Supplier performance is more important than ever
Outsourcing continues to explode on the eve of the giant Informex show. Buyers focus on total value and technical expertise.
By Susan Avery -- Purchasing, 2/7/2002 2:00:00 AM
Looking back on 2001 in specialty and fine chemicals and contract and toll manufacturing services, many trends PURCHASING identified earlier are continuing. In this mature marketplace, some makers of specialty chemicals are having difficulties getting price hikes to stick, competition is intense, and some smaller players are being merged into larger ones.
Events that occurred in the past year, particularly the tragedies of Sept. 11 and an explosion later that month at a hazardous chemicals plant in France, are expected to affect the marketplace for some time to come, say industry watchers. Through it all, though, outsourcing in general is expected to remain strong and the supplier selection process will continue to be critical as buyers deliberately choose custom and toll manufacturing services partners with the capabilities to meet exacting requirements.
For insight into the challenges facing buyers who purchase specialty and fine chemicals and custom and toll manufacturing services, PURCHASING Magazine surveyed 1,000 of its readers on their sourcing activities. Results reveal several ongoing buying trends:
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Price/cost remains among the most important supplier qualification and selection criteria, but other criteria also appear high on respondents' score cards, suggesting that total value is a crucial element in buyers' decision-making processes. In particular, purchasing managers are giving more weight to suppliers' marketplace knowledge than in the past. Manufacturing capacity has also risen in importance. Technical expertise, leadtimes and environmental responsibility are other critical considerations.
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Buyers of specialty and fine chemicals and custom and toll manufacturing services are outsourcing more than they have in the recent past: Fifty-seven percent of respondents outsourced an average of 24% more in 2001 than they did three years ago. Looking ahead, the trend toward outsourcing is expected to remain strong, although the rate of growth may slow a bit: Fifty-one percent of survey respondents plan to outsource an average 21% more in the next three years.
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An overwhelming majority of survey respondents is responsible for the specialty and fine chemicals and custom and toll manufacturing purchase. However, many of these buyers work with other functions within their companies on cross-functional sourcing teams to make these purchases. Purchasing consults with other departments including, research and development, production operations, and engineering. About a quarter of respondents say top management gets involved too.
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While suppliers located overseas measure up to their domestic counterparts on quality, price and technological availability, buyers continue to purchase much of their specialty and fine chemicals and custom and toll manufacturing services in the U.S.
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The trend toward online buying of specialty and fine chemicals and custom and toll manufacturing services continues to pick up, albeit at a slow pace.
Selecting suppliers
PURCHASING'S survey asked buyers to rate importance of criteria they use to qualify and select potential specialty and fine chemical and custom and toll manufacturing suppliers. On a scale of 1 to 10, with 10 being the most important, buyers rank price/cost as the most important factor when selecting suppliers, with an average rating of 8.3. Last year, respondents gave price/cost an average 7.7 rating.
"Price is always important," says David Longhini, accounts manager, performance chemicals, BASF, Pittsburgh, Pa. "Depending on the product and the services involved, price is still the primary driver. But buyers also are looking for companies that are easy to do business with—that have good customer service and e-commerce capability."
Knowledge of market also gained in importance when compared to previous surveys. Buyers give this selection criterion an average score of 7.1 compared to just 4.6 last year. Material capacity moved up in the rankings as well, receiving a score of 6.0 compared to 4.0 in 2001.
Following a trend established a few years back, buyers give technical expertise a ranking nearly as high as price/cost. The criterion earns an 8.1 score this year, slightly lower than the 8.3 given to price/cost. Last year, technical expertise received a 7.5 rating from buyers selecting suppliers of specialty and fine chemicals and custom and toll manufacturing services.
Lloyd Clark, senior buyer, Integrated Device Technology, Hillsboro, Ore., is one survey respondent who weighs heavily a supplier's technical capability. "We are especially interested in what our suppliers are doing to prepare for the future." Price/cost issues and quality are other factors he considers closely when selecting suppliers.
Leadtimes and environmental responsibility are other supplier selection criteria important to buyers; both elements gained over last year's rankings. Leadtimes receive a score of 7.3, compared to 6.9 in 2001 and environmental responsibility moved up from 6.6 to 7.3. Likewise, services offered garners a higher rating from buyers in this year's survey: 6.6 compared to 5.7 in 2001.
Importance of manufacturing capabilities and ISO-9000 certification in the supplier selection process remain about the same for buyers in this year's survey. Manufacturing capabilities receives a 5.7 score in 2002; its score last year was 5.6. ISO-9000 certification, which one buyer says "is a given" garners a 5.6 score compared with its 5.4 rating last year.
Top on the list for Brian V. Parsons, central purchasing, at Autoliv, Ogden, Utah, is a supplier's capability to turn out a quality product time after time. This consistency, he says, is vital to the automotive products his company manufactures.
Global presence and size of company appear to be less important to buyers in 2002. Buyers are not really concerned about size and scope of a supplier company as long as it can provide products and services on time. They gave global presence a score of 4.3 in 2001; this year the ranking is 3.8. Size of company received a 5.1 rating last year; this year the score fell to 3.5.
And while buyers rank e-commerce capability as the least important supplier selection factor this year as well as the past two years, the rating dropped even further. Last year the score was 3.3. For 2002, it's 2.8. Other surveys on purchasing professionals' buying habits, however, suggest greater interest in pursuing e-commerce-related buying, suggesting that the degree of specialization required in this market is at least a temporary obstacle for e-commerce.
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Back to basics
Keeping in line with criteria buyers say they use to select and qualify suppliers, respondents agree that cost management is the area in which their suppliers excel. Others are satisfied with their suppliers' capabilities to meet delivery requirements. Still others say their suppliers excel at understanding product specifications and providing technical expertise.
"Some of our raw materials are made by only one or two (maybe four) suppliers in the world," says Chris Frederic, planning & materials manager, DSM, Addis, La. "Fortunately, they are good companies and they recognize the need to supply high-quality products."
Another buyer echoes that sentiment: "Our suppliers excel in their knowledge of our use of products and components."
PURCHASING'S survey also asked buyers to identify areas where suppliers can improve their operations to help ensure that outsourcing arrangements are mutually successful. Many answers focus on developing better relationships through improved communications.
One buyer in the South would like to see improvements in "communications when exceptions occur."
Another respondent working for a company also located in the South sees the need for better communication early in relationships. He wants his company's suppliers to "communicate total services of their organizations."
A purchasing agent in the Midwest believes that his company's chemical suppliers are "our best overall. We work very closely with our suppliers and have developed relationships that benefit supplier and customer."
Trend continues
Predictions made a year ago about a slowdown in the overall growth of 
outsourcing in the specialty and fine chemicals and custom and toll manufacturing arena continue to hold true.
According to survey results, buyers purchase specialty and fine chemicals and custom and toll manufacturing services an average of 8.7 times per year, spending an average of about $2.56 million annually on these services. Compare this to last year's survey, when buyers said they were outsourcing an average of 10.1 times per year and spending about $11.1 million per year.
Some of this sluggishness can be attributed to the tragic events of Sept. 11, says Dr. Enrico Polastro, a vice president with international consulting firm Arthur D. Little Associates, in the company's Brussels, Belgium office. Commenting on the outsourcing of fine chemicals by pharmaceutical companies, he says that pessimism in the last few months of 2001 "was probably more psychological than anything, given that end-user demand has been quite resilient." Other markets, such as electronics manufacturing, he points out, can best be described as "disastrous" in 2001.
This year won't be without its share of uncertainties either, says Polastro. 
"Customers are becoming increasingly price sensitive. It's not a secret that GlaxoSmithKline has asked all of its suppliers for substantial price concessions—20% over the next three years. This is symptomatic of other big pharmaceutical companies."
There are bright spots. Take emerging pharmaceutical companies or biotech startups, for example. These companies have no in-house manufacturing so they outsource many of their requirements. However, they present a new set of challenges for fine chemical suppliers, namely that they are a more diffused customer group. The product development cycle is more unpredictable and there's also an element of financial risk. Startups have limited resources and still depend upon external financing.
Emerging pharmaceutical companies were perhaps most impacted by the events of Sept. 11, says Polastro. "Many of these companies postponed 
outsourcing decisions to save cash. However, the capital markets that were effectively shut down for a time now appear to be normalizing again."
Fifty-seven percent of buyers responding to the survey say that, in general, they are outsourcing more than they did three years ago. These buyers say they are purchasing about 24% more on average of outsourced services.
"While outsourcing won't be the 'be all/end all' initially proposed a few years ago, it will continue to be strong," says Joseph R. Colleluori, director of strategic outsourcing, Merck & Co., Whitehouse Station, N.J. He says companies will be evaluating the option to outsource based on a host of factors.
Some companies may be outsourcing more production to custom and toll 
manufacturing plants as internal capital budgets are being slashed. "If you want to expand sales and your capacity is inching toward 100%, you need to look outside," says Joseph Pawlikowski, procurement manager, chemicals, Rohm & Haas Co., Philadelphia, Pa. "It's a bridging strategy."
For an outlook on the frequency of outsourcing activity, PURCHASING also asked buyers to estimate how much business they expect to do in this area in the next three years. According to the survey results, 51% expect to do more outsourcing during the time period, at an average of about 21% more.
One industry insider expects the trend toward outsourcing to continue to be strong in coming years because of the impact of an explosion at an Atofina subsidiary fertilizer plant in Toulouse, France last September. Once the French government makes some decisions about future construction of hazardous chemicals plants, some companies may find it less costly to outsource their production. Another impact on the growth of outsourcing: new regulations for transporting some chemicals in the U.S. after Sept. 11.
An average of 87.5% of specialty and fine chemicals that respondents purchase come from manufacturers based in the U.S. Still, buyers who purchase from offshore sources are, for the most part, satisfied with performance of these suppliers. Product quality, product/service price and technological availability are all rated as equal to or better than suppliers located in the U.S. Delivery reliability is the one area where suppliers based overseas need to improve, buyers report. Says one respondent from the Midwest on delivery issues: "Domestic is usually superior." Another adds that, "until recently these suppliers were generally reliable."
Arthur D. Little's Polastro cautions buyers on outsourcing fine chemicals from low cost producers located in India and China. "With these suppliers there are quality and reliability issues. The penalty of failing can affect cost savings achieved."
It's likely that consolidation of the supply base may be playing a role in this trend. Average responses indicate that buyers are outsourcing their custom and toll manufacturing needs from far fewer suppliers.
One of the clear trends is that companies are going toward wider corporate contracts, says BASFS Longhini. "Five years ago individual locations may have been buying the same product from different manufacturers, today we are seeing much more single sourcing. Buyers are trying to reduce their supply bases."
For 62% of respondents, supplier reduction is a formal corporate strategy at their companies. And buyers are reaping the benefits of consolidated supply bases. Most respondents say they've been able to reduce costs through increased buying leverage and improved efficiencies in their internal processes. By streamlining processes, buyers say they can spend more time on strategic activities leading to further cost reductions. "Use of the strategy has allowed me to focus on supply chain activities instead of seeing suppliers," says one survey respondent.
Consolidating the supplier base not only increases a company's buying power through leverage, it also focuses its relationship with suppliers, says Paklikowski of Rohm & Haas. "Then you can raise the bar on your performance expectations."
In support of an ongoing trend identified in similar surveys conducted in the past, more companies are taking a team approach to the specialty and fine chemicals and custom and toll manufacturing services buy.
Survey results show purchasing operations make their buying decisions with input from a wide range of corporate functions. The corporate function routinely consulted by buyers during decision-making processes for the specialty and fine chemicals buy is research and development, which is identified by 69% of survey respondents. Last year, 77% of buyers said R&D is involved.
Production/operations also receive high marks in this area. This year, 53% of respondents say that representatives of this function serve on cross-functional buying teams for specialty and fine chemicals. Compare this to 2001 when 62% said operations plays a role.
Other corporate functions involved in these purchases, according to buyers, include engineering, which at 34% shows the biggest gain from 2001 when 15% said this function is consulted. The number of buyers who say that corporate management and sales and marketing are members of the team fell from last year's figures. In 2001, the number was 38%; in 2002 it is 22%.
Respondents are still reluctant to purchase fine and specialty chemicals and custom and toll manufacturing services via the Internet. Just 7% say they actually buy these products and services through online sales channels.
Trends continue in maturing market
01/10/2001Tough buy brings tough challenges
01/14/1998
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