Chemicals pose unique challenges in supply management. They are a heavily regulated product that requires a multitude of activity and information to support. These enterprise costs are often not tracked or actively managed. An emerging trend in chemical purchasing and management is called "chemical management services," or CMS. It is a strategic, long-term relationship in which a customer contracts with a service provider to supply and manage the customer's chemicals and related services. The provider's compensation is tied primarily to quantity and quality of services delivered, not chemical volume sold. Thus, CMS utilizes a performance-based contracting approach where suppliers optimize processes and continuously reduce chemical lifecycle costs, risk and environmental impact.
Since General Motors spearheaded the concept nearly 20 years ago (reducing their total chemical costs by one-third and starting a quiet revolution in the chemical supply chain), CMS has become well-established in the auto, aerospace, air transport and electronics sectors. It has recently been applied in university and research labs and power generation companies.
Why CMS?
One of the unique aspects of chemicals is the relatively high total cost of ownership. In research conducted by the non-profit Chemical Strategies Partnership, they have found that for every $1 of chemicals purchased, companies may spend from $1 to $7 to manage them. For every step in the chemical lifecycle (see chart below), there are associated costs and impacts for a company.
Many companies are realizing that although chemicals are a critical component of their manufacturing process, buying and managing chemicals is not a core competency. Chemical management's needs tend to gain attention due to the high costs and risks associated with chemical use. However, many companies do not have the dedicated resources and management attention to focus on reducing costs, improving efficiency and reducing potential exposure to liabilities associated with chemical use.
Can CMS Benefit Your Company?
In a 2004 survey of the CMS industry, customers reported several benefits to implementing a CMS program (see chart below). At the top of the list was the improvement in information management and inventory management. In the first year of a CMS contract, customers see costs savings from the reduced amount of chemical used, price reductions of chemicals purchased and improved manufacturing processes .
Driving a major change to the chemical supply chain may appear daunting to many supply management professionals. However, the trends toward supplier-managed inventory, more performance-based contracting and metrics to track improvements in supply chain activity are all part of a CMS program. Companies have the flexibility to design a program that fits their particular needs. However, some baselining evaluation of current systems is necessary to determine the scope of the CMS program and prepare a useful request for proposals (RFP) to solicit a CMS provider.
Below is an outline of the steps needed to develop a CMS program. It is adapted from the Chemical Strategies Partnership's manual, Tools for Optimizing Chemical Management, which provides sample team workplans and presentations, a simple spreadsheet tool for calculating current management costs and suggestions for contract structures.
Step 1 - Determine Objectives and Build a Team
If supply managers are thinking about CMS, they first need to consider their company's objectives, their available resources and the interest by top management. Then, assemble a multifunctional team - bring together colleagues in supply management, engineering, operations and environmental, and health and safety to determine their interest - and see if it makes sense to seriously evaluate implementing a CMS program. If the answer is "yes," then it is time to identify a champion in upper management. Once a team and champion are in place, then develop a workplan and begin to document baseline data on current chemical use and management costs.
Step 2 - Establishing Total Cost of Ownership (TCO)
The team will next need to evaluate the total cost of using chemicals in its facility or company. This cost analysis, coupled with a characterization of the team's chemical management needs, plays a pivotal role in establishing a successful CMS program. The data serves multiple functions
* To estimate the true, lifecycle costs of current chemical management practices
* To identify specific data deficiencies and management information system needs that a CMS program may fulfill
* To provide a baseline of chemical costs and use that can be used to evaluate CMS provider proposals
A four-step process can be used to assess the TCO for chemicals:
1. Map the flow of chemicals and identify the responsible internal departments at each stage of the chemical lifecycle. This illuminates an often surprisingly complex path, showing just how many people and resources are involved in each stage of the chemical lifecycle. The entire team must be involved — all perspectives are valuable and vital to understanding the total picture.
2. Assign the costs of chemical use to each lifecycle stage. This is accomplished by determining the resources specific to chemical management within each organizational function — labor, equipment, inventory and waste management are all part of this equation.
3. Analyze the nature of the costs and verify them. Understanding the differences in cost drivers can help determine where systematic changes are needed, what savings are possible when chemical use is better managed and what the cost structure of a CMS contract may be.
4. Finally, determine what activities could be transferred to a CMS provider. Consider which cost savings may result in actual bottomline savings (hard savings) versus those that will free up resources for other uses (soft savings).
After conducting this analysis, a decision must be made. Does it make sense to solicit a CMS provider to help develop a program? If so, the next step is to determine the scope of a program and develop an RFP.
Step 3 - Basic Decisions in Designing a Program
Determining the scope of a CMS program involves:
* Deciding which chemicals (direct, indirect, maintenance) should be included
* What aspects of management are likely to be more effectively handled by an outside provider
The wider the range of services, the more opportunities for cost savings - CMS programs with a larger scope of services have generally realized greater cost savings and environmental and safety benefits. However, supply managers may want to consider the staged rollout of a program by facility, division or business unit.
Other Issues
The logistical, procedural and organizational changes that CMS may bring pose several potential obstacles. Issues such as collective bargaining units, proprietary processes and the "we can do it better internally" argument can prematurely kill a program that ought to be investigated. All of these issues have been successfully addressed in companies that are now using CMS.
Step 3 - Basic Decisions in Designing a Program
Once the team has evaluated its cost data, determined the scope of the program and addressed the logistical and managerial issues involved in making the transition to CMS, the team is ready to develop an RFP to recruit a CMS provider. The RFP will serve two purposes:
1. To provide information to the prospective chemical service supplier - the team's requirements and objectives, the scope of work it is requesting and performance metrics.
2. To solicit a description of the CMS provider's capabilities and experience in order to assess its capacity to provide the requested services.
The key in developing an RFP is to clearly articulate the chemical management activities, goals and metrics that the company is seeking - do not indicate how they should be done, but rather what the company's end goals are. The CMS provider will respond with its best suggestions for meeting those needs.
Performance-based relationships involve contracts with aligned incentives to drive down customer costs over the long term and reward superior suppliers that meet specific performance requirements. They are the future in creating a supply chain that is aligned with the goals of a manufacturer prepared to compete in the global marketplace - CMS is already a proven example.
