Henkel studies buying costs for raw materials

U.S. procurement operation shares data internally and with German parent

By Karen Prema -- Purchasing, 9/1/2005

Buying chemicals is a big deal at Henkel Technologies of Rocky Hill, Conn., a maker of adhesives and sealants. The world would simply fall apart without its adhesives—from the company's Duck Tape to its family of Loctite products.

That's why the purchasing department's $450 million annual buy of ethylene, propylene, benzene and 4,000 other chemical products for 27 manufacturing locations in the U.S. and Canada is so important. The other key families of chemicals purchased by Henkel Technologies are surfactants, epoxy resins and hardeners, fats and oils, fragrances, and solvents.

Brian Stermer, director of purchasing for Henkel Technologies, manages the North America region purchasing group, which is responsible for the regional U.S. and Canadian raw material buy (90% of spend) and packaging purchases. Henkel Technologies has a total of 14 people assigned to raw materials/packaging purchasing who are located in four locations: Madison Heights, Mich.; Cleveland, Ohio; Elgin, Ill.; and Irvine, Calif. The North American team interfaces with parent Henkel Group's global strategic-sourcing teams, based in Germany, which manage the large commodities across the globe.

In its first-quarter report in March, Henkel Group commented that the U.S. economy was "losing some of its dynamism" while the cost situation in the raw material markets was remaining "tense." So more cost and supplier performance information-sharing across the global sourcing teams has become a key initiative for regional managers such as Stermer. That's because information is getting more visible and easier to access via the Internet. And it helps accomplish two important corporate goals—reduce the cost of purchasing and speak with one voice to the various supplier communities globally.

Most of the chemical products sourced for Henkel Technologies come from U.S. and Canadian suppliers, but Stermer says the team always keeps an eye on the global marketplace. Stermer says that the value of the dollar impacts his interest on the ability to do that. For certain specialty chemicals, the team always looks toward supply from such areas as China, India and the Middle East, says Stermer. But, within the last two years, the team's emphasis on procurement outside the region has been reduced because of the lower value of the dollar, which has made offshore purchases more expensive. There isn't as much reason to source from other regions if products can be bought locally, at a lower cost, Stermer says.

Henkel Technologies has expanded in the automotive sector because more prefabricated parts and foams are being used to improve vehicle acoustics, and new sealants based on special silicones are being used in transmission units and engine blocks. Also, sales of high-strength epoxyresin adhesives for the aerospace industry have been growing while makers of semiconductors and printed circuit boards have been steady buyers of adhesives and sealants. Interestingly, the company says it has further expanded business with the steel industry.

Cost and supply of raw materials are likely to remain high and tight throughout 2005, Stermer says, so the cost of freight, inflated by high fuel prices, also has become a big factor in sourcing. Chemicals are transported by and far on everything that moves. That's because the company relies on trucking to get materials to its plants and relies on on-time performance measurements when using and retaining suppliers. The cost of crude oil is a huge issue for the Henkel Group worldwide—since energy costs impact virtually every type of chemical made.

Stermer says the purchasing department has expanded its study of total cost on what suppliers charge for transportation and is getting a line-item breakdown to see if Henkel Technologies can save money by handling the transportation themselves. The analysis to date shows a marginal difference, although it appears that some suppliers who handle the larger commodities do it at a lower cost, the purchasing manager says.

The purchasing group at Henkel Technologies has been consolidating its supplier base—partly because firms are changing the emphasis of what chemicals they handle and partly because its supplier consolidation is a cost-reduction exercise.