Chemical supplier qualification just got more difficult
Regulatory and risk concerns have combined with economic and financial uncertainty in the chemicals supply chain to give buyers new challenges in evaluating chemical suppliers.
By Richard Weissman -- Purchasing, 2/12/2009 2:00:00 AM
While the barrage of chemicals price hikes of 2008 are a fading memory, the deepening global recession and its impact on the supply base looks to be this year's beast of burden for chemicals and plastics buyers. On top of their usual supplier assessment priorities including regulatory compliance, total cost analysis and product quality, in an increasingly slumping chemicals market, financial solvency is a real and pressing concern in qualifying and partnering with chemicals suppliers for the long-term.
Sourcing globally
And while keeping financial tabs on your domestic suppliers is challenging enough, doing deep-dive evaluations on overseas suppliers is an even bigger hurdle for people like Yannick Bohrer, lead buyer for chemicals at Netherlands-based company Royal DSM and vice president of purchasing for the consultancy Globuyteam. "While we have consistency in our overall supplier evaluation process, we do have some additional layers of scrutiny for our overseas chemical suppliers in today's environment," Bohrer says. "We perform additional sampling on delivery of chemicals, audit suppliers on health and safety issues a bit more deeply, and increase our focus on logistics due to longer leadtimes and risk of supply interruptions [with overseas suppliers]."
"You can't source chemicals overseas from a desk," says Bill Michels, CEO of the Ann Arbor, Mich.-based consultancy ADR North America, a proponent of stronger supply chain vigilance. Michels says as a result of the declining markets, fewer companies are allocating budget money to visit overseas suppliers, a crucial step in global sourcing of chemicals. "Buyers need to audit the supply chain and directly manage compliance issues including the chain of custody of materials, especially when it comes to low-cost country sourcing of chemicals and chemical products," he says, adding that some companies are leveraging third-party audit firms as a stop-gap measure but says buyers should evaluate those third-parties even more closely than suppliers.
Chemicals maker W.R .Grace sources overseas through its international supply chain centers for the acquisition of direct and indirect materials in China, Singapore, Germany, France, England, and North America. Tom Brossart, the director of global logistics and trade and compliance at W.R. Grace in Columbia, Md., says "suppliers are suppliers" and the buyer's focus should be on the fundamentals when it comes to evaluating chemical suppliers in any market.
"We concentrate on the core areas like quality, service, safety, finance and cost-price analysis," says Brossart, a strong advocate of supplier partnerships. "We are also focused on due diligence when it comes to evaluating and managing suppliers, so onsite supplier visits are critical to us, especially for those suppliers in the less developed world."
Regulatory still front and center
Regulatory and environmental concerns remain a pressing issue for chemicals buyers, perhaps even more so in a struggling supply base looking to shave costs at any turn. "The primary emphasis in the international chemical supply chain these days clearly focuses on the issues of sustainability and the environment," says Michels. "The environmental issues, which have been ignored for a long time, are not just limited to the suppliers of finished goods but to the whole chemical supply chain."
Michels advocates strict supplier vigilance and points to the recent news of lead paint in toys and melamine in milk to see a supplier management process gone awry. "These issues should raise a whole series of red flags about what may be going on in the supply chain," he says.
DSM's Bohrer agrees, saying the main difference in qualifying chemical suppliers from other commodity suppliers "mainly lies in safety, health, and environmental issues. Unlike many other commodities, chemical products are often dangerous and unstable goods that require a significant amount of in-transit attention."
Varian Semiconductor Equipment Associates, a Gloucester, Mass.-based manufacturer of capital equipment for the semiconductor industry, uses specialty chemicals and gases in its manufacturing and testing processes. Jim Modugno, Varian Semiconductor's supplier development manager, says he has seen an increased appreciation placed on the procurement of chemicals and gases in recent years, likely "due to increased focus on the health and safety of employees handling the product."
Modugno notes that a solid supplier assessment and qualification process should be applicable to the many commodities that a company may buy. But it should also have some additional focus for the unique needs of the specialty chemicals spend area, for example. "For products like chemicals and gases, we would be especially concerned about handling, storage, and hazmat requirements," says Modugno.
Risky business
But perhaps the biggest concern that keeps Modugno and his peers up at night in today's manufacturing market is the financial stability of his chemical suppliers. He said he is buying more chemicals from established and local and national suppliers that have a solid and long term history with his company as a way of minimizing Varian's risk.
DSM's Bohrer is also worried about supplier finances. "With current finance and credit difficulties cash is king, and all companies are focusing on cash flow to finance ongoing activities, including the buyer's company," he says. "In some cases ensuring cash flow is becoming more important than taking advantage of cost reduction opportunities."
Bohrer also notes that payment terms have become more of a strategic element of negotiation whereas it simply used to be part of total cost of ownership calculations. "Most overseas suppliers, especially those in the Far East, ask for cash or at sight payment," he says. "Payment terms are an increasing part of the sourcing equation."
Michels points out the current credit crunch is forcing changes in the chemicals supply chain's payment terms. "The credit condition of both buyers and suppliers is a real issue," he says. "Buyers may be extending their terms to 60, 90 or even 120 days, creating cash flow issues for their suppliers" which could come back to bite the buyers.
If suppliers have troubles getting a line of credit to finance extended payables, it could create supplier performance issues or in some cases failure, which could have a cascading effect throughout the supply chain. ADR works with its biotech clients, especially in the area of raw materials, on these issues. "We use simulation software to identify areas of risk supplier by supplier, create the financial impact scenarios, and identify alternate sourcing strategies," says Michels. "It is important to understand risk in the supply chain, not just at the first level but in the subsequent tiers no matter where they are."
Logistics priorities
Bohrer notes that logistics plays a key role in chemical purchases, including engaging trucking companies that are compliant with all needed regulatory clearances in the markets the products are being shipped in. "We need to have the ability to track chemicals down to the molecular level due to the potential of chemical reactions during transit," says Bohrer. "It is extremely important to avoid any risks to the public such as explosions or pollution."
"We spend a lot of time on packaging and transportation, especially with our chemical suppliers in Asia and Japan and particularly China," says Brossart. He says W.R. Grace has a corporate logistics policy where certain chemicals are not allowed on commercial airlines due to potential exposure of chemicals to passengers, adding another layer safety on top of current regulations. "We actively and carefully manage freight from our chemical suppliers and have excellent relationships with our freight forwarders. We even use special dedicated flights and couriers when the situation warrants," says Brossart.
Brossart's advice to all buyers is to understand what is on the material safety data sheets (MSDS) of the chemicals they are buying. "You have to make sure that the products are coded correctly as the MSDS drives packaging and transportation protocols," he says. "An incorrect MSDS could be a gotcha." Brossart maintains a staff of licensed hazmat experts in his organization to actively manage the logistics and compliance issues, adding to his span of control of chemical suppliers.
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