Buyers cite domestic price, supply issues in overseas sourcing

David Hannon -- Purchasing, 2/16/2006

Global sourcing is taking hold in all industries and chemicals and plastics is no exception. Forty percent of chemicals buyers polled by Purchasing in early 2006 say they are increasing the amount of chemicals they buy overseas. And while the majority of those buyers cite price as the major driver for that move, almost one-third say domestic quality is the reason. Twenty-five percent say risk management or diversifying the supply base is the reason for their global sourcing.

The survey found that, among the buyers sourcing chemicals overseas, the ranges varied between as little as 2% to as much as 100% of chemicals supply coming from overseas. The average was 32%.

The regions cited as new sources of chemicals supply also vary, but not surprisingly, China comes up the most. "My company recently began buying caustic soda beads and sulfonic acid from China and now buys about 25% of our chemicals overseas," says one buyer in the survey. "We moved to China because of price and availability issues from U.S. suppliers."

The Chinese market has seen strong demand and capacity growth for chemicals in recent years (see sidebar, "Who's over there?"). For example, a recent report from Chemical Market Associates says global demand for polystyrene has been driven by Chinese consumption. "China has been adding expandable polystyrene capacity at an incredible rate," the CMAI report says. "The fear of overcapacity exists in China as its own domestic demand has slowed, and imports might become more competitive."

India is another major target for buyers looking for low-cost chemicals and plastics materials. One purchasing executive tells Purchasing he is having good luck in sourcing aroma chemicals from India and has boosted the company's total overseas chemical supply to 50%.

As domestic demand for chemicals and plastics increases in India, more capacity is coming online. Ashland Casting Solutions, a business division of Ashland Specialty Chemical, recently unveiled plans to expand its business in India with the goal of establishing local manufacturing there by 2008.

"India is an important and emerging market for many Ashland products, and it is in the top seven casting producing countries in the world," says Mike Swartzlander, vice president of Ashland Specialty Chemical and general manager of Ashland Casting Solutions.

Daryle McDonald is president of Indiana-based Heartland Packaging, a maker of plastics packaging products. In 2003, Heartland bought about 10% of its plastic packaging and stretch film from India for the first time, but decided the quality of the product received did not meet the company's needs. "In 2004, we purchased about 5-7% of our packaging from India, based on assurances that the packaging would be within our specifications," says McDonald. In 2005, the company stepped up that amount to about 15%, fueled mostly by the rising material costs in the U.S. and the improved quality of Asian products. McDonald says the biggest issues he's had to work though in finding new suppliers have been language and cultural issues. Because Heartland has no manufacturing set up in Asia, the company is only buying materials for shipment to the U.S. market, so it is harder to find and work with local suppliers.

"We have found the best way to work through the cultural and political issues in China and India is to use a national agent to act as the intermediary," he says, adding that even cultural issues regarding food, gifts, and alcohol can make or break an Asian sourcing plan. "Taking a course or doing significant online research prior to meeting a supplier in one of these regions is essential," he recommends. "And you can't be in a rush—it takes relationship-building in these markets."

The majority of buyers polled by Purchasing say they do not have an established risk management strategy for buying chemicals overseas. But those that do, report more success in establishing regular supply overseas. "I'd only caution that buyers allow significant leadtimes and have a backup source of supply when moving to China, as the chance for supply disruption is higher," says one chemicals buyer in the survey. Another recommends using independent audits of all Chinese suppliers.

One buyer currently sourcing chemicals from Germany and Asia says capping overseas supply at 15% helps protect the continuity of supply while providing significant cost improvements. Establishing an in-country office also came up as a possible risk management strategy, but is a question of resources for some companies.

"You need to review not only initial quality, but the reliability of the quality from overseas chemical suppliers, as well as the delivery dates and price," says one survey respondent at a plastics company. "That's the only way to decide how to split up your supply."