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green@work : Magazine : Back Issues : Nov/Dec 2002 : Special Section

Special Section

Chemical Crossroads

A new business model can point chemical-intensive companies in the right direction.


A new business model is emerging that is designed to reduce chemical use, waste, risks and cost through the transformation of the chemical supply chain by redefining the way chemicals are used and sold. The Chemical Management Services (CMS) model calls for a customer to engage with a service provider in a strategic, long-term contract to supply and manage the customer’s chemicals and related services.

The CMS Model
The key to this new chemical services model is a change in the traditional relationship between chemical suppliers and their customers: instead of providing chemicals, suppliers provide the function of the chemicals, or chemical services. That’s a major shift from current practice with major implications. The model is compatible with many emerging business management trends: strengthening a company’s core business, outsourcing support functions and building strong alliances with suppliers.

Here’s how the shift works. Traditionally, suppliers’ profits are tied to chemical volume—the more chemicals sold, the more profit generated. Under CMS, the providers’ compensation is no longer based on volume, but on the quality and quantity of services delivered. This shift to chemical services often aligns the incentives of the supplier and their customer to reduce chemical use and costs. (See Figure 1.) Results to date indicate that the CMS model lowers total chemical costs, and both parties achieve bottom line benefits via reduced chemical use, costs and waste.

With CMS, chemical service providers offer a range of services across the chemical life cycle. (See Figure 2.) For example, a chemical service provider may purchase and deliver chemicals, manage inventory and MSDSs, provide data for environmental reports, research chemical substitutes and implement process efficiency improvements. By sharing cost savings, the chemical service provider has an incentive to continuously reduce costs and chemical use.

In a more mature relationship the service provider is often paid a fixed fee for each product successfully produced (e.g., a fixed fee per 100 car doors painted or 1,000 circuit boards cleaned). Thus, the chemicals themselves become a cost center that the supplier has an incentive to minimize.

CMS is far more than leveraged purchasing. It is focused on optimizing processes, continuously reducing chemical life cycle costs and risk and reducing environmental impact.

Markets
CMS began in the auto sector in the 1980s as a supply chain management strategy. Today, approximately 50 to 80 percent of the auto sector uses CMS due to the strategic and cost benefits of the model.

In other chemical-intensive sectors (e.g., electronics, aerospace, metal finishing), penetration is lower. However, CMS is growing quickly in these sectors, and the CMS industry expects strong growth in all sectors to continue. The growth projections reflect the close linkage between CMS and key management trends, including: outsourcing based on core competency, supply chain management and strategic partnering.

The environmental and cost benefits realized by initial CMS programs in the auto sector raised two questions: is the CMS model applicable outside the auto sector—and, if so, how can its environmental benefits be maximized?

In 1996, the non-profit Chemical Strategies Partnership (CSP) was founded to explore these issues—to investigate, through demonstration and application, the utility of CMS as a business model for continuously reducing chemical use and waste in a variety of industry sectors.

Toward these ends, CSP has pursued a varied program rooted in hands-on collaboration with manufacturing firms. Having demonstrated the business and environmental value of the model, CSP is increasingly focused on disseminating the model and introducing CMS into new sectors.

Why Change?
Chemical management begins with procurement and extends through use, treatment and disposal. These activities make up the chemical life cycle within an organization.

At each stage of the life cycle, a company incurs quantifiable costs of labor, materials, equipment, liability, safety training and compliance efforts. Unfortunately, design, production and management decisions regarding chemicals are typically made without consideration of all these hidden costs. Talking with several companies, CSP has seen the cost of chemical management range from $1 to $10 for every dollar of chemical purchased. That means for a facility purchasing $7 million in chemicals, the additional cost of using chemicals could be $7 million to $70 million. These costs are often higher than expected due to the concealed expenses behind chemical use, such as compliance, safety and inventory carrying costs.

Aside from lowering costs, some of the primary reasons companies launch a strong effort to improve their chemical management include:

* Freeing up floor space for manufacturing
* Improving staff productivity by eliminating chemical
management tasks from their overall responsibilities
* Increasing employee safety
* Reducing chemical use to drop emissions below environmental reporting thresholds
* Leveraging the knowledge resources of a supplier
* Reducing the number of accidents on site
* Reducing liability

Successful Examples
Several companies within the automotive and electronics industries have effectively implemented chemical service programs. Some examples include:

* General Motors (GM), together with its chemical service provider, reduced cost, chemical variety and associated risks. One GM assembly plant achieved a 43 percent reduction in the number of chemicals used and total savings of more than $750,000 a year.
* Navistar International and its chemical service provider developed opportunities for reducing, cutting and grinding fluid waste. The chemical service provider installed a process to clean and reuse the fluids, reducing new fluid use by 50 percent. This lowered the cost of fluid waste by 90 percent.
* The chemical service provider for a semiconductor manufacturing facility helped cut its chemical consumption by 50 percent over two years and instituted changes resulting in savings of approximately $200,000 a year.
* One facility of an aerospace company achieved total savings of $1.1 million in chemical management costs during the first year of its chemical service program.

A New Tool
CSP has developed a new manual to help firms measure the real cost of using chemicals in their manufacturing operations. This information can then be used to reduce both chemical costs and use.

The manual, Tools for Optimizing Chemical Management, explores whether implementing a chemical management service program—a program that puts supplier expertise to work in reducing total chemical costs and volumes—makes sense for a firm. By “real” and “total” chemical costs, CSP includes all the costs tied to chemical use, including: procurement, compliance, inventory, training, delivery and disposal of chemicals.

These costs are significant and often hidden. Several studies have revealed that chemical management costs can range from 1 to 10 times the purchase cost of chemicals. Few companies realize and track these total chemical management costs—and fewer utilize supplier know-how to reduce chemical related costs and volumes.

The CSP manual provides guidance on developing a chemical service program. A chemical service program involves strategic partnering with a chemical service provider (Tier 1 supplier) who performs some or all of the chemical management activities for a facility. A chemical service provider may be a chemical supplier, waste hauler or environmental engineering firm that offers a range of services to manage your chemicals. Some of these services include:

* Purchasing and delivering chemicals
* Maintaining inventory
* Improving process efficiency
* Collecting data for environmental monitoring and reporting
* Waste collection and disposal

A chemical service approach helps to shift the supplier’s profitability motive from “sell more” to “manage better.” That translates into decreased chemical use, costs and liabilities for any company. (See Figure 3.)

The manual outlines the CSP approach and provides step-by-step guidance, as well as specific tools, to help companies develop and implement their own chemical service program. It will help a company answer questions like:

* What do chemical management services include?
* Should the development of a chemical service program be considered?
* What baseline information is necessary?
* What are total chemical management costs? (See Figure 3.)
* How can the environmental and cost justifications for upper management be developed?
* What services are providers capable of providing?
* What steps are needed to successfully implement a chemical service program?

If a company does not already engage in outsourcing or strategic partnerships with some of its suppliers, implementing a chemical service program will likely constitute a major cultural shift. In addition, initiating a chemical service program takes an investment of time and resources, but in the majority of cases, the benefits significantly outweigh the costs.



Information for this section was provided by the Chemical Strategies Partnership, a non-profit organization based in San Francisco, CA, founded by the Pew Charitable Trusts with major support from the Heinz Endowments. For information, call
415-421-3405; e-mail: inquiry@csp.sfex.com;
www.chemicalstrate gies.org

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