Value-add is a must from chemical distributors
Chemical buyers look for help from their distributors to manage volatile prices.
By Maria Varmazis -- Purchasing, 11/2/2006 2:00:00 AM
Buyers are pretty happy with their chemical distributors—if only prices would just stay put, buyers would be on cloud nine. Unfortunately, commodity and specialty chemicals continue to provide for a bumpy ride. Until the market settles down, buyers are turning to their distributors for increased value-add services to help take the edge off.
“Service and price are the main things I consider when selecting a chemical distributor, in that order,” says Ben Shepherd, buyer for the Chanhassen, Minn.-based Bergquist Company, which manufactures thermal materials, substrates, and electronic components. A crucial part of the service he's looking for is how quickly his distributor responds to his questions or confirms orders for the solvents he buys both in drums and in bulk.
He's not alone in that, as many buyers say building a solid relationship with a chemical distributor trumps everything else, though keeping prices low is a constant pressure. “The relationship is a higher priority than a competitive price for us,” says Paul Kane, global sourcing manager of bulk chemicals, intermediates and APIs at Indianapolis-based Eli Lilly.
Another major concern among buyers is security of supply. As Kane procures chemicals for Eli Lilly's line of insulin products, a major supply disruption can have a very real, very devastating effect on the customers that depend on the product. “Our biggest priority is security of supply, especially when it's a life-saving product. We do everything we can to make sure we're getting the best price, but the relationship and risk avoidance is key.”
Letting a distributor handle chemical sourcing takes a certain level of trust, but for Kane, it's all part of the package of value-add services he expects from his distributors, especially the ones that supply the less-critical chemicals. “I don't necessarily know the world market on those chemicals, and I expect my distributors to know if a manufacturer declares force majeure,” he says. “I expect the distributor to know the market for those chemicals and leverage their knowledge and drive prices down if they can, or come to me with ideas on getting new sources.”
Kane says while 12% of the company's total $150 million chemical spend goes through a distributor, that 12% pays for up to 80% of the chemical products. In trusting his distributors to monitor the market and supply base, Kane saves a huge chunk of time.
Quality expectations
Kane's distributor expectations mirror those of Marie O'Reilly, purchasing manager at Biozone Labs, a custom manufacturer of cosmetics and over-the-counter drugs in Pittsburg, Calif. She says with the larger, multinational distributors—which she uses to source her commodity chemicals—there's a certain assumption of high quality and responsiveness, as several have in-house testing facilities.
And O'Reilly says she, like Kane, is willing to pay a little more to assure the chemical coming in is exactly what is needed. “We will pay a higher price if we can get that material, because frankly, good price and on-time delivery go out the window if you don't have the right thing,” she says.
O'Reilly says quality levels are a bit more flexible when it comes to specialty chemicals, which are generally provided by smaller distributors. “They're selling very distinctive chemicals that I can't source. So I need to work very closely with these suppliers to rectify any quality or delivery problems,” she says. “The quality of these chemicals is sometimes not as high as the large multinational distributors, because of what they're selling—generally organics, which vary according to season, so quality standards have to be a bit more flexible.”
The way a smaller distributor can make up for irregular quality levels goes back to value-add again: O'Reilly expects organics distributors to have high levels of technical expertise on the products they're providing to Biozone, and to know what the industry standard quality levels are for what she's buying.
“If we have something come in out of spec, we want to know: How is the supplier going to handle a quality problem? Do they have the technical expertise on staff at the distribution facility? Do they have to go back to their manufacturer or distributor?” she says. “When we receive a specialty chemical from a smaller national distributor, we're often fourth, fifth or sixth down the supply chain. We may be very far removed from the actual manufacturer in China or India. Somebody at some point down the supply chain has to assure quality.”
The distributor perspective
Distributors are hearing buyers like O'Reilly loud and clear. Sean Macdonald, president of JLM Marketing, a subsidiary of solvent and resin distributor JLM Industries in Tampa, Fla. He says quality levels are one of the biggest concerns of JLM's customers, and “our time spent confirming quality has increased quite a bit.”
But the biggest issue of all is, of course, pricing stability. Distributors are trying to be as transparent as possible if they see the need to make any kind of price change, says Macdonald. “All purchasers are under a great deal of pressure to cut costs and petroleum-based chemistry has made this very difficult, so our goal is to constantly manage this objection with reasonable data to prove out any price change,” he says. By keeping his customers informed of price trends he's tracking, Macdonald says he can at the very least reduce the overall risk from a volatile chemicals market.
Mark Laehn, vice president and general manager of Hydrite Chemical Company of Brookfield, Wisc., is also seeing customer fatigue when it comes to price changes. “I think our customers are very tired of the price instability. It makes the market very difficult for everybody to price their product through the supply chain,” he says.
Laehn believes distributors can help insulate buyers from price volatility by seeking out new suppliers to pad its supply base.
“The biggest thing we could do is make sure we serve our customers a depth of suppliers,” he says. “We're constantly looking for second sources of supplies, looking at overseas imports if that's a better economic solution.”
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