Supply chain management cuts costs
More than ever before, chemical distributors are filling the product and service needs of suppliers and buyers.
By Christopher Reilly -- Purchasing, 11/1/2001 2:00:00 AM
Distributors have long been an important part of the chemical supply chain for the many strategic benefits they provide chemical buyers, such as market and product expertise, small-volume and bundled product offerings, value-added services, logistics services and just-in-time delivery. But today's rapidly changing chemical and manufacturing marketplace, with companies constantly merging and restructuring, has made aligning with chemical distributors more critical for cost reduction than ever before.
More than just the neighborhood supplier, chemical distributors are being called on to provide the unusual order, and solve supply, delivery and operating problems for customers throughout the supply chain.
Opportunities abound
Rapid consolidation throughout the chemical industry in the last few years has brought about profound changes in the way chemicals and raw materials are bought and sold. Changing supplier/ buyer relationships and functions within companies have become so prevalent, in fact, companies have begun instituting "change management" programs to train top management and purchasing professionals to succeed in the fast-paced chemical arena.
As chemical companies continue to merge and restructure, many "dislocations" between longstanding buyer/distributor and distributor/producer relationships have occurred. For instance, a coatings producer used to buy all of its resins materials from a direct supplier, but that supplier has just merged with another supplier and decided to spin off its resins business. As a result the buyer doesn't hold out much hope that his company will get the same deal on resins that it had prior to the merger, because none of the same people still work for the company and the business relationship has changed. So the buyer begins to identify and qualify new suppliers.
In situations like this, buyers often favor sourcing materials from chemical distributors who offer a wide breadth of product and services, including strategic sourcing help and supply chain management tools.
"This consolidation and rampant change has helped the chemical distribution industry become more sophisticated, especially from a knowledge management standpoint," says Steven Clark, president and CEO of Brenntag Inc., located in Reading, Pa.. "And it has given distributors a chance to assume a major role in supply-chain management and cost restructuring, because, for a certain piece of the chemical business, no one else can make supply-chain management happen," he says.
For example, Clark says that many companies on both the supply side and the buy side are looking to chemical distributors in order to outsource their logistics function. "They want to outsource the business of their smaller accounts, because maintaining the customer relationship is too expensive for them," he says.
Rohm & Haas Corp., the specialty chemical manufacturer based in Philadelphia, Pa., is one of these companies. Historically, Rohm & Haas didn't use distributors for its material needs, opting rather to balance its large volume low-cost buys with many smaller-volume higher-cost transactions. The result was unnecessary cost spread throughout a large supplier base. Now, the company has turned over a large portion of its material spend to distributors which enabled the purchasing department to cut $10 million from its material spend over a three-year period (see the full story in the May 3rd, 2001 PURCHASING CPI Edition).
In addition, Rohm & Haas has begun to focus its operations on its larger, more strategic customers, and using distributors to satisfy the material and service needs of its smaller accounts. Brenntag's Clark explains that by doing this, companies like Rohm & Haas can greatly reduce their costs. "At the same time, they don't lose any of their business—in fact, their business grows more because they have someone paying attention to their smaller customers," Clark says.
"Suppliers may be able to reduce the number of orders they have to process from 60,000/yr to a couple thousand/yr by outsourcing orders to distribution," Clark says. "
In doing this, their administrative costs and customer service time shrink enormously, and their selling costs go down," he adds.
In a similar vein, distributors are beginning to field requests from customers who are looking to outsource the entire logistics service or even the purchasing function. According to Clark, "We might be asked to purchase all of the less-than-truckload (LTL) products for a customer, handle, and deliver those products to all their plants across the country," Clark says. "Or, in addition to handling all the products that we have traditionally distributed to the customer, we may be asked to source other products (that we don't carry) from a new supplier, and distribute them to the customer."
"On top of that," Clark continues, "There are many customers who want distributors to handle the process of logistics completely, and even take over the distribution of their finished product," he says. "That's a big change," Clark says. "And it is going to develop much further in the years ahead," he says.
Douglas A. Brown, president of Oakland, N.J.-based Brown Chemical Co., agrees, adding that, "It seems like the manufacturing community is getting further and further away from the small customer. Suppliers are concentrating more on developing low-cost manufacturing processes, and on developing their own new technologies," says Brown. "Logistics is not suppliers' core competency, but logistics has been distribution's core business for a long time, and that's where we have an opportunity to step in as a group and provide that service."
In addition, Brown proposes that chemical distributors take their logistics efforts a step further. "For example, distributors should begin to buy barges and lease tank space for material distribution," he says. "These are measures that were taken by only the largest distributors in the past, but I believe that as a group, chemical distribution will have to do something like this in the future."
E-Business & chemical distribution
Stressing the importance of order fulfillment, chemical distributors have jumped online with their product and service offerings, and continue to develop their e-business services to attract customers.
"The major value of e-commerce right now is its interconnectivity," says Brenntag's Steven Clark. "Interconnectivity will help drive a lot more of the collaboration and relationships that are necessary between buyer and supplier to reduce total costs," Clark says.
"Many customers don't take much in the way of convincing that the Internet is the way to do business in the future," adds Clark. "And smaller accounts are using e-business much more actively than many of the larger global customers." This may be surprising to some, due to the investment required of smaller companies to put e-commerce initiatives into practice, but larger corporate infrastructures tend to take longer to identify and implement change.
"The primary challenge for smaller companies in putting their e-business systems together," according to Clark, "is that once they've begun an integration project, costs don't go down—instead, they go up," he says. "That's because you have to run two systems simultaneously—their old ERP system can't simply disappear," he says. It is only after a critical mass is reached, that the real savings the Internet provides become evident—both for the customer and for the distributor, Clark adds.
Not to be left behind the technology curve, the large national distributors have spent significant capital and time getting their many plants, warehouses, and operations connected. Typical of the strategies of many of the large national distributors regarding e-commerce is that of Ashland Distribution. In the last year, Ashland has been busy launching its e-commerce systems and online transactional offering for each of its business segments, including chemicals, distribution, plastics, fibre reinforcements, fine ingredients, and thermoplastics.
"Our push in 2001 has been to get customers on our Web sites, get them registered, and encourage them to actually conduct business online," says Ashland Distribution president, Peter Bokach. "Last year, our percent of total sales conducted online averaged in the low single-digits, but that figure has more than doubled since that time. We're now averaging in the double-digits," he says.
Bokach says that though the company's e-business offering has come a long way in the last year, he believes that it will again have to double its on-line transactions to hope to begin to capture the productivity benefits that are accessible through e-business processes. "This is our formal goal and we're trying to work within its context," Bokach says.
Online alliances gear up
While the large national chemical distributors continue to develop their on-line chemical transaction systems and services, many smaller independent and regional distributors are taking a different tack. To offset the costs of setup and maintenance of electronic business systems, reach a wider customer base and compete on the same level as the large national distributors, OmniChem136, comprised of 13 distributors located in major markets across the country, have allied their product and service offering in an online venture.
According to Tom Coyne, president of Croydon, Pa.-based George S. Coyne Chemical Co., and spokesperson for OmniChem136, the alliance is in the process of hiring a central general manager and industry specialist position to provide group leadership, help process bids for national contracts, and see transactions through their final stages. In addition, Coyne says that the general manager position will satisfy any antitrust concerns and provide a single point of contact for dealing with OmniChem136's customers.
Once the general manager/industry specialist is hired, which Coyne expects will be in the next two months, OmniChem's national accounts will operate under a concept of joint leadership between the hired general manager and the lead distributor, which is determined by the existing relationship, geographic proximity to, or amount of business conducted with the customer.
The only other online alliance of independent chemical distributors of distinction in the chemical industry is The Chemical Distribution Network. What started out as a loosely held group of e-business minded distributors in Chicago, led by Larry Hayes, president of Chemical Distribution, Inc., has grown to include 13 independent distributor members with sales territories covering much of the continental U.S.
"We think that there are opportunities for us to handle multi-site or national contracts, as well as provide supply chain management, especially to those customers who may be considered secondary- or tertiary-tier companies," says Douglas A. Brown, a CDN member.
CDN plans to work with customers and suppliers to reduce total costs by handling the ordering, information transfer, supply chain management, logistics and delivery functions of the online chemical and raw material transactions, and (hopefully) pass some of the savings on to its customers.
"If we can set up an electronic process with the manufacturing community (through the suppliers' e-commerce hub or directly through our computer systems that would allow us to integrate order entry and data management directly into their systems, we may be able to bypass suppliers' customer service cost centers," says Brown Chemical's Doug Brown. "That would take significant cost out of the process."
Another proposal, says Brown, is to reduce costs by aggregating the alliance's buying power. "For example, if all the members of CDN buy caustic soda in tank trucks, that represents many individual orders, tank trucks, invoices and bills of lading," he says. "If we can consolidate our purchase of caustic soda into a one-time, bulk order (one barge), then we could distribute the product ourselves, allowing the manufacturer to avoid multiple shipments, placing multiple orders, collecting multiple invoices, terminaling, etc.," Brown says.
The top-10 global chemical distributors
As chemical distribution companies grow, they continue to branch out their product offering and distribution infrastructures to other global markets. The following is an informal ranking of the top players in the global chemical distribution market, ranked similarly to PURCHASING's annual Top-100 North America-based distributor listing.
NOTE: Companies are ranked by their total annual sales, represented in U.S. dollars. To qualify, the companies must have an existing logistics infrastructure in more than one world region, and chemical distribution must make up at least 51% of total sales.
| Company | Headquarters | Annual sales (U.S dollars) |
| Source: PURCHASING |
||
| 1. Royal Vopak | Rotterdam, The Netherlands | $3.83 billion |
| 2. Brenntag GmbH | Mulheim, Germany | $3.78 billion |
| 3. Ashland Distribution Co. | Dublin, Ohio | $3.2 billion |
| 4. Solvadis | Frankfurt, Germany | $1.37 billion |
| 5. ChemCentral | Bedford Park, Ill. | $915 million |
| 6. HELM A.G. | Hamburg, Germany | $807 million |
| 7. Penta Chemikalien GmbH | Aschaffenburg, Germany | $803 million |
| 8. JLM Industries, Inc. | Tampa, Fla. | $435 million |
| 9. Caldic Nederland | Rotterdam, The Netherlands | $406 million |
| 10.Quimidroga S.A. | Barcelona, Spain | $309 million |
Peter Bokach, Ashland Distribution Co.
"I don't think that we'll see any major changes in the way chemical distributors operate in the next five years," says Ashland Distribution Co.'s president, Peter Bokach. "We'll probably see some more rationalization of the market, but I doubt that the rate of change we're seeing now will be altered significantly," he says. Bokach adds that integration of the recent mega-mergers in the chemical distribution market, such as Vopak's and Brenntag's, will be a long journey of pulling together operations and sorting through all the challenges involved.
"Also, more regional distributors will likely decide to exit the business (for any number of reasons), and we'll probably see more associations of smaller, independent distributors formed to provide chemical materials and services on a global basis," Bokach says.
Steven Clark, Brenntag, Inc.
"With globalization, we will have a lot more intense competition," says Brenntag's Steve Clark. "When you have one region of the world competing against another, you have different cost structures affected by various issues, (i.e. labor, environmental, political, etc.). With this kind of competition, there is a natural tendency for organizations to get bigger through mergers and acquisitions in order to spread their costs and become more competitive on a per-unit basis," he says. As competition intensifies and consolidation of the marketplace continues, Clark says, "relationships between suppliers and customers will become far more complex. We're moving past the traditional buy/sell relationship toward a more collaborative stage," he says.
Donna Fujimoto Cole, Cole Chemical & Distributing, Inc.
"Our strategy is to develop as many alliances and acquisitions as we possibly can to grow our business geographically—backward integrating in complimentary products and businesses," says Donna Fujumoto Cole, president of Cole Chemical. "In the next five years, I think there will be closer ties between producers and distributors while producers learn to make product more efficiently, and develop new products to allow distributors to market their products on a lean manufacturing basis regionally, nationally and globally," says Cole.
Tony Rumfola, TCR Industries, Inc.
"Regulations, which must be dealt with in great detail, will continue to change the chemical distribution market," says Tony Rumfola, president and CEO of TCR Industries, based in La Palma, Calif. "Now, regulations are so demanding that, for example, if a truck is placarded to cover more than what is called for, the driver and company can be cited and penalized severely," he says.
"In the next five years, I believe some of the markets we serve will shrink due to ongoing mergers and acquisitions," Rumfola says. "This has, and will continue to force smaller chemical distributors to diversify their product offering and continuously explore new markets."
"At this point, if chemical distributors are not able to electronically communicate with customers to share production demand and other business information, they are out of step with the industry," Rumfola says.
Tom Coyne, George S. Coyne Chemical
"In the next few years, there will be opportunity for more online consortiums made up of chemical distributors that focus specifically on product niches or on a focused geographic coverage," says Coyne.
In contrast, OmniChem combines a broad range of the larger independent distributors to compete aggressively against the large nationals. "Together, we have tried to be a full line distributor, and we're also trying to bring about some added benefits from the purchasing side by structuring more competitive pricing," Coyne says.
Coyne is betting on optimistic mid-term growth in the OmniChem venture. "It is not unrealistic to estimate that 5-10% of our collective total sales will come from national accounts serviced and supplied by OmniChem in the not-too-distant future," he says. "Short-term, we're gearing up for the fourth quarter bidding cycle—when purchasing managers come out with new initiatives for contracts that are set to expire in December."
Douglas A. Brown, Brown Chemical Co., Inc.
"We'll look to branch out globally," says Douglas A. Brown, president of Brown Chemical and member of the Chemical Distribution Network. "We have a couple members who have done significant business in other regional markets, and we have opened some conversations with independent chemical distributors in the European and Asia-Pacific markets," Brown says. "It will take some time, but we'll continue to develop those contacts and relationships with overseas distributors, and continue to look for opportunities as they come along."
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