Buyers respond to market shifts
By Christopher Reilly -- Purchasing, 4/8/1999
Last year's buyer's market for specialty and fine chemicals has leveled off in 1999, and the consensus of buyers, sellers, and market analysts is that prices will remain flat on the whole for at least most of this year. But basic fundamentals of the specialty and fine chemicals market are changing. Buyers are focusing more closely on using assets wisely and reducing supply chain costs, and suppliers are closely examining core skills in an effort to optimize how resources are deployed.Specialty and fine chemicals are showing classic signs of a maturing market. This fact has much to do with how buyers and suppliers are refining their business strategies.
"Many products historically considered specialty chemicals are now exhibiting characteristics typical of commodity chemicals as patents expire and competition develops," says one purchasing manager in the Midwest. "Further, as sales and margins cycle down on finished goods, pressure is applied on suppliers to reduce prices."
Indeed, at least some of the bloom is off the rose of the specialty/fine chemicals market, where inflationary price increases appear to be a thing of the past. "Some margins have been reduced and some of the sweetness has been taken out of supplying specialty/fine chemicals," agrees Tony Durante, an analyst of the specialty/fine markets at ChemSystems, a market research firm in Tarrytown, N.Y.
Eroding margins have helped spur a rash of mergers and acquisitions in specialty and fine chemicals. Short term, the shifting supply base creates disruption and some degree of uncertainty. Longer term, however, it creates opportunities for cost reduction and a chance for purchasers to build deeper relationships with suppliers that offer numerous products and services.
Relationship building
Even in the fast-paced specialty/fine chemicals market, buyers and sellers alike are finding that the building of close supplier relationships can best tap the expertise of both parties.
Al Deraney, purchasing manager at Lonza, Fairlawn, N.J., is a firm believer in close supply relationships. "In the specialty/fine chemical area, face-to-face negotiations and relationships are still the way that the most successful purchasing is done, especially for long-term success," he says. "If you're purchasing for short-term success, or if you're strictly a price buyer in this field, you'll definitely get bit in the long term," he adds.
Deraney says it's important to take the time to sit with supplier representatives, explain to them your business, your position in the marketplace, your chemistries, your customers' needs, and the challenges that you face. "Teach them your business and then ask the same questions about the suppliers' business. Often, you may be able to get a tip about new capacity coming on line that will help you save in sourcing and will keep you abreast of the industry," he says.
Deraney wants more than products from suppliers. "I'm looking for market information," he says. "I'm looking for any information that will give me a better idea of what's going on in the industry today, and more important, what's going to happen tomorrow."
Deraney also is looking for quick response time when things don't go according to plan, and he's far from alone. "No person, company, or process is perfect--mistakes do happen and we understand that, but we ask our suppliers for a quick response when things go wrong. We also want straight answers to our questions and limitless effort spent at the first signs of trouble." Deraney explains that his company has made concessions when a long-term supplier was in trouble, and he hopes that they would return the favor if his company had a problem. "In a long-term alliance, there can be a lot of give-and-take."
A Midwest buyer of specialty/fine chemicals and services agrees that buyers and sellers should develop multiyear alliances where both buyer and seller work together to remove costs from the supply chain. "Three- to five-year agreements create an atmosphere of cooperation toward achieving a common goal," he says. Cooperative efforts also provide stability to both companies.
Refining strategies
As consolidation becomes more common in the industry, buyers and suppliers are developing business strategies to meet the new needs of today's and tomorrow's market. One way suppliers do that is by refocusing their services. Some are trying to be a "one-stop shop," while others are concentrating on their specific strengths.
James E. Faller, commercial development manager for fine chemicals at PPG Industries, Inc., Pittsburgh, Pa., explains his company's strategy: "We hear much about how company 'X' is striving to be everything or do everything for company 'Y'," he says. "We believe that the real key to doing business in specialty/fine chemicals and services is to differentiate your capabilities in the areas of technology, speed, cost control, customer service, quality, manufacturing resources, etc.," he says.
Albemarle Corp., Baton Rougue, La., also is fine tuning core skills and focusing on key accounts where they either already have a long-term business relationship, or they know that the customers' needs fit the capabilities they offer. "We're not taking the 'job-shop' approach," says John M. McChesney, manager of Albemarle's marketing excellence program.
Faller says his company has tried to listen to its target customer base and differentiate in areas they consider to be most important. "For instance," Faller says, "in servicing the pharmaceutical industry, a wide technology base may be more important to the customer than the available manufacturing resources. But when supplying agricultural intermediates, having manufacturing resources available may be critical," he says. "Listening to customer needs and applying that to the specific challenges of that market segment is pivotal to supplying specialty/fine chemicals and services."
A sourcing challenge in specialty/fine chemicals is to keep purchasing practices in line with the company's overall business strategy, according to Faller. He says that it's very tempting in the fast-paced world of fine chemicals to divert from a strategy based on the actions of a competitor, a short-term trend in industry, or the need for short-term profits. "Stable direction is critical," Faller says, "You must stay focused on a strategic goal. You can't try to be everything to everybody all the time and be successful."
Many purchasing pros are specifically asking that suppliers refine their operations to better meet overall business goals. One East Coast specialty chemical supplier points out that strategic suppliers "work to reduce customer costs." Examples of this approach include "direct bulk delivery and coordination of forecasts to minimize inventories," he adds.
Purchasers also want suppliers to be as proactive in reacting to declining materials costs as they are in raising prices when costs escalate. "Sellers should be proactive in reducing prices when market conditions cause their raw-material prices to drop," says one buyer. "Also, they should be active in reducing price as they develop new technology and processes to reduce costs," he says.
A continuing challenge in specialty/fine chemicals sourcing is a scarcity of supplies in specific areas. "One way to stay on top of the purchasing function in sourcing specialty and fine chemicals is to develop security in the purchasing portfolio," Faller says. He believes it can be critical to maintain a diverse portfolio of existing products and new product opportunities to source specialty/fine chemicals effectively.
"In R&D, the mix of new products or chemistries must include 'quick hitters' as well as long-term, strategic opportunities, and using a 'staged-gate' process for developing business opportunities can help regulate the purchasing portfolio," according to Faller.
Drug makers focus on core skills
Many specialty and fine chemicals buyers are now looking for suppliers that can help them succeed in specific markets where they have a technological edge. This trend is especially prevalent in pharmaceuticals.
"Many pharmaceutical companies have made an effort to focus their resources on the things they do best--drug discovery, development, marketing, and distribution," says Mike Gaudet, business director, pharmaceuticals at Albemarle. "Innovative pharmaceutical companies are placing more emphasis on things they do well, such as the discovery of products, development, and distribution," he says. Instead of spending money building chemical plants, these companies are concentrating their investments on expensive clinical work at the front end--and the successful launch of new products on the back end, Gaudet says. And they need suppliers to help them.
During clinical drug trials, having a rapid, responsive, and reliable source of advanced intermediates or bulk active ingredients is critical. Buyers are looking for suppliers that can quickly and reliably supply kilogram-to-first-ton quantities for clinical trials, even for the most complex molecules. They also want suppliers to work within customer-defined time-frames to develop, improve, and implement appropriate full-scale processing methods.
Another buyer from the Midwest comments on the need for innovation: "Budget cuts, particularly in the area of research and development, are negatively impacting long-term growth of the specialty/fine chemical market and the introduction of new products." And with regard to pharmaceuticals, the Midwest buyer says that the FDA approval process needs to be streamlined to facilitate quicker access to the market when new products are developed.
Albemarle's McChesney points out that suppliers can play a major role in speeding time to market: "Some of today's challenges include the ability to introduce new performance products in a timely manner. Innovation in terms of new performance products is slowing primarily because it takes a long time to get them approved." McChesney continues: "Suppliers have to learn how to speed the approval and regulatory process." This has value to customers, he says, because suppliers can then introduce new products. "Speeding the approval process is one area that we're concentrating on."
Another challenge in pharmaceuticals is effective utilization of all assets. "Life cycles of fine-chemical molecules, especially custom synthesis molecules, are becoming shorter," says PPG's Faller. "The goal is to continually review the products in the mix to ensure that research & development and manufacturing resources are directed and fully utilized," he says.
Several market factors will be driving pharmaceutical intermediate demand over the next several years, explains Albemarle's Gaudet. "First, many of the new drugs that are being developed are being targeted for much more specific applications. These products typically are used in small, but potent dosages and have small market volumes," he says.
To meet these requirements, pharmaceutical companies look for pharmaceutical intermediate suppliers with multipurpose manufacturing equipment that can handle smaller product runs. "In addition, during the next five to ten years, a large number of drugs will be coming off patent and there will be many opportunities available, as companies look for ways to remain competitive," Gaudet says.
Albemarle's McChesney continues: "In the fine chemical arena, the bulk of the activity is with existing products. What's happening with the pharmaceutical companies is a trend toward fine-chemical suppliers who are now doing multistep processes," he says. "So the real challenge here is in developing relationships with the pharmaceutical companies, to the point where you have access to opportunities for new products at hand, and you also may be able to anticipate opportunities," says McChesney.
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