Procter & Gamble puts a new spin on global chemicals sourcing
Consumer products giant investigates new chemicals supply markets in an era of high energy costs.
By David Hannon -- Purchasing, 2/15/2007 2:00:00 AM
Global sourcing strategies for chemicals have taken a dramatic turn in the past two years as spiraling energy costs in some regions push buyers to look for new sources of supply. Consumer products maker Procter & Gamble has developed a supplier diversification strategy to provide it with more flexibility in its chemicals sourcing decisions.
Stefan Van Straelen, vice president of global chemical purchases based in Brussels, heads up the chemicals buying for P&G globally, which amounts to $6-7 billion a year. He reports directly to Rick Hughes, vice president of corporate purchases at P&G at its Cincinnati headquarters.
“Energy costs are a major factor in our chemicals sourcing decisions today,” says Van Straelen. P&G as a corporation is highly affected by the cost of energy in the materials it buys and uses, he says. “In the past two to three years, energy costs have exploded, which has created challenges for us in forecasting due to the increased volatility of energy costs, as well as having a major impact on our material prices from several aspects.”
  To hear Stefan Van Straelen’s outlook and strategy for energy costs, click here.To hear Stefan Van Straelen discuss P&G’s strategy for sourcing in the Middle East,click here. |
Energy's impact
Van Straelen says the impact of high energy costs on chemicals comes in three major areas. First, crude oil—the basic building block of most petrochemicals—rose to all-time highs in 2006 and remains highly volatile. Secondly, the process to produce chemicals is heavily reliant on natural gas, which has also risen steadily in many markets. And lastly, fuel and gasoline prices have raised the cost to transport chemicals in a global supply chain.
“We expect to continue operating in a high energy-cost environment and a relatively high commodity-cost environment for several years, maybe even 10, with continued high volatility, “says Van Straelen.
P&G's response has been to expand its global chemicals sourcing capabilities and provide more flexibility in its supply base. P&G is spreading the 200 people in its chemicals sourcing organization out around the world, creating new sourcing organizations in Moscow and Dubai to investigate the supply markets in those regions. The goal is to increase the company's flexibility in sourcing chemicals from suppliers in various geographic markets, both to support its own manufacturing in the region and possibly to export chemicals to P&G facilities in other regions.
P&G typically starts off cautiously in a new supply market. Van Straelen points to the company's sourcing in the Middle East as a recent example. He started by sending a pair of P&G professionals—a technical person and a commercial person—to the region to “scout it out” as a potential supply region for chemicals. While the pair was in the region, energy prices skyrocketed in the U.S. and there was a migration in chemicals manufacturing from the West to the East—specifically the Middle East, where energy products are more readily available with limited transportation costs.
P&G soon decided to establish a sourcing team in Dubai to coordinate the sourcing of chemicals in the Middle East and determine which are well-suited for export. As part of that analysis, Van Straelen brought in an outside logistics consultant with expertise in the region to provide input on logistics costs in exporting. “Our interest is delivered cost, not the cost when it leaves the location,” Van Straelen says.
“We strive to find the right balance in our sourcing between where our internal resources are located and where our external market is. The organization is set up so we have a solid presence in the regions we are in.”
Learning from China
P&G's experience in sourcing chemicals in China has proved to be an invaluable learning experience. Van Straelen says the company had a chemical sourcing organization on the ground in China “several years before any of our competitors” but found some definite challenges in getting product out of the region.
“We needed to set up resources on our end to handle the logistics and exporting. Many of the suppliers we were working with early on in China did not have the logistics and exporting capabilities.” He also notes that developing relationships with Chinese chemical suppliers took longer than in other regions and regulations for doing business in China slowed down some of the work.
But in the years P&G has been sourcing chemicals in China, the supply base has improved its capabilities and “become more reliable and more knowledgeable in how to export,” according to Van Straelen, despite its highly regulated environment. The issue in China today is the same as in many other regions—energy costs.
“China has a shortage of energy, so there is a question about its long-term potential as a supply source,” Van Straelen says. “Anyone using [suppliers in] China for export should not become too dependent on them for that reason.”
Tips for beginners
Van Straelen says chemical buyers looking to expand their supply base globally should look first to chemical distributors, which often work with suppliers in various regions around the globe. “It is obviously not as powerful as talking directly to producers in a certain region, but distributors often provide good knowledge in certain regions,” he says. “Apart from that, there are outside consultants available that focus in these areas.”
Perhaps the most important aspect of developing sourcing organizations in global markets is hiring the right people in those regions.
“There is no defined profile in what we want in these people,” says Van Straelen. “That said, we typically do not hire from purchasing schools or universities. We look for economic, business, finance, and marketing backgrounds for these positions.”
And while P&G typically prefers to hire new graduates that can be trained in its business specifically, Van Straelen says in overseas markets, it sometimes helps to find people with at least a couple years' experience in the region.
For more information on P&G’s buying strategies read:
How to get over the wall in product development
P&G boosts leverage
P&G leaps on the Net
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