Category Archives: Chemicals

Energy Prices in Flux

Where are energy prices going? We’re not really sure.  A recent forecast reports conflicting information.  U.S. crude plunged toward negative daily territory as the Energy Information Administration revealed worse than expected crude and refined products supply figures, signaling a strong bearish outlook.  The only bullish sign for oil was that supplies at Cushing, Oklahoma, dropped to the lowest level since October 2009.
Oil tycoon T. Boone Pickens, speaking at the ISM 2014 Annual Conference, suggested that new drilling technologies have radically changed the capacity of the U.S. to produce oil and gas over the long haul. He also said conversion from gasoline to natural gas in transportation fleets will come quicker than anyone else is predicting. He predicted those changes could keep domestic energy prices under control for the foreseeable future.

Apple’s Supply Chain Skills Can Still Score

Apple may be getting beat up by critics for falling behind Samsung in sales and new features, but a recent tear-down of the iPhone 5S reveals that it still has a knack for fostering innovation from its suppliers.

The blog All Things D recently wrote about the tear-down by consulting firm IHS.

According to the report of the IHS analysis of the iPhone 5s 16G, Apple is likely paying about $191 for its components and another $8 for assembly. That means the iPhone’s manufacturing costs are no more than the $199 subsidized price consumers pay for a unit with a two-year contract. Whatever the carriers are paying Apple is all margin. Not bad.

However, that’s not the most interesting SRM story. Buried in the 5S components is a unique set of radio-frequency chips from as many as six different companies that are all collaborating with Apple. Considering the effort that it takes to create a strategic relationship with one supplier, you can imagine what it might have taken to bring six suppliers into an innovation-driven collaboration.

The result may have been worth it. The iPhone 5S has an integrated RF system that can be used in many parts of the world that have different LTE wireless standards. According to one analyst quoted, older Apple models might have been able to connect to five different LTE systems, the new one, 13. That means one model can be sold in many more global markets, and more international travelers are more likely to be able to use their own phones wherever they go. Simplifying manufacturing schedules and inventory in distribution could turn into nice savings for Apple. And the feature could be a nice benefit to people who travel extensively.

It may not have the head-turning appeal of the fingerprint sensor or snappy new graphics, but creating a more global-friendly iPhone could be a big win for the Apple supply chain team.

U.S. Court Upholds Conflict Minerals Rules

The logic of the rules is uncertain; the process to publish them took forever; the cost of them is debatable; and their effects may be largely unintended. Nonetheless, the SEC conflict mineral rules mandated by the Dodd-Frank Act are still moving forward — propelled by a favorable ruling by a U.S. District Court judge. Here is the coverage from Reuters on the ruling.

To remind us all — the SEC rules require public manufacturing companies to try to trace the sources of any tantalum, tin, tungsten or gold in their products, and to disclose whether or not they think any of those minerals came from the Democratic Republic of the Congo (DRC). The idea is that public disclosure will pressure companies to source someplace else, because mining those minerals has helped fund DRC militant groups with a history of human rights abuses.

A consortium of business groups fought the rules on First Amendment grounds, among other arguments, and are now considering an appeal. In some ways, though, actions by Apple and other technology companies that use those minerals have already moved beyond the scope of the rules because they faced pressure from customers and investors.

And while the rules may be flawed, their intent is consistent with the ISM principles on corporate social responsibility in the supply chain. On the issue of human rights, ISM has these standards:
* Ensure and uphold human rights internally and through the supply chain.
* Respect and support protections explicitly set forth in internationally proclaimed human rights principles, declarations and documents.

How Quickly We Forget

Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies.
This week it’s deja vu all over again, as The Detroit News reports that an explosion in a single factory in Germany likely has disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The News reports that 200 engineers, purchasers and others gathered outside of Detroit to figure out what to do next.
It turns out that the explosion at the Evonik Industries AG plant in Marl, Germany not only produces 25% of the world’s supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12.  With automotive production up in the U.S., global inventories of the resin could run out in quickly.
Now, it does show progress that the industry responded quickly after the accident to sort out alternatives, but it’s still shopping for an umbrella after you’ve already been caught in the rain. If the OEMs had thoroughly mapped their supply chains before this happened, they would have seen the big red “X” where all fuel hoses and brake lines led back to Marl. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.

Risk Quick Fix – Backup Sourcing

What a turnaround to the phrase attributed to Henry Ford that you could have a Model T in any color “as long as it was black.” Ford Motor and others have found themselves telling dealers you can have vehicles in any color except black. That, of course is a result of the earthquake and tsunami that damaged Merck’s Onahama, Japan plant. According to Automotive News, “the only plant worldwide making its Xirallic metallic pigment.”

Read more:

While Merck scrambles to restore production there or elsewhere, companies are rapidly changing strategy away from single sources to dual sourcing. Primary and secondary sources are a quick fix to SC risk.

2011 starts with manufacturing momentum

Yesterday’s ISM Manufacturing Survey reported economic activity in the manufacturing sector expanded in December for the 17th consecutive month. Norbert Ore, chair of the ISM manufacturing survey committee said, “the average PMI for January through December (57.3 percent) corresponds to a 5.1 percent increase in real gross domestic product (GDP).” That’s based on the historical relationship between the manufacturing index and the GDP.

The story for procurement professionals in the report is that manufacturers noted price increases in 23 different categories of commodities. Metals, chemicals, fuel, and grains were all there. Since the whole world seems to be shaking off the recession, upward price pressure is likely to continue for the foreseeable future.

Oil seems to be a particularly worrisome category. According to the Wall Street Journal, Goldman Sachs is predicting crude oil prices up to a $100 per barrel again this year. However, the Journal also says OPEC has a self-interest in keeping price hikes moderate because the giant spike in 2008 was one of the factors that killed the global economy. According to the Journal, that might have been a short-term windfall for OPEC, but the more stable prices through 2010 were really a better long-term deal for oil producing countries. And consumers as well. If oil prices cannot be contained and other commodities spike as well, the slow growth out of recession could still be in jeopardy.


Where did the cadmium come from?

According to the New York Times, McDonald’s is paying customers $2.00 to bring back drinking glasses they bought as a promotion for the movie “Shrek Forever After.” It turns out the painted image of the bright green but gentle ogre contained cadmium — the toxic heavy metal that led to a huge recall of Wal-Mart jewelry earlier this year.

McDonald’s reaction, although the actual risk is not that high, is not surprising, but it did expose a gap in their supply chain of custody system.The company could quickly identify the source of the glasses, but according to the Times, a McDonald’s spokesman said the company didn’t know the source of the paint or the cadmium.

Maybe someone did a risk mitigation analysis and decided a strategy of paying a premium to buy back defective product, and running an aggressive PR campaign to back it up had a better payoff than tracking all raw materials used in a promotional item.

But my guess is that the better investment would have been either a complete supply chain environmental sustainability assessment or a chain of custody system that could track all materials used in the glasses. Either one would have likely turned up a “flagged” chemical, such as cadmium.  As even a consultant for the International Cadmium Association told the Times, “Our position is that cadmium pigments should not be painted on consumer glasses.”

Here’s the link to the New York Times coverage:

More Inflation Cautions

The Institute of Supply Management’s Purchasing Managers Index (PMI) for October that was reported today made its biggest jump since 2006. — from 52.6 in September to 55.7 last month. (See the news release.) That’s good news for the economy as a whole, but it bolsters our cautions that pressures on prices are likely to increase faster than the pace of economic recovery over the next few months.

The PMI is considered a leading indicator of economic business conditions. Purchasing managers are already reporting price increases in 11 commodity categories. Furthermore, inventories have been contracting for 42 consecutive months. Those facts suggest that price pressure is likely to go up.

Suppliers may be trying to recover from their losses over the last year and perhaps betting that shortages might drive prices higher quickly. It’s also possible that tight credit is still limiting manufacturers to add production capacity. Whatever the reason, buyers must remain diligent in their efforts to contain cost.  As companies recover and work to improve their bottom line, cost containment will be the core focus in managing suppliers in 2010. It will be necessary for buyers to review their tools for containing costs and develop new methods for dealing with price escalation.

In southeast Michigan we see the same kind of pressures on prices, but there was also a drop in the local PMI, released by the Institute of Supply Management – Southeast Michigan.  The ISM-SEM reported that its October purchasing managers index was 51.3, a drop of more than 10 points, but still in the range that demonstrates some modest improvement in economic conditions. The three-month trend of the index also remains positive.

We likely had an uptick in September as a trailing result of the ‘Cash for Clunkers’ automotive incentives. The October composite figure shows a slight cooling off, but looking deeper we see local purchasing managers reporting higher prices in a number of categories. That suggests there is finally demand building that can drive new growth.

The drop in the southeast Michigan index might suggest a note of caution about the national figure, too, because Michigan’s PMI often leads the index for the rest of the country. October’s big jump in the national PMI might be followed by a lower index next month, matching Michigan’s pattern. With so many uncertainties, we shouldn’t be surprised if the recovery has some fits and starts. Overall the outlook is still positive.”


I recently had a good conversation with Richard Weissman at Purchasing Magazine about buying chemicals. I can tell you a few things I told him — or you can read the whole article (with good comments also by Tom Brossart, the director of global logistics and trade and compliance at W.R. Grace in Columbia, Md.).

1. Nothing really replaces an in-person supplier visit. Travel budgets are tight, but risks from low-cost country sources are significant.

2. An example of an area of risk is environmental practices. You can no longer “export” pollution to countries that have less stringent laws than the U.S. Organizations are monitoring practices around the globe, and consumers hold companies here accountable for what their suppliers do abroad. Sustainability and the environment are critical issues that reach through the whole chemical supply chain.

3. The chemical supply chain is suffering from the same effects of the credit crunch as other products. Buyers are extending terms. Suppliers are squeezed and risks of disruptions are increasing. We work with clients to run simulations that gives us clues where the stress is greatest, so we know where we ought to line up standby sources.

It is easy to think of chemicals as commodities that need to be evaluated almost exclusively on price, but when you add considerations of risk — environmental, logistical or financial — procurement strategies have to more carefully constructed to accommodate them.