ISM's Doctoral Dissertation Grant Program, which has funded one or more Doctoral Dissertation Grants since 1960, is to produce useful research that can be applied to supply management, and to support high-potential doctoral candidates who will teach and conduct research in supply management. A key criterion for selecting grant recipients is that their dissertations have direct value and implications for the purchasing and supply management function. Additional information on application procedures for ISM's Doctoral Dissertation Grant Program is available online.

The ISM Board also approved the following Senior Research Fellowship to support outstanding research in supply management by:

  • Assistant Professor Tobias Schoenherr — Michigan State University
    Electronic Procurement — Context, Practice, Bundles and Performance

The objective of the $5,000 grant is to support emerging, high-potential scholars who teach and conduct research in supply management, and to help produce useful research that can be applied to the advancement of supply management.

ISM Offers Sustainability and Social Responsibility Conference

The ISM Sustainability and Social Responsibility Conference is scheduled for November 5-6, 2009 in Adelphi, Maryland. Sign up online to receive updates by e-mail as they become available.

10th Annual Services Conference

ISM will present its 10th Annual Services Conference December 3-4, 2009 in Phoenix. To receive updates by e-mail, log on to the ISM Web site and enter your name and e-mail address.

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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:

  • A recent ISM article — Counterfeiting — What (and Who) Can You Trust? — spotlights the real impact of sourcing fake goods — a phenomenon plaguing pharmaceuticals, electronic components, medical devices, automotive and aircraft parts, navigation charts and much more. It also discusses increased legislative efforts to stop counterfeit goods sourcing, how to avoid and minimize your risk of procuring fake goods, and the importance of buying from authorized sellers and resellers.

  • "From Energy Sourcing to Energy Management," a presentation by 2009 Richter Award Winner (Process) Royal KPN Telecom at ISM's 94th Annual International Conference, discusses the company's more than 12,000 network sites with individual contracts. Royal KPN was able to identify savings and reduce its taxes by 90 percent by integrating contracts, and also by lobbying the Dutch Ministry of Finance to qualify for a tax exception. By forming a cross-functional energy management group, it was able to get a much better grip on cost and consumption; the company also realized energy efficiency within the supply chain. Energy management has now become a spearhead in KPN's CSR program, with long-term energy management goals.

  • ISM's 2009 Salary Survey results show that supply management salaries have increased 6.8 percent since last year, with a new average of US$98,117. Now in its fourth year, the survey has demonstrated an overall average salary increase every year it has been conducted. According to David Schultz, CPSM, C.P.M., former manager of the Resource Center at ISM, this trend is a good sign of progress for the profession, especially in today's tough economic climate. "Time will tell if this trend is able to continue through the remainder of 2009," he says.

  • In Great Negotiators Are Made, Not Born, author Simon Brown, executive vice president of PMMS Consulting Group, talks about how to map your objectives and blend them with "the human factor" to achieve the best possible results in your next negotiation. According to Brown, natural-born talent has very little to do with success. Rather, top salespeople, winning negotiators and dominant diplomats see negotiation as a process that can be analyzed, practiced, rehearsed and refined.

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