Buyers target strategic partners

Goals include ensured supply, leverage, inventory management and better quality.

By -- Purchasing, 4/5/2001

Now more than ever, the specialty and fine chemical marketplace is seeing an alarming rate of change.

Spurred by cost pressure from all sides, these markets continue to mature. As specialty products become more like commodities and competition accelerates, companies are taking a closer look at their supply chains in order to develop more lucrative agreements and long-term contracts.

For both buyers and suppliers, a critical part of this progression is forging stronger relationships, alliances and partnerships throughout the supply chain that go beyond tactical needs and provide a more strategic path to commercial success.

A market in transition

Companies in the specialty and fine chemicals market segments continue to scramble for market share by developing new products, improving on their services, and in some cases, by buying up the competition. But along with the name changes, buyers and suppliers are seeing more subtle changes on pricing and demand trends, and on the way these chemicals are bought and sold.( continued )

"We're seeing cross-currents regarding pricing of most specialty chemicals," says William Loomis, team leader and manager of new business development at 3M's specialty materials business, based in St. Paul, Minn. "There's a strong desire on the part of many chemical producers to raise pricing because costs are going up. Offsetting that, however, is tremendous pressure from customers to maintain or reduce prices," Loomis says. "I see those as conflicting trends, and I don't think that they have yet been sorted out in the marketplace."

"With this situation, you can either fight it out in the marketplace (and there is some of that going on right now in the chemical industry), or you can try to bring the customer more value through supply chain optimization," Loomis adds.

"Also, yesterday's specialty chemicals are becoming less special," says Loomis. "If companies really want to be special, they have to keep developing new products that will help customers do their jobs or process their end products better," he says.

Increasing sophistication of specialty and fine chemicals buyers, along with increased cost pressure throughout the supply chain, is having a profound impact on the marketplace. For Loomis, as well as for many specialty chemical suppliers, this means that specialty chemical buyers now have higher expectations of their suppliers than in the past.

"Buyers are under tremendous pressure to be a better resource to their own organizations in terms of increasing efficiency and reducing costs," Loomis says. Within their own companies, "buyers have reaped cost reductions from the lower-hanging fruit of the process-the basic commodity chemicals that they buy-and now they're turning their focus to the specialty materials, questioning if they can get the particular benefits those chemicals provide more cost-effectively," says Loomis.

And at the same time, increased competition in the specialty and fine chemicals markets has led suppliers to continue to develop their product and services.

"We are seeing increased intensity of activity in the marketplace," says Nick Jawdosiuk, sourcing specialist with St. Louis, Mo.-based specialty and fine chemical firm, Sigma-Aldrich Corp. "Not only are we seeing more competition, but people are looking for larger quantities of material," Jawdosiuk says. "This has placed more pressure on purchasing to ensure that you have the best suppliers that can help you get to the marketplace using the best route possible."

Regarding competition, Lenwood Grant, sourcing expert with pharmaceutical giant Bristol-Myers-Squibb, based in Syracuse, N.Y., says that "in the past, most competition in the specialty and fine chemicals markets was confined to expertise in one particular product area or technological step. But now companies are becoming more competitive with their pricing and more willing to work with customers because they know that if they don't actively compete for buyers' business, someone else will," he says.

Keys to partnering

Everyone says that they're partnering with suppliers, but how do buyers ensure that those partnerships and alliances are truly strategic? How do you know you're not just paying the term lip service?

According to Lowell Hoffman, president of Global Sourcing Solutions, a consulting firm based in Charlotte, N.C., the term "partnership" means different things to different people. In fact, for Hoffman, the term is most appropriately used as a way of expressing goodwill between the buyer and supplier, and usually falls short of its true aim and effectiveness.

"If you look at what a supply chain requires to succeed, you'll find that the relationship between buyer and supplier should be something more toward the collaborative than adversarial," says Hoffman. "If we then start to be more demanding about our expectations of a business arrangement, we begin to get into the area where a true partnership can exist."

"In my mind, real partnerships require participation of a multifunctional group, as a formal team or as a process, where engineering, manufacturing, research, and even marketing get together with purchasing and become part of setting the expectations," says Hoffman.

For Bristol-Myers-Squibb's Lenwood Grant there are two fundamental factors that must accompany a successful long-term partnership: The partnership must provide a measurable benefit to both sides of the transaction and trust must exist in the relationship.

"Also, you don't want a partnership that is based on necessity," says Grant. "If you don't think that the partnership is a good mix, but you do it because you have to-possibly because that supplier is the only provider of that material in the market, because you've signed an exclusive contract in the past, or for some other reason-it's not a true partnership and is likely to fail," he says.

A good way for buyers to be more strategic in their partnerships with suppliers (and to ensure that you're partnering with the right suppliers in the first place) is to become more knowledgeable of suppliers' markets. "Historically," he says, "the weakest point of partnership and alliance development with suppliers has been customers' failure to know how suppliers utilize their own supply chains." In turn, Grant advises that buyers should investigate their suppliers' credentials. "We have to make sure that our suppliers are being supplied so that they can meet our delivery needs," he says.

According to Grant, knowing your suppliers' suppliers can have some added benefits. "It's possible that the buyer's company has an existing relationship with the upstream supplier, which can go a long way toward smoothing availability problems should they arise and ensuring delivery," he says.

If buyers and suppliers hope to learn more about their partnerships, monitoring performance and customer loyalty is a necessary aspect.

"If we're going in the right direction, we want to know why," says 3M's William Loomis. "And if we're going in the wrong direction, we really need to know why."

When monitoring the partnership, buyers should focus on the big picture. Bristol-Myers-Squibb's Len Grant warns that having too many metrics or relying on them too much can actually strain a partnership by adding unnecessary rigidity. As an example, if a supplier says they can deliver an intermediate in six weeks, but the buyer needs the material delivered in two, and the supplier ends up delivering it in three weeks, "there are two ways to look at the situation," Grant says. "If you're only concerned with cold, hard numbers, the supplier is late, but I don't think that should be the only gauge with which you monitor supplier performance and rate the partnership," Grant says.

Other necessary factors of a successful partnership, compiled from an informal survey of buyers, include:

• All partnerships should have a charter. Not to be confused with a contract, the charter should list the expectations of both the buyer and supplier, as well as the reasons and goals of the partnership.

• Partnerships should include a free flow of information between the key players. For buyers, this should include regular supplier visits.

• In order to ensure that the partnership strives for continuous improvement, metrics for measuring delivery, quality and price reduction should be clearly defined.

Trust is essential

Each of the buyers and suppliers interviewed identified trust as an essential element of any successful buyer/supplier partnership. But what is trust? And how do you know trust exists in the relationship?

Global Sourcing Solutions' Lowell Hoffman defines trust as something that is earned by a series of promises kept over a period of time. But more specifically, trust can mean a wide variety of things to different people, and usually means different things to different corporate functions.

For example, Hoffman explains that for engineering, trust might mean "help me solve my problem by giving me what I need rather than what you've got in the catalog," Hoffman says. For purchasing, Hoffman says that trust tends to mean "Honor me, educate me, and make me look good in front of my peers with no surprises. Let me understand the cost drivers that will enable me to succeed, while helping me over time to significantly reduce costs," he says. "For purchasing, trust tends to be measured in dollars saved," he adds.

Bristol-Myers-Squibb's Grant describes his qualification of trust: "When a supplier makes the seemingly impossible possible." That's when you know you have trust, and that's when you know you have a true partnership," he says.

And in a successful partnership, trust must flow both ways. According to Grant, "Some buyers say they want to partner with a supplier, but they try to dictate every aspect of the relationship," he says. Instead, he says that buyers should learn to rely on their suppliers for their expertise. He explains this using what he says is an old expression in the specialty and fine chemicals business: "I won't tell you how to manufacture specialty or fine chemicals, if you don't tell me what I need."

Buyer wants

From the supplier perspective, developing true, lasting partnerships with buyers in the specialty and fine chemical arena places a lot of weight on improving customer loyalty. While it's true that increased competition has made suppliers more sensitive to buyers' needs, as well as more dependent upon their long-term business, before supplier's can hope to keep customers loyal, they have to find out what buyers want.

For years, most buyers in the CPI were satisfied with quality product delivered on time and at a reasonable price. But cost pressure pushing throughout the supply chain, and the fact that most of the low-hanging fruit in terms of process efficiency improvements has been reaped, has raised the stakes for suppliers to add value to their product.

"Many customers in the specialty and fine chemical market are most concerned with the time it will take to develop and manufacture each step of production, and less on the price of the materials involved," says Nick Jawdosiuk, buyer at St. Louis, Mo.-based Sigma-Aldrich Corp. "But perhaps even more important than delivery is that suppliers have the research infrastructure in place to effectively handle and develop new projects. To a buyer, nothing beats chemical competence," Jawdosiuk says.

A common goal of buyers operating in the pharmaceutical market is to get their key suppliers involved earlier in the development of new products. Bristol-Myers-Squibb's Lenwood Grant says that by partnering with suppliers early in the product developmental process, buyers may be able to eliminate problems and prevent errors before scale up. "Doing this earlier can save time and the cost to re-work specifications, orders and transactions," Grant says. "And the better you can map out a route to production, the faster you can get your new project ready for marketability.

One way suppliers can help buyers in the pharmaceutical market segment is by being flexible. Bristol-Myers-Squibb's Lenwood Grant says, "For a supplier to have the flexibility to service multiple sites has value to us beyond buying leverage." For example, if Grant is dealing with a European-based supplier, he says it may be advantageous to have the material delivered to the company's production facility located in Ireland. "We may be able to get the product there faster, and without the delays involving U.S. customs," he adds. "If we can get the material delivered to the Ireland facility faster than one of the other facilities, we may be able to transfer the entire discovery process to Ireland, which carries the added benefit of tax breaks on pharmaceutical production," he says.

But beyond early involvement and flexibility in new product development, Grant says that nothing makes him more loyal to a chemical supplier than if the supplier shares some of the risk and cost involved. He explains: "In the early product development stages, our product specification may not be clearly defined," Grant says. "Often the specification is to the point where re-work is necessary." Grant says that buyers that don't have a relationship developed with the vendor may find themselves fighting over the rework costs," he says.

In the most effective buyer/supplier partnerships, Grant says, "Buyers should feel confident in the relationship that both sides are working together toward the common goal. And in the interest of getting to that goal, "suppliers should be willing to 'bite the bullet' and absorb some of the risk and the re-work costs of new product development," Grant says.

What buyers look for in a strategic partner

Dow offers B & O program to improve partnerships