Although chemical manufacturer recognizes the importance of strong purchasing power, few companies turn this function into a source of strategic advantage. Here’s how they did it.
To obtain raw materials with appropriate price, specification, quantity and quality is the basis for chemical manufacturers to make profits. The purchase expenditure is equivalent to 20% to 60% of the sales revenue of special chemicals manufacturers and 50% to 80% of the sales revenue of commodity manufacturers. For chemical manufacturers, it’s not just the scale of procurement spending that makes it so important. The return to volatile raw material prices, which are down more than 50% from two years ago, means that making the right purchase decision is more important than ever.
Since 2000, with the increasing globalization of raw material market, chemical manufacturer has a wider choice of prices and grades of many commodities, although this has an important impact on delivery time and transportation costs. This supply continues to grow as new resources such as low-cost shale gas production in the United States enter the market.
On the demand side, many companies face increasingly complex issues as their customers demand niche products to fit specific end uses or meet different local regulations – which affects what they need to buy. In addition, players must find ways to operate their heavy assets and inflexible production systems in a profitable way.
Purchasing improvement plan can make a substantial contribution to better financial performance. Reducing overall spending by 6-10% (based on our observations of the industry, if spending accounts for 50% of sales, that’s a reasonable target) can increase EBIT by 3-5 percentage points.
With so much value, it is not surprising that the chemical industry has developed stronger purchasing power in recent years. But there is still room for further improvement. For example, in our global purchasing excellence benchmark, the chemical industry has an overall average score of 2.6, which is among the top industries studied.
Perhaps more telling than the average performance figures, however, is the spread. Among the chemical companies studied, 85% showed stable medium packaging performance, while in the whole sample, only 6% were among the real purchasing leaders. This shows that less than one in ten chemical manufacturers have taken the next step of performance procurement: transforming their procurement function into a source of sustainable competitive advantage.
Compared with the automotive industry, high-tech industry and consumer packaging industry, there are fewer companies in the chemical industry that have achieved outstanding procurement, which is well justified. While there are common ways to optimize indirect spending in most industries, direct spending on chemicals presents two particular challenges.
First, the product is complex. For a commodity chemical company, 10 to 20 products may account for half of its total expenditure. This seems to be a straightforward purchase proposition, but it is deceptive. Each product can be offered from multiple locations and in several basic forms and many levels. In addition, relatively small changes in the characteristics of these inputs may lead to large changes in the cost of processing them into finished products. This makes chemicals an environment where it is difficult to make the best procurement decisions, and it requires buyers to have a deep understanding of the technology of their category and the complexity of the supply market. Despite its complexity, the pricing of many chemical commodities is largely index driven, which makes purchasing seem simpler than it actually is and makes companies reluctant to invest in the expertise they need.
The second is the long tail effect of low yield products. Chemical enterprises, especially in special fields, may use thousands of additives to fine tune the characteristics of their products to meet the needs of customers. Some additives may be rare or rarely used, but they are critical to the performance of the final product. Similarly, companies may have to offer hundreds of different packaging and labeling combinations. Even if it’s direct (usually not) to achieve better purchase value in these categories, it’s a huge workload for the purchasing team to do so.
Because of these complexities, companies tend to limit their efforts to improve procurement. These efforts usually include typical procurement methods, such as bundling products with fewer suppliers to achieve economies of scale, and actively negotiating to lower prices.
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