Following several strategic acquisitions in recent years, and the much publicized acquisition of Morton International in 1999, Rohm & Haas Corp., a chemical and performance products manufacturer based in Philadelphia, Pa., implemented a strategic sourcing initiative. The mission: significantly reduce the supply base and realize economies of scale and eliminate $300 million in total costs, $150 million of which would come directly from purchasing.

As part of the initiative, purchasing began to look more closely at the commodities it purchased and to overhaul its supply base, qualifying and awarding more long-term, multisite contracts to suppliers.

From maintenance, repair and operating (MRO) materials, to energy, to chemical raw materials—the company segmented all the materials it buys into 15 sourcing groups, one of which would focus on material purchases from chemical distributors. Each group was given focused purchasing goals based on total spend and specific market analysis.

For an idea of scope, the largest of these contracts was for more than 4,000 different chemical items or stock keeping units (SKUs), amounting to more than $80-million worth of business. For this contract, purchasing was able to find the best-value deal from an unconventional source, bringing about an estimated savings of $10 million over three years.

In its search to find the right distributors to handle its multisite chemical raw materials needs, purchasing at Rohm & Haas first developed a cross-functional team to begin the rigorous task of qualifying suppliers.

With central leadership from purchasing, the team included cross-functional representation from marketing, research and development, sales, quality and other functions. According to Joseph Pawlikowski, regional purchasing manager, North America for Rohm & Haas, "We used the other functions as resources to support the core purchasing team."

From an original chemical distributor supply base of more than 40 companies, Pawlikowski says it was purchasing's job to narrow the number of distributors to "the lowest common denominator of distributors that could meet our specific objectives," he says. Originally, the idea was to qualify two primary suppliers from each region of North America.

Under the qualification program, potential distributor suppliers were rated on the following sets of criteria:

• Competitive pricing. "We have models within Rohm & Haas that compare pricing for single products over several different regions of the country," Pawlikowski says. "So we can look closely at how suppliers perform from an historical pricing perspective."
• Geographic coverage. The contract was going to cover about 50 Rohm & Haas locations, spread throughout the U.S. and Canada. To qualify distributors' coverage, the company divided the continent into seven regions (Northeast, Southeast, Midwest, South, Central/Mountain, West Coast and Canada), then compared each distributor's coverage. "Our minimum requirement was that the distributors would have a leading presence in at least three of the seven regions," Pawlikowski says.
• Performance history. Pawlikowski says that detailed records of distributors' on-time delivery performance in accordance with Rohm & Haas' service and quality requirements played an important role in qualifying prospective distributor suppliers. Only those distributors with a past positive performance history were considered as potential bidders.
• Service offering. Distributors' value-added service offerings were scrutinized closely in Rohm & Haas' selection of distributors to handle the large accounts. Pawlikowski says services such as repackaging were some of the company's primary service concerns.

"Also, in some cases, we looked for dedicated inventory service," Pawlikowski says, explaining that inventory could be handled either on a consignment basis or by what he calls ship-to-stock. "This is where we share our demand and production schedules with the distributor and they pre-qualify, sample and inspect the material before delivering it directly to our production floor when needed," Pawlikowski says. Rohm & Haas has used the latter of these services within the company's electronic materials purchasing group.

Eventually, about eight distributors qualified for the contract proposal and received invitations to bid. From the eight, six were actually awarded business.

With qualification, bidding and distributor selection complete, Rohm & Haas awarded its three-year contract for $80 million to a select group of distributors, including an alliance of regional chemical distributors, comprising the following companies: The George S. Coyne Chemical Co., Croydon, Pa.; Los Angeles Chemical Co., South Gate, Calif.; Ulrich Chemical Co., Indianapolis, Ind.; Hydrite Chemical Co., Brookfield, Wis.; Hubbard Hall Chemical in Waterbury, Conn.; and Canada Colors & Chemicals Inc. in Toronto, Ontario.

Commenting on formation of this alliance to handle the large packaged contract, Rohm & Haas' Pawlikowski says, "The smaller regional distributors may have looked at our distributor initiative as a wake-up call. To their credit, the group quickly formed a loosely held alliance to cover our needs over a wider geographical range than any one of them could provide on their own," he says.

Among the distributors, decisions were made by a board comprising top management at each of the companies. Coyne Chemical acted as the distributor representative to Rohm & Haas, so that the company could deal with one point of contact.

The alliance offered a wide range of chemical intermediates, specialty chemical actives, fine chemicals and commodity solvents. "Across the board, the alliance was competitive with the larger nationals," Pawlikowski says.

To save $10 million on its three-year contract, Rohm & Haas applied a variety of techniques, but Pawlikowski admits that most of the savings came from a reduction in base pricing.

Rohm & Haas broke the 4,000 products into three categories: where incumbent distributors lowered their pricing, where one distributor outbid another, and where the company had moved from buying direct to buying from a distributor.

Additional cost was shaved by negotiating volume rebates, determined by threshold values of product, as well as some early payment discounts and working capital inventory reductions.

Qualifying alternate products also yielded significant cost savings. Pawlikowski explains that alternate products were classified into three groups.

• The A-group includes chemically equivalent product replacements.
• The B-group includes functionally equivalent products (which have been used before by the company and have been found to yield improved performance).
• C-group products may be recommended as functional equivalents to current products, but have never been used before by the company.

Another technique was to guarantee 48-hour delivery of all SKUs. Using just-in-time (JIT) inventory management practices enabled the distributor alliance to reduce Rohm & Haas' working capital by as much as $1.5 million, says Pawlikowski.

Awarding business to an unconventional alliance of independent regional distributors was not the only unusual aspect of the distributor contract, Pawlikowski says. "In consolidating our distributor suppliers, we also broke the model in our minds of the products you buy logically through distribution—a subtle but important point," he says. "Most buyers have certain types of products in mind that may be handled by chemical distributors." These typically include anything required in low volumes or shipped in less-than-truckload quantities. "We tried to expand our thinking to include all chemical raw materials in the scope of the distribution project," he says. The reasoning: Why exclude certain products if there might be a possibility of reducing cost?

This kind of thinking led to distributors obtaining business that had been handled traditionally by direct suppliers. "For example, we were able to buy some product groups from distributors and have them delivered by tank truck," Pawlikowski says. "In some cases, due to the distributors' geographic proximity to our plant, or because they were actually larger-volume buyers of certain products than the direct suppliers, we were able to take advantage of their infrastructures or their buying power to save cost," he says.