Partnering to succeed
To cut costs and compete against national distribution chains, smaller chemical distributors are organizing supply alliances.
By Jason Seigel -- Purchasing, 11/4/2004 2:00:00 AM
The chemicals marketplace has just a few national distribution companies, and many regional or local distribution firms. The dot.com craze of the late '90s prompted small to mid-sized chemical companies to organize supply alliances that would allow them to compete with the national conglomerates. One such alliance is the Chemical Distribution Network of Naperville, Ill., which has 18 member-companies in the U.S. "Our goal is to drive value and efficiency for our membership through internal collaboration in many functional areas," explains Chris Coates, executive director of CDN since December 2003. "Additionally, we collaborate externally with suppliers, and work to leverage our market coverage by establishing new global supply channels and relationships."
Members of alliance organizations promote collaboration between chemical companies that distribute similar commodities. From leveraging corporate spend—and maximizing maintenance, repair and operations (MRO) efficiency—to extending each member company's product lines, membership in CDN means cost savings and increased ability for non-national distributors to leverage the global marketplace and compete more effectively.
"Several years ago, several of the independent chemical distributors saw some value in working together as a cooperative collaboration amongst other independent chemical distributors," says Brian Clark, who chairs CDN's purchasing committee. He also is an executive with ChemGroup, a collective encompassing six chemical distributorships serving a 10-state area in the Southeast.
"With the constant changes that occur in our industry, we want to always be a valuable option and a pipeline for chemical distribution in the U.S.," he says, "We need to be atop changes and provide the best value to the consumer and be a good value-added distribution channel for chemical producers."
CDN allows members like Clark's five-member ChemGroup to have "a better pulse and scope on our industry by networking with companies very similar to us." The idea, he says, is to allow collaboration as an association to allow us to talk about best practices and changes in the industry without the fear of sharing business plans with could-be competitors. Clark says this new ability to discuss supply-side landscapes is "the single biggest issue" in today's shifting marketplace. "We make sure we're the most affordable option to consumers," Clark says. "We have to have the best ability to bring value to the customer."
CDN members do more than consult one another, though. They buy together—not only chemicals, but also totes, freight trucks, insurance, safety equipment and other necessary items and materials. "There's a lot of redundant cost we try to reduce by collaborating: we aggregate demand for pallets, drums, etc. on a combined basis, and on the chemical buy where it makes sense to buy together—we will not only try to reduce costs internally but also to reduce the costs for our suppliers."
That's key, agrees Coates of CDN. "Our goals include not only chemical cost reduction through aggregated purchasing but additionally we drive mutual cost reduction through logistics collaboration with our strategic suppliers. We can often identify more efficient channels to move materials on a combined basis which delivers value for both sides of the channel and drives much stronger long term supply partnerships." Collaboration goes well beyond an internal strategy with the CDN. "We are doing things utilizing and leveraging the web and e-commerce, moving towards collaboration on a global basis with our overseas business partners."
How CDN Works
CDN has four face-to-face board meetings annually where higher-level strategies, priorities and initiatives are decided. Execution takes place through the six functional committees—purchasing, sales and marketing, e-commerce and technology, operations, membership and environmental, health and safety—and through their respective subcommittees and project teams. Within the committees the CDN will run various collaborative projects that might include combined chemical buy, truck GPS, drum or pallet buy, insurance or a combined tote supply arrangement.
Committees will engage further through conference calls and have more focused objectives, timelines and tasks. Additionally they utilize web seminars internally and externally with potential suppliers to drive projects to completion. "I'm very careful on how we propose to engage the time and resources of our members and their respective management teams," states Coates. "It's critical that we are efficient on how we communicate as an organization."
Leveraging Coates' e-commerce background and to facilitate communications efficiency, the CDN recently launched their own Intranet communications portal. "Executing within a very decentralized business model certainly has its challenges," admits Coates. "This strategy has improved communications and productivity and has expanded our collaboration ability on a global basis."
The CDN intranet centralizes all the activities of the organization and gives everyone visibility into strategies, projects, tasks, timelines and updated progress. There are close to 100 member users that log into the CDN system on a regular basis. "It has elevated member involvement in our organization's activities and has improved our project cycle times. Visibility is a powerful tool says Coates. "This is a key component to our strategic plan."
In addition, he says, CDN is collaborating and engaging with some of our European and Asian business partners leveraging this technology and has aggressive plans in the future to expand and implement extranet and channel management functionality into its communications and e-commerce strategy. "This strategy has already opened avenues and opportunities on specialty product lines with new global suppliers," says Coates. "There will be a strong ROI for our membership as we move forward in this area. "
CDN's procurement process is driven partly through analysis of combined purchase data visible only to the executive director. From this combined data the executive director has many avenues to drive value for the membership either on a combined basis or on an individual and intraorganization basis. There is a strong amount of return-on-investment that is realized through internal support between the members. It might include new supplier introductions and shared product lines or even spot product support on an immediate need. "We've had situations where one member opened its plant on a weekend to support the product and logistics needs of another member," says Coates. "This is the culture of our group."
"Within the purchase process, and as we identify opportunity to take our combined chemical spend to market, we will often approach and try to leverage an existing strong domestic supplier relationship. We feel that is a better approach and fits well with our partner philosophy. Additionally, and in conjunction with our domestic supply strategy, we are busy with our global sourcing initiative. Like many others in our industry we have consummated a number of new global supply relationships. We will continue to aggressively pursue new channels of supply by partnering with companies that can add real value in the channel and share our partner philosophy. "
Coates states that in all their projects there is a strong amount of participation from the membership in the discovery process. "There is value and efficiency in that alone. As we come to consensus on what the best solution is for a project, whether it is a specific chemical buy or a GPS system, tote supplier, etc., the members ultimately decide on their individual participation level moving forward. If a company chooses to participate on a limited basis or not to participate at all in a combined solution that decision is respected."
Suppliers have been known to receive up to 75% or even 100% of an alliance's total buys of certain negotiated products. A key point is that member organizations have more than sufficient warehouse space to hold the large volume of stock that this kind of purchasing can generate. At the same time, the alliance's members can get suppliers to send out chemicals and materials immediately to end customers, if necessary.
In order to minimize any probable competition between U.S. members, there is essentially no regional overlap of CDN members in the U.S. "Culture is a big part of fitting into the organization," Coates says. CDN looks for partners with product lines similar to its current members in order to add value to the domestic network (that currently has a gap west of Mississippi and in Texas).
"Globally, we engage in some marketing and partnering organizations (in Europe and Asia)," Coates says. CDN has a partner company in Europe called PlusChem. "They're an organization pretty similar to us, and I talk to them fairly often about what they're trying to do in terms of projects, initiatives and global sourcing," Coates says. "We're leveraging some of their channels to China and India to operate on a combined basis."
Under development is a partnership with an import representative company to work with CDN's member companies "to source better globally, as well as to facilitate some existing global projects," he says.
"The closer the member companies are in business the better that will allow us to drive similar value," Coates says. "Chemical distributors with like structures that are generally small to midsized fit best within our group."
The product line similarity of the nonoverlapping members allows them "not only to roll up and buy combined chemicals and find better costs and suppliers, but to have a lot of internal buy/sell," Coates says.
There is a lot of shared information within alliance members about best costs and best purchasing practices and even regulatory issues and information. There's also an expanded internal buy/sell of commodities when some firms only need a limited amount of material that another firm sources extensively.
"There is a lot of internal collaboration," Coates says: "That's part of what I execute generally; there's a fair amount of centralized info coming into me (like what members buy, who they buy from, what costs are)." Coates uses this information to orchestrate internal buy/sell without jeopardizing the business secrets of any member company.
"Members may not want others to see exactly who they do business with or exactly what they pay, but as director, I have visibility into all that," Coates says. So, if a company contacts him with a request for help in sourcing a particular product, he can scour all the purchasing data of the other member companies to find the best deals.
"This business model isn't necessarily an easy one to execute," Coates says. "The model gets tougher as you look at the top chemicals that all the member companies buy. The bigger volumes generally have more strategic relationships. As a member I might want to keep that strategic relationship the way it is.
"But since the CDN members do not compete, they are often comfortable letting other members piggyback on their time-tested strategic relationships. The member company with the best buying relationship for a given chemical often contacts its supplier to see whether the supplier would like to increase volume to cover the other CDN member companies as well."
CDN success stories
Membership in the CDN requires a small 100% recoverable equity investment along with monthly dues. CDN tracks member ROI for internal and external purposes. "If a member is engaged in just some activity it's not too difficult to get your investment back in a very short period of time," say Coates.
One member realized a $50,000 return in just one area of internal product and specialty line support. "We have documented saving and cost reduction for our membership in many areas from chemical spend and insurance premiums to tote purchases and truck GPS systems," says Coates.
On most projects, whether chemical buys or other, there is usually at least a 5% to 10% savings for member companies.
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