chemical suppliers’ technical levers

When purchasing important direct raw materials, most chemical suppliers use contract and supplier management as the main means. There are also some additional factors that come with first-class companies. When there is a major change, such as the recent fall in oil prices, they will be strict in demanding that supply agreements be renegotiated and that contract terms that control the risk of price fluctuations are carefully defined.

But perhaps most importantly, they have strengthened their traditional business capabilities through a comprehensive and up-to-date factual basis and strong analytical skills, which gives them an in-depth understanding of the true costs of suppliers and how market changes will affect their purchases. As a result, their negotiating teams rely less on tough tactics and more on finding real opportunities to supply materials at a lower total cost.

The basis of this fact begins with an understanding of the global market for chemical products. Prices of chemicals vary by region, depending on the quality and availability of raw materials, energy prices, local demand and the production capacity of the region. The cost curve, as shown in Table 3 of caustic soda, can show the best location to provide the required product at the most attractive cost and provide insight into price and usability development. In the case of caustic soda, the Middle East and the United States currently have the lowest costs (in the case of the United States, this is mainly due to the low price of shale gas). However, the biggest sales in the market are in China.

Understanding the dynamic characteristics of the cost curve can help enterprises to develop medium – and long-term advantageous procurement strategies, for example, by establishing relationships with suppliers in cost reducing regions.

Prices can also fluctuate in the short term. Sometimes, seasonal demand for a commodity from other industries pushes up prices at certain times of the year, creating cost saving opportunities for chemical suppliers to use the raw material more in times of demand downturn.

Changing supply market dynamics make it important for companies to understand how the supply base of key commodities evolves. New suppliers often enter the market to take advantage of the growing demand of a region or the advantages of local production costs. Leading companies use a systematic approach to collect market intelligence from current and new market participants. By understanding the investment plans of these suppliers and the changing situation in their major markets, they can often identify new sources of savings.

Even in regions where goods are available, differences in supplier size, technology, plant utilization, and business strategy can lead to significant cost differences. Clean cost model is an effective way for enterprises to understand the basic cost of suppliers (see sidebar, “clean cost model”).

Once chemical suppliers identify opportunities for additional value, they need to use a smart, structured approach to capture these opportunities when negotiating with suppliers. Preparation is the key to success. Companies should have an in-depth understanding not only of the product category itself (usually with new models), but also with the business relationship between buyers and potential suppliers. In this category or other categories, is the buyer an important strategic customer of the supplier? Does the two organizations have a record of successful cooperation? Understanding potential transactions from the perspective of suppliers can help companies choose the right negotiation strategy.