BASF procurement gets deep into R&D
Early Procurement Involvement program helps drive R&D efforts.
By Alan Earls -- Purchasing, 6/18/2009 2:00:00 AM
With 97,000 employees and products ranging from plastics and performance polymers to agricultural products and fine chemicals, Germany's BASF is one of the world's largest and most diverse chemical makers. And as such, it's on the forefront of innovation in the chemicals and plastics markets. But not all of that innovation comes directly out of BASF's research and development labs. In fact, a growing part of that innovation is coming through the North American purchasing organization at BASF.
Heidi Alderman has been BASF's senior vice president of procurement in North America since January 2008. In her current position, Alderman is responsible for sourcing approximately $7 billion worth of annual material, energy and services across BASF's North America business region. But Alderman's background is not only in procurement. She previously served as business director for BASF's Functional Polymers unit, where she was accountable for the $700 million Dispersions and Paper Chemicals business in Charlotte, N.C.
So Alderman has seen both sides of the product development process up close and has used that experience to bring more innovation into BASF's supply chain. In addition to managing the company's spend, Alderman also works closely to support new product development efforts within each business unit. BASF has 14 different operating divisions.
"Each division has a different strategy and different customer interaction models and we work closely with each of them," says Alderman. For example, the petrochemicals division produces ethylene, propylene, ethyl alcohol and other large bulk commodity chemicals. In the petrochemical division R&D is important but the big focus is on running their crackers at 100% capacity whereas other divisions focus more on new product development.
"Although the R&D function is different in those businesses we have to work with each of these groups and customize our efforts to their needs," says Alderman.
Internal efforts
To drive the R&D and innovation efforts within the business units, Alderman's organization established an initiative called Early Procurement Involvement. "Under this initiative, any time the R&D community is developing a product and it looks like there is a new raw material involved that we have never purchased before, procurement gets involved early to make sure we have multiple sources of supply and ensure that those suppliers are reliable," says Alderman. "If we wait until actual scale-up or commercialization, we run the risk of finding that the selected supplier really isn't viable or that there may be a lower cost supplier."
To make sure the program really delivers, stakeholders in the Early Procurement Involvement program attend regular of meetings to review the checks and balances in place. "We ask if the R&D team contacted procurement or find out if procurement has evaluated the sources for a given project," she says.
Furthermore, procurement has a liaison for each of the operating divisions. Alderman says the liaison is traditionally someone who is "seasoned" and has some seniority. "We have people who come from the business units to procurement and then go back to work in a division in this liaison role," she says. This person becomes the main coordinator and they, in turn, form a team with the key decision makers in the business unit, including those in R&D, marketing and sales. Together, they work to align the objectives of procurement with goals of the business unit.
They meet monthly to go over priorities and ensure that contracts are functioning as expected. At this monthly meeting they also discuss new R&D projects and where procurement will get involved, she explains. One supplier may have a product equivalent to another but in fact they are never exactly the same so it may be necessary to do a trial and sometimes end customers need to get involved, too.
Alderman says an example of the Early Procurement Initiative in action occurred recently in BASF's Functional Polymers business. The business developed a new paper coatings binder that required a brand new, specialty material. The paper coatings binder provided higher brightness performance in the finished paper, a growing trend in the industry.
"Because we were involved with the R&D group at such an early stage we could secure supply of the material initially and then develop and qualify a number of alternate sources at lower cost very quickly," she says, adding that the product has been a commercial success thanks to the combined efforts.
Tapping supplier innovation
But in addition to its internal efforts, BASF's procurement organization also tries to leverage suppliers as a source of competitive advantage and innovation as much as possible. "Because innovation takes many forms, we are always on the lookout for supplier initiatives," Alderman says.
In terms of raw materials, for instance, BASF seeks out new raw materials that could add different performance and features to the company's products. "So we try to facilitate the relations between the BASF business unit and their suppliers so they do have access to our R&D community," she says.
There have been many cases where BASF has been able to change its approach to a project by using one raw material as opposed to another. "We try to balance our purchasing goals with what's needed for the ultimate performance of the product," she says.
In one case, BASF's procurement department was made aware that a polymer additive supplier wanted to conduct business with the company. Procurement coached the supplier to be proactive in setting up technical meetings with BASF's research group to understand the technical issues facing each business, developing products to meet those needs and following through on the project to final evaluation and launch. In 2008, the supplier began the process and by early 2009, BASF had an additive that delivered superior results for a key industry specification. It is expected that the improved performance demonstrated by this treated polymer will earn use in several different market segments.
Even though procurement within BASF is a standalone function, the current management promotes business liaison roles, notes Alderman. That is, each procurement manager is an expert in one of BASF's market segments. In this case, the procurement manager knew the supplier's organization well, knew they had the expertise to deliver technical advancements, knew the internal business issues by being an expert in that business through the liaison role, and finally facilitated the relationship.
In addition, based on that supplier's close work with BASF, it has been invited to participate in other global negotiations, which is a win-win for both companies.
Eliminating single sources
Over the last year and a half, procurement has been spearheading another effort that is helping to drive supplier innovation, the Single Source Initiative. Most prominently, identifying which items were single sourced minimized the risk if BASF couldn't get that substance, says Alderman. But single sources also minimize innovation, because the buying team has less leverage to drive those suppliers towards more innovation and the R&D team often limits its scope of innovation based on the materials and suppliers at its disposal.
Alderman explains that often a chemist in the laboratory already has some specific raw material on the shelf that they are used to working with. However, at some point down the road when a product is ready for commercialization, that legacy substance may not fit the company's purchasing strategy or may not be appropriate for scale-up. "Sometimes we get stuck," says Alderman.
When a single source is identified, Alderman and her team decide whether it can be eliminated. "Often we can find an alternative source of materials but the business unit must still qualify that material and, in some cases, our end customer has to do the same," she says. And, she adds, the Early Procurement Involvement should eliminate single source risks in the future.
"If they decided not to work on qualifying alternative sources and then there are issues with suppliers, that's a risk they take. But we aren't just advisors. We try to lay out the table in terms of the initiatives and our views on the market," she adds.
Making it work
Alderman says a key to the success of both the Early Procurement Initiative and the Single Source Initiative is the support both have at the executive management level as well as within the business units. "These initiatives have clout because we have senior procurement people involved and on the business unit side we have directors of marketing and R&D," she says. In addition, Alderman says at the start of each year she invites BASF's group vice presidents to attend a meeting and help identify their most critical concerns for the year ahead.
Procurement also meets with group vice presidents in a roundtable format "a few times a year to review the state of the union" and procurement's forecast for key raw materials. "We have an SAP system but these days I don't think anybody really knows what the demand outlook is so we look closely at big ticket items, especially the top 10 materials used by the business in terms of inventory value," says Alderman.
Alderman says the strategies work because her organization strives to function as a partner to each business. "We don't independently drive the agenda, so we are not out there insisting that we are going to go out and find a fifth alternative supplier for some particular raw material. Instead, the business unit tells us what things are important and we tell them if and how they may be taking a risk," says Alderman.
And the current economic climate presents some opportunities for procurement to drive change throughout the entire supply chain. "The role of the procurement organization is changing," she says. "Not only are we doing the typical things purchasing does, like cost control and renegotiating with suppliers, but we are also taking on the role of challenging the demand. We ask if really need to buy a material now. We may have an inventory of some things so we need to determine if we really need to buy more, which is sometimes difficult to determine," she adds.
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