DuPont sharpens contract/specialties buy

By By Christopher Reilly -- Purchasing, 1/11/2001

With a total annual purchasing spend in excess of $14 billion, DuPont Corp., based in Wilmington, Del., pays special attention to outsourcing and the application of best practices.

From a corporate-contract perspective, DuPont spends more than $300 million annually in a wide range of areas including specialty and fine chemicals, resins, and custom and toll manufacturing services.

But whether you're the biggest or the smallest company on the block, the sourcing objectives in the specialty and fine chemical, custom and toll manufacturing services arena are the same: get the most value from the best suppliers.

To accomplish this, DuPont focuses on writing better contracts with its specialty and fine chemical, custom and toll manufacturing services suppliers.

Through a system where sourcing is central and kept apart from most other procurement tasks, DuPont has developed a cadre of best practices and metrics written into its outsourced manufacturing deals, which are designed to create lucrative partnerships with suppliers, resulting in cost reductions and more total value from the relationship.

Building better contracts

In this market, securing material from suppliers often comes down to outsourcing for the benefits it provides in time and capital saved-outsourcing to a contractor with existing reactors saves a company the time and expense of having to build their own. Also, buyers gain the benefit of tapping into other companies' core manufacturing strengths, technical process expertise, market knowledge and other capabilities.

But outsourcing also carries with it a downside. Loss of control of a project, the need to share proprietary information, and high price tags for specialty and fine chemical materials and manufacturing services are concerns of any buyer operating in these markets. It is the downside of outsourcing that makes supplier selection and the development of better contracts with suppliers crucial.

One of the main thrusts purchasing at DuPont has tried to instill in its buyers is the time and emphasis it places on negotiating and developing better contracts with suppliers.

From its central position, the company's sourcing function develops best practices for contractual arrangements that buyers within DuPont's many business units are expected to follow. These best practices are pooled from the experiences of sourcing personnel located within the business units, as well as from benchmarking other companies, whether they operate in chemical manufacturing or in any industry. "We benchmark a wide selection of companies," says Kathy Wright, director of global sourcing within DuPont's Global Services business (which houses the company's central sourcing function). "You never know where a good idea will come from that may be adapted to your own practices," she says.

Some examples of best practices are written directly into outsourced specialty chemical or contract manufacturing agreements. At DuPont, in many cases, these often take the form of fixed and variable metrics used to define the expectations of the project. Usually designed to provide a win-win situation, these metrics measure supplier performance, provide for cost-reduction incentives, or safeguard against problems that may occur.

"Fixed incentives focus on issues such as safety, production up-time, and obeying all the laws and regulations concerned with the production process," says Aldrich Delaroderie, a corporate contract manufacturing sourcing specialist in DuPont's central sourcing group. "If a contractor is able to meet all of the six invariable metrics, the contractor can earn a monetary year-end bonus, usually totaling $50,000 to $75,000. "Many of our contractors set this money aside as their plant managers' annual bonus," he says.

On a quarterly basis, contract manufacturers and plant managers meet with DuPont contract administrators to detail their progress with the project, compared to DuPont's cost metrics. "That way, they can see what's happening to their bonus," Delaroderie says.

Variable incentives written into the outsourcing contracts are changed every year and are usually based on cost.

If our contracted price for a particular outsourced chemical last year was 95¢/lb, we may require that the contractor help us to reduce that cost to 93¢/lb for the coming year," says Delaroderie. This stipulation would then be added to the contract as a variable metric. Other variable metrics may include improvements in on-time shipment, low error rates, etc. A typical contract will have five or six variable incentive metrics written into it, Delaroderie adds.

The contractor's incentive for exceeding the cost reductions and performance improvements defined by the contract's variable metrics are twofold: First, saving a customer money is a great way to ensure their repeat business; also, DuPont documents a dollar/lb cost savings for the production of the contracted product. According to Delaroderie, on an annual basis, DuPont reviews the contractor's documented cost improvements, adds them up, and splits the total savings with the contractor, 50/50.

As an example of a variable cost savings, Delaroderie describes a contractual arrangement with a toll manufacturer. "We send one of our proprietary chemicals to a contractor, and we also provide methanol for the reaction," says Delaroderie. "For every pound of the material we send the contractor, we expect to get a certain number of pounds out. If the contractor exceeds that usage range, they owe us money at the end of the year. If the contractor performs within the specs, then they're paid normally under the terms of the contract," Delaroderie says. "However, if the contractor uses less material than the specified range of requirements, we split the cost savings."

Another example is with organic chemicals. "The more waste the contractor creates, the more we have to spend on its removal. For this, we have a minimum range that the contractor tries to beat in order to earn a standard dollar/lb cost savings for that range," he says.

While the variable metrics within DuPont's supplier contracts vary widely from project to project, Delaroderie says that one clause is included in every contract-an alternate dispute resolution article. Developed over the years, the alternate dispute resolution article is followed when a problem exists between DuPont and a contract manufacturer.

In the event of a dispute, talks are escalated within the companies to a level where each side of the transaction is represented by people who were not previously involved in the process. This is designed to remove any personality conflicts or emotional attachment from the discussions. These parties have a time period allotted to resolve the issue. If at that point the problem is still unresolved, it is handed over to unbinding mediation. Failing that, each party has a right to take the problem to litigation.

One example of a dispute might be a customer claim. "If we get a claim, and we have to investigate it, we'll invite the contract manufacturer to be a part of the investigation," he says. "We tell the contractor that if the claim is a result of the material we send them, or if it's a result of the products that meet the specifications, then the responsibility of the claim is ours," Delaroderie says. "If the investigation determines that the claim is a result of anything else, it's the responsibility of the contract manufacturer."

Process fine-tuning

In today's business environment, DuPont, like many other companies operating in the specialty and fine chemical markets, is outsourcing more than ever before, and for a wide variety of reasons. But according to sourcing specialists at DuPont, one reason to outsource stands out: to fine-tune new projects in order to cost-effectively determine the feasibility of scale-up in-house.

"In this economy, companies are going to avoid sinking money into steel, iron, brick and vessels until they are sure they have a firm business plan behind it," says DuPont sourcing specialist Michael Darby. "Whenever one of our businesses is reluctant to spend capital to implement a process, or is reluctant to invest in other fixed costs, (such as the people to develop or run the process), we would rather outsource it, at least in the early phases of development," he says.

By outsourcing production to a contract manufacturer, DuPont can attempt to make the process work on a smaller, more economical scale before trying the process in-house and at full scale. This way, the company also develops an inside track toward efficiency improvements and cost reductions, and has the benefit of advice from an expert in making the process work.

DuPont sourcing specialist Aldrich Delaroderie details an example of an outsource project that was fine-tuned: "We were trying to develop an innovative process step in the lab," he says. "We thought the process would work, but because it was still lab-scale, we wanted to outsource production to a contractor that had medium-size reactors and distillators," he says.

"The contractor had to be larger than a pilot plant, but small enough to handle our needs while we tried to make the process work," he says. "In short, we were looking for the right fit for the scale of the project," he says.

After sending out contract manufacturer questionnaires and qualifying several possible suppliers, Delaroderie awarded the contract to a custom manufacturer based in Houston that met the project's size requirements. The contractor was also a long-term, trusted supplier of DuPont that Delaroderie had used in the past, which, he says, was critical when things went wrong.

"After a 33-day pilot run of the process, the results were below specifications," Delaroderie says. A second attempt was made in accordance with some changes recommended by a concerted effort of Delaroderie, the buyer and the contractor.

"On the second try, the project worked in less than 20 days," he says. "We went from lab-scale to pilot-scale to having something that we could take to a producer," he adds.

"When we bring a process to a contractor, we may think we know how to make the process work, but the contractor may be able to add some ideas that we hadn't thought of, best practices from their previous experiences, and help us apply them to our operations," Delaroderie says.

More strategic sourcing

To overcome the many challenges of purchasing in the specialty and fine chemical, and custom and toll manufacturing arena, DuPont has combined the specific market knowledge of buyers in each of its separate business units with the leverage and perspective possible only with a centralized sourcing structure. According to DuPont's Wright, Darby and Delaroderie, the structure has improved workflow within the purchasing function through better communications between the business units.

DuPont's purchasing structure provides for buyers and contract administrators at each of its locations and within each of its 18 strategic business units. These buyers handle the purchasing tasks of the business on a general day-to-day basis.

In the specialty and fine chemicals, custom and toll manufacturing services buy, more strategic sourcing is required. Here, buyers look for innovation not only in technological processes, but also for ideas to get the most from their suppliers and contract manufacturers. In this area, as well as when the company is looking to develop more forward-looking multisite, regional, business-unit-wide or even corporatewide purchases, central sourcing is brought into the picture.

Sourcing personnel, those that focus on the more strategic procurement tasks, are grouped in the company's Global Services business unit. Headed by the chief procurement officer and three directors (two for sourcing and one for logistics), the global services business unit includes many purchasing professionals that specialize in various areas of strategic sourcing, including energy and raw materials, specialty chemicals, contract manufacturing, equipment, transportation and logistics.

And while the need for a specialty chemical supplier or contract manufacturer is identified within the business units, sourcing personnel are in charge of finding, qualifying and selecting suppliers to fill the business unit's needs. These sourcing specialists are also responsible for contract development and negotiation of terms and conditions.

On the surface, DuPont's division of purchasing tasks may appear to be a sure sign of bureaucracy. But in contrast, the division enables the strategic side of the purchasing coin to focus and leverage their own experience and market knowledge. And for specialty and fine chemical purchases and custom and toll manufacturing services sourcing, the division of purchasing responsibilities seems tailor-made. In other words, those that specialize in corporatewide outsourced custom chemical manufacturing have the time to concentrate on what they do best, finding and developing the best custom manufacturers, without as many administrative concerns and paperwork. Business-unit-specific buyers work closely with suppliers to ensure that production runs according to plan.

Kathy Wright characterizes the company's purchasing structure as an "integrated matrix, which strives for a balance of effectiveness and efficiency."

Collaboration makes it work

At a company of DuPont's size, centralized business functions that hand down procedure can often lose touch with buyers on the site level. A strong network of purchasing personnel that relies heavily on communication is required to get things done.

"The high level of integration and our collaborative team approach between central sourcing and purchasing at the business units, and our tight feedback loop make the system work, Wright says. "We're not just telling the business units 'here's the supplier you need ... go use them.'"

In addition to the sourcing and purchasing divisions within DuPont's central and localized purchasing models, sourcing personnel are also stationed within the business units, having dual responsibility-to the business units and to the company's central sourcing structure. These purchasing professionals (or sourcing leaders) act as liaisons between the business units and the central structure, coordinating procedure with purchasing at the business and site level, and relaying the concerns, needs, best practices and new sourcing projects of the business units back to the central sourcing structure.

Wright likens the function of these sourcing leaders to a universal joint used in automotive applications. "Sourcing leaders within the business groups facilitate corporate standards and practices to the business units, and at the same time, they feed information back into the central functional unit in order to keep our priorities and practices aligned," she says.

"In the case of contract manufacturing, buyers within the business unit work hand in hand with business leadership to articulate needs, develop specifications and put all the requirements together for an outsourcing project," Wright says. "These buyers are then able to interact with the business unit's sourcing leader to explain the requirements of the project," she says.

When sourcing contract chemical manufacturing services, a great deal of time and effort must be spent up front to get a new project under way. Near-constant communication is required between contractors, purchasing and sourcing personnel to iron out the terms and conditions of a contractual arrangement, or problems that may arise.

Having these sourcing leaders within the business units is a pivotal part of the purchasing matrix because it allows buyers to meet daily with a sourcing representative to get their questions answered-without having to schedule meetings with central sourcing. Also, because these sourcing leaders are located in the business units, they may have more of an emotional attachment or connection to sourcing within that business unit.

Then, depending upon the project's scope, spend and area of purchasing, central sourcing specialists are called into the effort to tap their experience and market knowledge and identify possible suppliers or contract manufacturers.

When the suppliers are found, qualified and the RFQ process is implemented, the central sourcing specialist brings the supplier to the business unit and leads negotiation.

Once the contract is in place, responsibility is handed over to the contract administrators, which operate within the business units.

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