The changing face of chemical distribution
By Christopher Reilly -- Purchasing, 11/4/1999
In a market where small, regional "mom-and-pop" chemical distributors once flourished, large distribution companies with distribution networks that can handle national and even international accounts now dominate.The current environment, rife with price-pressure on all levels and consolidation of producers, distributors, and their customers, has made streamlining the supply base critical to future success. This adds pressure on purchasing professionals to develop strategic relationships with distributors to reap the benefits of multiple products, value-added services, and the purchasing power distributors can provide.
Toward achieving total-cost reduction and growing their businesses, the development and implementation of new, technological, and traditional services is at the forefront of buyers' and distributors' minds.
As a result, buyers are aligning with chemical distributors. And this has begun to change the perceptions of the traditional, transactional (and sometimes adversarial) relationship.
The changing role of distributors
In response to changes brought about by consolidation and the continued emphasis on supply chain efficiency, the role of distributors has changed.
Distributors are now offering and providing services that were once the domain of suppliers or were handled by customers internally. For many distributors, these services are no longer offered as a rigid menu. Instead, they tend to vary with individual customers, on an à la carte or as-needed basis.
"We're no longer simply the middleman between manufacturers and suppliers," says Tom Coyne, president of Coyne Chemical in Croydon, Pa. "Now we're called on to be more of a problem solver, providing supply management solutions to customers and various services as well as product," he says.
"Some of our larger accounts have undergone reductions in manpower, which puts a little more pressure on us to plug our value-added services," says Edward Pitkin, president of Ulrich Chemical, Inc., in Indianapolis, Ind. "If they've reduced their purchasing staff, we help by advising them on substitute products or better ways to minimize their waste," he says. "We try to fill our customers' gaps where needed," Pitkin says.
Filling in the gaps can mean providing a variety of different services, according to Pitkin. Other examples include research or market analysis that his company provides to customers. "If we do the analysis, and that means that the customer doesn't have to do it, that has value," he says.
In some cases, Pitkin says that he is able to cut costs by looking at the logistics scheme of the customers' operations. "If the customer has a warehouse and a separate point of use for a product, we may be able to bypass the warehouse and deliver straight to the use point," he says.
"A lot of what we do involves providing the 'unusual order', which may include a low-volume, specialty, rare, or hard to find product," says Peter M. Bokach, president of Ashland Distribution Co., in Dublin, Ohio. "Often, it also involves the 'last minute' call from a customer."
The role of consolidation
For the past few years, consolidation has been the most visible trend in chemical distribution. Large chemical distributors have been buying up smaller, more regional distributors to extend their chemical distribution capabilities, augment their product lines, and form distribution networks to handle large national and international accounts.
The effects of consolidation for distributors don't stop there, either. Mergers and acquisitions among chemical suppliers have resulted in fewer chemical supply choices for distributors. Customers of chemical distributors have also been consolidating, which has reduced the customer base of chemical distributors. But consolidation has also led to more efficient supply channels in the industry.
The obvious result of consolidation has been that chemical distributors now must strive for stronger partnering relationships, both with their suppliers and with their customer base.
"In the future, distributors will not compete head to head with other distributors, rather they will compete as a component of the entire supply chain, against other supply chains," says John Ritorto, vice president of national accounts at Ellis & Everard, Inc., based in Atlanta, Ga.
Ritorto explains that as a side effect of consolidation, most partnering approaches now involve multiyear arrangements, which makes securing an account an important strategic issue. "If you don't get an account one year, not only do you lose it for that year, but you also lose it for subsequent years," he says.
Bill Fidler, executive vice president at Brenntag, Inc., based in Reading, Pa., says that all components of the supply chain are choosing partners based on their abilities, and that has made life difficult for some distributors. "'Mom & pop' distributors are finding it difficult to compete in today's environment, because they don't have the critical mass necessary to stay in the business," he says. "Both suppliers and customers are demanding more services from distribution, which requires investments in people, facilities, and IT structures that smaller companies can't afford to make."
From the buyers' perspective of consolidation, Bruce Stafford, manager of purchasing and materials at Baxter Hemoglobin Therapeutics, a biotechnology and health-care firm located in Boulder, Colo., comments, "We have had some good and bad examples of consolidation. In positive situations, vendors have brought us a broader range of products at reduced cost," he says. "Through their own consolidation, they benefit from the contractual pricing. As they got bigger, their purchased material volume got bigger, and we were able to benefit," he says. "But in other situations, we have seen a good supplier go bad. The philosophy of the acquiring or dominant company was not as open-minded or their corporate supply strategy was different--not in line with our own."
While most distributors see both positive and negative effects of the trend toward consolidation, some distributors have experienced only the positive.
Brenntag's Bill Fidler says, "Consolidation has created more national and international opportunities." Fidler adds, "This has enabled us to fully deploy our large international asset base--both to the benefit of our customers and to our suppliers. We view consolidation in this area as a positive thing," he says.
According to Ulrich Chemical's Edward Pitkin, he hasn't seen any negative effect of consolidation. This he attributes to his customer base of smaller and medium-size customers, who, he says, "Are largely unaffected by mergers and acquisitions. As long as a chemical distributor has the resources, chemical product lines, or a niche in the industry, and as long as they are strong in their business, consolidation won't affect them much," Pitkin says. "It's usually the weaker players who are affected."
Give us service!
What are buyers looking for? The consensus of answers from chemical distributors points to a broad product offering and the basic fundamentals of supply--consistently providing the right product at the right time and for the right price.
But beyond that, customers want ease of doing business. As manufacturing companies concentrate on what they do best, they're relying more on distributor suppliers for services. According to distributors, these services include vendor-managed inventory programs, tank telemetry, pre-blending, custom packaging, EDI ordering, and electronic funds transfer for payments.
According to David Jenne, manager, purchasing operations for CK Witco Corp.'s Performance Chemicals Group in Greenwich Conn., achieving total value and ease of doing business is a prime reason for aligning with distributors, especially in terms of small-volume LTL (less-than-a-truckload) materials. "Nobody has time to analyze bids from six different suppliers for 10 drums of material in order to achieve $50 in cost savings. The name of the game is the big picture, taking cost out in addition to price savings," he says. "Buyers need to look at the total supply chain, and put the most efficient process in place to procure these items."
Baxter Hemoglobin's Bruce Stafford says, "We take a total-cost approach to materials procurement, so price is certainly important to us. But more important, we're looking for distributors that are able to offer the whole package of companywide service and support. This involves learning about our operations, evaluating our needs, and providing services to improve our efficiency," he says.
Stafford says that custom product packaging, expert product and market knowledge, and third-party procurement assistance are the services most important to his company's operations.
For many chemical buyers, the best distributors are those that take a proactive stance. Stafford explains, "Rather than having to call a distributor to explain a situation and ask, 'Can you do this?' we want a distributor representative to say to us, 'We can do that. Would you like us to?' To me, that is cutting-edge service," he says. "And distributors who do that tend to get the majority of our business."
"Providing technical support to our customers is a service that is growing in popularity," says Ashland's Bokach. He explains that Ashland provides technical support as a value-added service to customers. The program consists of employees that go out to customers' locations to provide technical knowledge in helping to make the customers' processes more efficient.
"It's not a cookie-cutter approach," he says. "It is set up differently in the various Ashland businesses, depending on the needs and variable factors for each respective business. In some cases, it's a decentralized setup, working on an as-needed basis, but in others, it's more centralized with technical service personnel making regular service calls to customers," he says.
Ed Polen, president and chief executive of emco Chemical Distributors, Inc., in North Chicago, Ill., has also been adding services for customers. "In addition to chemical distribution, we are in the packaging, blending, and compounding business," he says. "We also have seven chemists available to answer technical questions and provide analytical services."
Developing partnerships
Cost-reduction pressure from both suppliers and customers has placed added emphasis on the development of long-term strategic partnerships. As one buyer puts it, "Gone are the days of three bids and a cloud of dust." Today's chemical procurement environment necessitates that buyers and vendors align their operations to compete in the marketplace.
According to buyers and suppliers, the most important part of developing a strategic alliance is an honest, open line of communication between purchasing and the vendor representatives.
Tom Coyne of Coyne Chemical says, "The best buyers to work with are those that share a lot of information on a regular basis for determining correct specifications for products and processes. Often, many cost-reduction strategies result from working together with the customer, being up-front and encouraging frequent communication," he says.
Brenntag's Bill Fidler agrees, "Our most successful relationships are with customers who share their objectives and needs. Knowing that, we can tailor solutions to their problems and best satisfy those needs."
Dave Courtney, president and CEO of ChemCentral Corp., Bedford Park, Ill., adds that purchasers can improve the buying process with distributors by being more accurate in articulating their needs. "It is an aspect of the partnership that can always be improved," he says.
Kendall Troutman, director of corporate accounts at Kirkland, Wash.-based Van Waters & Rogers, Inc., says, "Buyers should spend more time deciding how they want to be perceived in the marketplace. We have to understand exactly what is important to them from a total-cost approach," he says.
From the buyer's perspective, Baxter's Bruce Stafford puts a high premium on communication and planning with his distributor suppliers. "Increasingly, we have been looking at the throughput of materials with our distributors. Planning is the key," he says. Because we have been able to articulate our plan with distributors, we have established better contracts--they know our needs. And once you have a good plan in place, it's no problem to tweak it here and there. Whenever you're in a knee-jerk situation, it can cost you."
Example: Stafford says he recently met with a vendor to compare packaging for a chemical necessary for a specific production process. "We compared their list of pricing and packaging against a custom package available through one of our distributors. We found that with the distributor, we were actually able to reduce our costs. We didn't think that would be the result, but through frequent communication, we were able to realize significant savings," he says.
Integrated supply
In its July 15, 1999, issue, Purchasing reported on a global supply agreement forged between CK Witco Corp., the Greenwich, Conn.-based producer of specialty chemicals with its small-volume LTL chemical distributor, Brenntag, Inc., of Reading, Pa.
This agreement is indicative of another major trend emerging in chemical distribution--large, multisite manufacturing companies are developing long-term strategic agreements with distributors on a national and, in some cases, global basis.
A similar arrangement was created about four years ago between Ellis & Everard, Atlanta, Ga., and Clariant Chemical Corp., headquartered in Charlotte, N.C.
According to Jim Dickinson, director of materials procurement at Clariant, "The program was started on a pilot basis at one location, but has spread to three more Clariant plants that use a substantial amount of LTL-type chemicals," he says.
The structure of the program includes a steering committee comprising top-level purchasing personnel and management and salespeople from Ellis & Everard, and at each plant site there is a cross-functional implementation team, comprising members of Clariant's local purchasing, production, planning, logistics, and finance functions, as well as the distributor representative. The implementation team works on an ongoing basis.
Dickinson says that the steering committee meets once per quarter to review a variety of topics, including spending, what's happening in the marketplace, supplier performance, etc. "This team drives continuous program improvement," he says.
"The program generally includes about 200 small-volume LTL items that represented only about 5% of our total spend on materials, but took up about 45% to 50% of our time to source," Dickinson says. "We wanted to bundle all these items together with one chemical distributor supplier.
"There is a price savings up front, but the real strength of the program is measured in time saved and the changed relationship between the buyer and the seller," Dickinson says. "Now, we have the distributor as an extension of our purchasing department, managing these LTL-type products for us," he says.
"A natural by-product of the relationship," Dickinson says, "Is that the distributor is now on your side in dealings with suppliers and has to understand that they can no longer be opportunistic. They mean too much to us and we mean too much to them," he says." Our E&E representative is charged with managing a portfolio of products, and we measure performance in terms of price, logistics, administration costs, and innovation."
Another benefit of the program is in inventory management.
"For many of these LTL items, before the program was put in place, the supplier, the distributor, and Clariant would all maintain inventory," Dickinson says. "Now, E&E is working with us to manage inventory."
"The system resembles a modified JIT system," he says. "Essentially, E&E is required to carry certain levels of the designated products at all times, and they're available to deliver it on a moment's notice, but because we share our production plans and our MRP run, E&E plans full truckload deliveries accordingly," he says. "Instead of getting each product on an LTL basis, we get a full truckload with five drums of one chemical and ten drums of another, as needed."
Dickinson also identifies some administrative savings as a result of the program. "In one case, we have gone from about 560 invoices/yr for these products to only 12. The same is true for our number of receipts."
According to Dickinson, one area for improvement of the program is in technology and electronic commerce. "That's our next big drive," he says. "Right now, we're moving toward an SAP environment that will be integrated with e-commerce capabilities." Dickinson expects the drive for new systems to be under way in 2000.
E-commerce
The one trend mentioned by all the distributors and buyers interviewed is the emergence and rise of electronic commerce and its application in chemical supply and distribution. The fact that everyone is talking about e-commerce is evidence of its importance in future operations.
John Ritorto of Ellis & Everard comments on the trend, "Rapid changes in technology will dictate future changes in how business is conducted. We can't predict how that will affect business, however, companies are certainly positioning themselves to be technically capable of conducting future business electronically," he says.
"E-commerce is a big trend these days," says Baxter's Stafford. "As the capability to order product online becomes more widespread, companies will eliminate much of the paperwork involved and streamline the buying process," he says. "Buyers will also be able to monitor inventory and search supplier databases to discover new products.
ChemCentral's David Courtney says that chemical distributors have been and will continue to invest in technological systems to meet the changes brought about by e-commerce. "Fully integrated computer systems are becoming a requirement for gathering and analyzing data to improve the operations of both buyers and suppliers," he says.
According to Courtney, ChemCentral is currently developing an integrated system for ordering, invoicing, and conducting inventory analysis to transfer information between the buyer and the distributor at the touch of a button. "The system will create a link between the buyer's production schedules and JIT inventory systems," he says. "In the future, these systems will be fully customized for continuous and batch process manufacturing facilities."
"EDI and electronic funds transfer are currently being used by ChemCentral," Courtney says. "In addition, we have established links to our manufacturing base through our Web site so that technical information and product specifications may be obtained via the Internet. These tools will continue to be refined in the future," Courtney says.
Van Waters & Rogers launched its online ordering capability in May. Registered customers have access to a suite of e-commerce applications, including online product ordering, order status, order history, and product material safety data sheets (msds). The site may be found at www.vwr-inc.com.
While many of the larger national distributors are making sizeable investments in e-commerce, many smaller regional players are being left out.
Alone, most small regional distributors don't have the capital, the manpower, or the product range to make an e-commerce venture profitable, but by banding together, some regional distributors hope to compete directly with the large national distributors.
A group of five independent, Midwest-based chemical distributors recently announced the formation of ChemSource LLC, a joint venture designed to provide world-class e-commerce infrastructure as an added service to customers.
With the help of Distribution America, Inc., a $4.3 billion distribution, marketing, and merchandising organization based in Des Plaines, Ill., which will host the Web site and coordinate the service, the founding member companies--Chemical Distribution, Inc., Lisle, Ill.; Producers Chemical, Batavia, Ill.; Seeler Industries, Joliet, Ill.; Tinker Chemical, Westmont, Ill.; and Viking Chemical, in Rockford, Ill.--are developing their online initiatives. Time will tell if they prove successful.
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