P&G’s chemicals challenge: Pricing volatility

Buyers work to build close relationships with fewer suppliers

By Alan R. Earls -- Purchasing, 9/8/2008 7:34:00 AM

The biggest challenge for purchasing in companies like Procter & Gamble is figuring out how to deal with pricing volatility. “In a market like we have today, where all the commodities materials and energy costs are up, it is very difficult,” says Stefan Van Straelen, vice president of chemicals purchasing. “I have been in purchasing for close to 30 years and I have never seen a cycle like we have today for chemicals, agricultural products, and energy,” he says. The solution: close supplier relationships.

Although Van Straelen is spared the worry of energy purchases – that’s handled by another part of the business -- P&G still has a mind-boggling chemicals shopping list in support of its 300 brands. That shopping list includes thousands of chemicals and other ingredients – including agriculture ingredients used for the snack and pet food products. 

Assisted by a staff of about 220 people “with very diverse but mostly business-oriented backgrounds,” (Van Straelen himself started his professional life as a journalist), the purchasing operation is spread around the globe. The largest single concentration is in Cincinnati with European offices in Brussels, Geneva, and Moscow plus locations in Dubai, Japan, Singapore, China, and Venezuela.

“We recently moved the headquarters of our chemicals purchasing activity to Geneva and I’m in Brussels, which is also a center for R&D, but I could be located anywhere because I travel 70 percent of the time,” he says.

Van Straelen says the products using the most chemicals are detergents and fabric enhancers, followed closely by beauty care, and shampoo, which uses a lot of surfactants and polymers.   Detergents, beauty products and shampoo account for 99 percent of the company’s approximate annual $10 billion chemicals spend. The remaining one percent goes to health, pharma, diapers/wipes and institutional products.

For Van Straelen, one of the goals in recent years has been reducing supplier count. “We make a consistent effort to continually consolidate our supplier base, and sometimes that means we have to go to people at the individual brands to discuss alternatives,” he says. The company buys only a small portion of its chemicals from distributors.

“About 80 percent of our chemicals spending is concentrated with about 50 strategic suppliers,” he says. Portions of that remaining 20 percent can be very fragmented. For example, he notes that the perfume contained in one product could require 20-30 ingredients, some of which come from very small companies. “In some of those cases we work with distributors because they can efficiently handle all of the back office functions needed to deal with a number of small suppliers,” explains Van Straelen.

In general, Van Straelon says P&G’s preference is to work with large suppliers that have a broad geographic presence. That’s because of  two primary trends in the chemical industry.  On the one hand, he says, there is a continued movement toward greater consolidation, for example with Dow acquiring Rohm and Haas and BASF acquiring Johnson Polymer and part of Degussa. The second dynamic is the movement from west to east. “If you look at the new capital investments, they are all happening in the East and in particular, the Middle East,” says Van Straelen. That’s because the region offers manufacturers both cheaper energy and lower commodity costs. Furthermore, the same move to cut costs -- and serve a growing customer base -- is also manifested in a movement toward chemical manufacturing in China, India, and Asia in general. “Over the next few years I think those areas are where most of the new investment will happen, so we will need to build relations with those new and emerging elements in the chemical industry and perhaps even reconsider our own plant locations,” says Van Straelen.

He says that the company is considering more distributed manufacturing operations to reduce transportation costs. In some countries, he says, particularly Russia due to a range of regulatory and political issues, P&G uses local suppliers almost exclusively.

Making the Cut

Of course, on a more granular level, sometimes suppliers just don’t fit, or perhaps a new product requires a different ingredient. In either instance, that can mean searching for a new supplier. Van Straelen says in such cases, a search of commercial database will usually suffice to reveal all the potential or actual producers. “We would then approach many of them to see what capabilities they have to make the material and their terms and conditions,” he says. Then, he and his team would grade suppliers. “We tend to look for feed-stock integration [suppliers that control their own sources of raw materials and are thus less likely to exhibit pricing volatility], global span, geographic location relative to where we need the materials, and whether they are a leader in their market.” That last point involves looking at how the target supplier scores on innovation, and whether they are spending enough on R&D, among other things.

“For us, the innovation part is very important,” Van Straelen says. “I spend a fair amount of time and resources working with R&D to identify more efficient chemicals, and we are also trying to move away from the materials that demonstrate price volatility.”

Indeed, at P&G, the role of suppliers in supporting R&D and innovation is particularly prominent. “About 15 percent of my organization doesn’t buy anything and their sole role is to work with our R&D organization and in building relationships with external partners and bringing us innovative ideas from outside,” explains Van Straelen. 

He says the company used to be secretive regarding the innovation process and wanted to invent everything internally. “Now, we realize that in today’s world we can’t invent everything and we need external partners,” he says. “We have multiple relationships with multiple suppliers, not only in terms of developing more weight-efficient chemistry but in terms of increasing performance and/or developing new products.”

Making sure the complex management of suppliers, in all its dimensions, is handled as effectively as possible has also led to experiments in establishing a more formal rating system.

He says his team makes a distinction between strategic and non-strategic suppliers and takes inputs from internal clients such as manufacturing, R&D and legal.

“We try to pick for long term strategic relations, where we believe we can do business successfully for 10 or 20 years,” says van Straelen. “Trust is extremely important. If we don’t have trust in the relationship that would be a red flag – it really comes down to the quality of the people and the openness of our communications.”