Sun Chemical targets savings as prices soar
Procurement chief Gregory Nelson finds path to success in centralizing purchasing, buying in bulk and switching to nontraditional suppliers.
By Gordon Graff -- Purchasing, 8/17/2004 2:00:00 AM
In an era of $40 per barrel oil and stratospheric natural gas rates, most chemical companies would be content to hold the line on spending from one year to the next. But Sun Chemical Corp. recently launched a globally centralized purchasing organization that has the ambitious goal of reducing the company's total cost of ownership in the supply chain by 10%. That target is more than a pipedream. Several trial projects at Sun over the past two years, involving key segments of the company's $2.2 billion in annual spending, have demonstrated savings in that range.
Heading the new purchasing unit at Sun is Gregory N. Nelson, the company's senior vice president for global procurement and supply chain. When Nelson arrived at Sun in March, 2003, the company's chief executive, Wes Lucas gave him the task of unifying under one umbrella the purchasing practices of far-flung businesses and divisions that had become accustomed to following their own rules and procedures. According to Nelson, Lucas "felt that purchasing could play a key part in making the company a lot more profitable, and he believed that the way we were doing purchasing needed to change." The fragmented nature of Sun's purchasing network contrasted starkly with the relatively centralized procurement system at Dow Chemical, where Nelson had served as vice president of global purchasing before coming to Sun.
The diverse structure of Sun Chemical, headquartered in Fort Lee, N.J., reflects the piecemeal way the company has grown over the years through a series of acquisitions. A wholly owned subsidiary of Dainippon Ink and Chemicals Inc. in Tokyo, Sun, with annual sales around $3 billion, is the world's largest producer of graphic arts printing inks. It is also a major manufacturer of inks and pigments that go into paints, coatings, plastics and cosmetics. The company, which has 12,500 employees supporting customers around the world, includes subsidiaries with such well known names as Coates Lorilleux, Gibbon, Hartmann, Kohl & Madden, Swale, Usher-Walker and US Ink. In addition, Sun Chemical has many joint ventures, the largest being its $1.5 billion Kodak Polychrome Graphics venture with Eastman Kodak. which makes prepress products and equipment.
Sun's mix of different business and regional units posed a challenge when Nelson began to reshape the company's purchasing structure. "We weren't getting the best prices from suppliers," he recalls, "because we didn't have as much purchasing power as our size and volume, if we put all our components together, would indicate." Another issue, he adds, was that "suppliers would treat us differently in Europe than in the U.S." because of different pricing models in the two regions.
Phasing in changes
While it was clear to Nelson that a single, consolidated purchasing organization would help overcome these limitations and generate savings, he concluded that the transformation had to be done with care to minimize the inevitable resistance to change. "Telling the business units that today you operate the old way and tomorrow you go to a centralized structure, where everything is done by one group, would not have had a successful outcome," Nelson says. Instead, he decided to phase in the changes in stages.
The first stage built on a pilot program in Europe that Sun had launched in October, 2002, to see whether cross-functional teams of purchasing agents drawn from different divisions could work together to achieve substantial reductions in spending.
The program focused on four product areas—carbon black, nitrocellulose, special organic pigments, and titanium dioxide—and employed several cost saving techniques that have since become an integral part of the globally centralized procurement unit that Nelson now directs.
One of these approaches was to leverage the volumes from different Sun divisions that previously purchased the same goods and services separately, thereby obtaining volume discounts from suppliers. Another element of the program was to shift purchases to lower priced grades as long as the quality of the final product would not be sacrificed. Also in the project was a search for new, lower cost suppliers that Sun had never dealt with before. Many of these "wild cards," as Nelson calls them, were located in China, India, and Eastern European countries such as Russia and Ukraine.
Another part of the program was a tough stance in negotiating with suppliers. To encourage existing suppliers to offer lower rates, says Nelson, they were queried about their costs and pricing structures, and were provided with competitive cost guidelines from the market, including wildcards. New and existing suppliers were also evaluated according to their product quality, reliability and delivery costs. These factors were combined with the offered prices to come up with a "total cost of ownership" rating for each supplier, Nelson says. That rating helped Sun decide whether to stay with a supplier or switch to a new one.
According to Nelson, all these tactics helped Sun's pilot program, which ended in March, 2003, realize savings on procurement in all four product areas it focused on. Nelson's first activity when he arrived at Sun was to expand the pilot effort to a global scale. He did this by organizing Sun's worldwide procurement personnel into 14 broad product categories accounting for $1.1 billion, or 50% of Sun's annual spending. He later assembled an additional seven teams representing the second half of Sun's outlays. After a few months of study, beginning in April, 2003, the teams reported to Nelson that they could realize substantial savings from lower negotiated prices, changes in the grades of purchased supplies, and optimization of Sun's production processes so they would use less materials. Savings were to be gauged by comparing each year's contract for goods and services with the previous year's.
With the cross-functional team concept now proven, the time was ripe, says Nelson, to "make it stick" by centralizing these teams under the roof of a single worldwide purchasing organization devoted to institutionalizing the new cost-saving practices. (The team members had previously reported to their respective business leaders, and their mandate for saving money lasted only a few months.)
The new organization, which was rolled out in August, 2003, has four key components, all presided over by Nelson (see chart). One group consists of global category teams—purchasing agents responsible for broad classes of product and service procurement across Sun's worldwide operations. Not only are there team members responsible for purchasing specific products such as resins, pigments and solvents, there are others who supervise logistics, MRO, administrative services and new supplier development. Each team member is able to draw on technology and manufacturing people in their areas, both for consultation and to interact with suppliers.
Because the requirements of purchased materials and services can vary strongly by region, the new Sun organization includes regional purchasing leaders. The job of these individuals is to make sure that all the purchasing deals made by the global Sun team are implemented at specific sites in different geographical areas such as the U.S. or Europe. To do this they must be aware of the technical and regulatory conditions in their particular regions and be ready to meet with company personnel at the plant level.
Separate from, but overlapping in function and personnel with the regional purchasing group, is the supply chain group. Members of that unit are responsible for such tasks as sales and operations planning, distribution and warehousing. The implementation and supply chain functions are meant to cooperate to provide a seamless flow of raw materials from their suppliers down to the plants where they are consumed.
Information resource
One innovation that Nelson has introduced at Sun is a knowledge center—officially the Center of Expertise—to provide the information, training and strategic resources that are essential for the functioning of the other groups he directs. The new center supplies market research, industry news, supplier data and alternative sourcing information. It helps Sun personnel design strategic sourcing plans and trains employees in new skills such as contract negotiations. It also allows procurement people to track the progress of their programs.
The Center of Expertise is sort of the glue that holds the other components of the purchasing organization together, in the view of Deborah Patterson, director. "Part of our challenge," she says, "is to find out who does what in different parts of the organization, to evaluate their skills and knowledge and bring them to the attention of the entire group."
Patterson's unit is assembling a global data warehouse that will pull together all of Sun's purchasing information from existing databases. This will make it much easier than in the past for a category leader to get a global view of spending in a selected product area. Easy access to worldwide data is vital to the success of the new procurement organization, Nelson notes.
The procurement group at Sun certainly has its work cut out for it, especially because prices of chemicals on which Sun relies are trending upward. In particular, Sun is under pressure from escalating petroleum costs in the form of raw material price increases, freight surcharges, and increased transportation costs. These higher costs directly affect costs for packaging solvents, heat-set solvents, energy curing monomers and oligomers, carbon black, nitrocellulose, titanium dioxide, acrylic resins, and transportation. All indications point toward crude oil prices remaining well above historical averages; as a result, Sun officials expect energy price pressures to remain for the foreseeable future.
Despite these challenges, Nelson remains confident that his team will deliver on their commitments. Although shifting to lower cost grades of raw materials and optimizing processes are expected to account for some of the targeted economies, the largest savings, he notes, will come from agreements with suppliers that demonstrate the lowest total cost of ownership. To find such suppliers, Nelson is looking more and more to Asia and Eastern Europe.
In a lot of cases, suppliers in these regions are "hungrier" than their counterparts in North America and Western Europe, says Nelson, adding that their costs are typically much lower than those of the more established suppliers in the West. And as far as their relationship with Sun is concerned, he continues, these suppliers "are eager to get access to the largest ink-making company in the world."
Nelson concedes that there have been questions in the past regarding the quality and reliability of chemical suppliers in Asia and Eastern Europe. But these issues are fading, he notes. Still, he stresses that Sun evaluates each potential new supplier on the total cost of ownership model, which includes quality and reliability issues, before making any decisions that might have an adverse impact on the company's customers.
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