Supply base rationalization is a top priority for a growing number of chemical and chemical raw materials buyers, according to PURCHASING's benchmark study on Buying Trends in the CPI (see White Paper story ). However, detailed follow up interviews with survey participants find many companies beginning to move beyond their supply-base consolidation phases into richer supplier development phases of their strategic sourcing endeavors.

Looking at long-term buying strategies among 324 chemical-consuming companies across the country, PURCHASING's survey finds a strong push toward supply-base rationalization with 39% of buyers reporting supply base reductions over the past two years and 40% reporting plans to continue with reductions over the coming two years. Biggest cuts in chemical supplier numbers are coming among makers of adhesives, paints and coatings, plastic resins, industrial gases and water treatment chemicals.

Among buyers who say they will be making fewer supply-base consolidation moves in the coming two years, many say they have already achieved or are rapidly approaching maximum sourcing leverage. For example, John Gundersen, director of materials management, Newmont Mining Corp. in Denver, says his operation expects to be seeing considerably less rationalization over the coming two years "not because we've lost interest, but because we've already made our major moves." These days, he says, "we're putting more focus on managing the suppliers we kept rather than reducing their numbers."

Jim Marshal, senior buyer at Genzyme Corp. is working with ambitious strategic sourcing cost reduction goals, but he says the company is no longer contemplating substantial cuts in the size of its supply base because it started reducing its supplier numbers very early on. In fact, he suggests Genzyme might even need to think about adding back suppliers in some areas where it now has only single sources.

Mike E. Henson, senior buyer for Coors Brewing Co., Elkton, Va., says much of his activity a few years ago involved rationalizing the company's supply base. But Coors has reduced the size of its supply base from 10,000 suppliers to around 5,000 over the past few years. Now, Henson says, most of his strategic sourcing work has shifted from reducing supply base size to improving individual supplier performance.

Henson notes that strategic sourcing has already cut $41 million out of an annual supply bill totaling around $1.4 billion and that heavy cost reductions have come as the result of close attention to supplier delivery performance.

Asked about the criteria they use in deciding which suppliers make the cut and which do not, purchasing executives list a mix of factors: 96% of the purchasing pros surveyed by PURCHASING list product cost and quality at the tops of their lists. Other important criteria include inventory services (75%), supplier location (68%), global capabilities (39%), and e-commerce capabilities (28%). PURCHASING's follow-up interviews also find significant use of criteria associated with suppliers' abilities to add value beyond price of goods and services—for example, work on value engineering problems, inventory reduction programs, and enhanced delivery services.

In terms of overall business management strategies, chemical buyers display a remarkable degree of determination to take full control of their supply processes and this determination appears to have backing from a broad swath of executive management. For instance, 31% of the purchasing and supply management operations contacted in PURCHASING's study say they are working with and within defined corporate strategies in the selection and use of chemicals and chemical raw materials suppliers.

Many buyers like Greg Kostas, senior buyer, Chapman Mfg. Co., are working with strategic sourcing plans that literally look at everything, as he puts it, "the whole nine yards." His goals for strategic sourcing cost reduction are in the range of 2-5% a year, and plans and goals are reviewed quarterly. Currently Kostas is taking a special look at the goods and services being offered by distributor suppliers, providers of nonproduction goods, and providers of general plant services such as trash and waste removal and office equipment maintenance. Often, he suggests, it's these seemingly unimportant areas where significant cost reductions are most likely to turn up.

The corporate director for a Midwest specialty chemicals maker notes that his company has a strategic sourcing plan covering all direct materials. He is working with a cost reduction target of 15% by 2007. Coming under close scrutiny are supplier delivery and quality issues. In an effort to facilitate achievement of cost reduction goals, suppliers to his company are being issued report cards on how they are doing as preferred suppliers. The company has developed metrics to measure suppliers' performance against one another.

William Kohnen, purchasing manager at Analog Devices, Santa Clara, Calif., says that, since his company's strategic sourcing plan has been in place it has played an important role in reducing total costs of manufacturing chemicals by some 10-15%. Looking ahead, predictions of 3-6% yearly reductions in chemical costs are being discussed. Greater use of outsourcing, he suggests, is expected to play a major role in achieving these goals.

The purchasing director for one Midwest chemicals firm says strategic planning at his company is directed as much at cost as at prices. Often, he says, the most significant contributions to lower costs come from areas outside of price. Supplier delivery, title transfer, quality, and provisions for handling hazardous materials, he feels, "all offer major opportunities to bring about substantial long-term cost reductions. Fruitful payoffs are also available with careful attention to safety and environmental considerations."

Use of e-commerce is another area being featured in a number of strategic sourcing plans among chemical-consuming companies. Unfortunately many of the tools are receiving a relatively cold response from chemical buyers. A fair number of survey participants, for instance, say they have tried reverse electronic auctions, but, up to here, have little in the way of major cost reductions to show for their efforts.