Servicizing the Chemical Supply Chain

By Edward Reiskin, Allen White, Jill Kauffman Johnson & Thomas Votta

The shift from a product-focus to a service-focus enterprise in the manufacturing sector – a transformation we call “servicizing” – has potentially profound implications for industrial ecology. It appears across a broad array of traditionally product-based firms: XEROX moves from a photocopy machine maker to the “Document Company”; IBM from a mainframe and PC maker to an information services company; Herman Miller from an office furniture maker to an office furnishings service provider; Electrolux from an appliance manufacturer to an industrial cleaning service firm; and a unit of Castrol from an industrial lubricants vendor to an industrial lubricants services supplier.

These shifts share a common theme: the realization that value is linked to the function of a product rather than the product itself. That is, customers have less interest in the physical product (the office carpet, the photocopier, the PC, the chemical solvent) than in the service delivered by such products (comfort/aesthetics, document reproduction, information processing, a clean metal surface).

Insofar as servicizing means the producer owns the products in perpetuity while extracting maximum service value during a product’s useful life, it will contribute to transforming the volume-based incentive structure that undergirds the modern manufacturing corporation.

Decoupling volume from profitability represents a fundamental shift in how companies select, design, and manage materials. Extending the product life through innovative engineering and materials choices, building in flexibility to adopt new technology without discarding the entire product, enhancing transportability through lightweighting and miniaturization, and facilitating repair and disassembly through modularization – all these attributes point to lower material and energy inputs over the product life cycle.

Servicizing requires a transformation of traditional incentive structures from “more is more” to “less is more.” Value is based on functionality, not material content. It requires an information-rich environment in which firms clearly articulate exactly what “functions” customers really want, the true costs of delivering a unit of such function, and building an information system which sends signals to both service provider and customer that services delivered in a quality and timely fashion yield economic benefits to both parties.

Servicizing in the Chemical Industry
Companies that purchase chemicals for indirect use (versus direct use as product constituents) generally see little intrinsic value of the chemicals per se. Its value resides in its function; eg., cleaning, coating, lubricating. The Chemical Management Services (CMS) model transforms chemical suppliers into service providers, and along the way creates mutual incentives to reduce costs, chemical use, and waste generation while improving overall resource efficiency.

To be sure, many chemical suppliers are not poised for this transformation. Reducing chemical throughput poses an obvious conflict for a supplier that profits through volume sales. Also, the skills and resources to manage chemicals are different than those required to produce and market them. Other issues related to corporate strategy, time commitment, and business risk may give chemical suppliers pause. For suppliers moving in the service direction, motives are mixed. Some use CMS to expand their product line into a facility. When they provide a value-added service such as chemical management, they build knowledge about the needs of the customer. They may be able to replace existing brands with their products and develop new chemistries with the customer. The ability to meet, or even create, new customer demands is a competitive advantage at this early stage of CMS development.

Why Should Managers Care?
Managing chemicals is costly – far more costly than most managers recognize. The cost of a chemical reaches far beyond its purchase price. The cost varies between facilities and industries, but taking into account only the direct costs such as labor, materials and equipment, every dollar spent to purchase a chemical may require at least another dollar to support its use. Estimates by auto manufacturers and the U.S. Department of Defense have put the ratio of chemical management costs to chemical purchase costs in the range of 5:1 to 10:1.

Like any purchased materials, chemicals generate costs associated with procurement, delivery, inspection, and inventory. Because of the specialized and heavily regulated nature of chemicals, these costs are high relative to other material inputs. Many industrial processes require chemicals with sophisticated properties – such as purity and heat resistance – that demand more attention and expertise by procurement staff. Transportation is subject to stringent regulations; storage often requires incoming inspection, climate control, shelf-life management, labeling, and safety precautions. Such costs are most often recorded across a wide array of company accounts. Unlike most purchased materials, chemicals require substantial resources for monitoring, tracking, reporting, training, handling, disposal, not to mention the less tangible but real costs of liability and, sometimes, public communications and corporate reputation assurance.

Collectively, these requirements place a significant burden on EH&S staff. Procurement systems, for example, are rarely linked to the environmental management systems that contain information needed for reporting. Therefore, determining the volume of any specific chemical component released from a facility requires manual data gathering and manipulation.

The more costs are dispersed throughout a company they are harder to pin down. In most manufacturing facilities none of the activities associated with chemicals are part of the core business. Because it is outside its core business and costs may be perceived as relatively small, chemical management may not be as carefully managed or continuously upgraded as production processes.

By Edward Reiskin, Allen White, Jill Kauffman Johnson & Thomas Votta

How Servicizing Works
An outside CMS provider assumes the responsibility for managing chemicals over some – or in its most compre
hensive version – all stages of the material cycle. The model rests on two premises:

1. The service provider has the necessary expertise to reduce the absolute use of chemicals and the inefficiencies associated with their management; and

2. The service provider will pursue such improvements if the proper incentives are in place.

The linchpin of CMS is compensation of suppliers for services provided, not volume delivered. Profits are related to quality and quantity of service, not product. Example: an auto manufacturer has 100 car doors to paint each hour. Each door requires about one gallon of paint; therefore, the manufacturer purchases 100 gallons, assuming no wasted inventory (expired shelf life, contamination), application mistakes, or unintended overuse (spills). If the paint costs the supplier $4 per gallon and sells it for $5 per gallon, the manufacturer pays $500 under a traditional arrangement and also incurs the many hidden and indirect costs of managing the paint. The supplier takes $100 in profit and benefits from every management problem that results in increased paint use. The supplier may make occasional suggestions to improve process efficiency to maintain customer loyalty.

CMS Scenario: the supplier and buyer face the same incentives – lower materials throughput, higher process efficiency. The buyer is compensated for every painted car door that leaves the facility. It is sensible then, to compensate the supplier in the same way. If, as a baseline, it costs the supplier $4 for each door painted and the supplier receives $5, the supplier still profits by $100, but the incentives are reversed. The supplier now profits by decreased paint use! For example, if the supplier increases the paint application efficiency and reduces the amount of paint required for each car door by 25%, the supplier only needs .75 gallon to paint a door and his costs go down to $3 per door. Thus, the supplier’s profit rises to $200. The supplier now has an incentive to work with the customer to increase efficiencies – to use as little paint on a door as possible with a minimum of waste. Under a gain-sharing arrangement, savings can be shared to further incentivize both parties. Under this scenario, it makes sense for the supplier to manage more of the process; in effect, become a service provider.

CMS is an operational expression of life-cycle management with the added capability of driving suppliers and users toward joint efforts to squeeze waste out of each step in the product cycle. The model covers a spectrum of service levels from procurement-only to comprehensive life-cycle coverage. The more comprehensive the system, the greater its potential for realizing gains in reduced material throughput.

Transferring chemical management to a supplier can be a daunting task, though, because of the many linkages with other management and manufacturing systems such as procurement, material management, production engineering, and waste management. And, as with any change process, implementing a CMS program is subject to individual and organizational resistance, inertia and risk aversion, especially when potential gains do not directly accrue to the parties essential for implementation. CMS also creates increased interdependency between supplier and customer that requires high levels of confidence and trust. It requires long-term, continuous, and multi-faceted interaction.

A thoughtful implementation program can respond to these challenges. The transition can take place gradually and sequentially in different parts of a facility or company, by incorporating different classes of chemicals, and by phasing in different stages of the life cycle. Despite these formidable challenges, successful CMS programs are evident and increasing. Over the last decade, General Motors has experimented with CMS programs and has refined and increasingly standardized its program. Such programs, in various forms, are in place in over 80 percent of GM’s North American plants, and are now being deployed worldwide.

Navistar, a leading producer of truck engines, has partnered with Castrol Chemical since 1987 at an Illinois facility. Castrol supplies and manages the plant’s coolants, cleaners and associated additives. Castrol has reduced coolant use there by over 50 percent and coolant waste by 90 percent. In the process, production downtime, the number of reworks, and cost of inventory has been reduced. Through its knowledge of Navistar’s facility, Castrol has been able to identify tens of thousands of dollars worth of savings opportunities that would otherwise most likely remained untapped. After all, Navistar is an engine producer, not a coolant system manager.

Another area where CMS has gained a foothold is in the intensely competitive and cost-conscious semiconductor industry. Intel and Motorola have led the way in bringing chemical managers into their facilities to improve efficiency, increase quality, reduce chemical use, and cut costs. Chemicals play a critical role in production in this highly specialized manufacturing process. Even in this industry where management attention is strongly oriented to chemical design and processes, many companies have realized significant benefits from engaging a CMS provider. In fact, the trend is for new semiconductor facilities to incorporate comprehensive CMS programs from day one of operations.

The Chemical Strategies Partnership
The Chemical Strategies Partnership was formed in 1996 to promote this business model. It is a project of the Tides Center and is funded by the Pew Charitable Trusts and Heinz Endowments. The goal is to reduce the use of persist, bioaccumulative chemicals. Three companies in the electronics industry are participating: Raytheon Systems Company, Northern Telecom (Nortel), and AMP, Inc.

Each firm formed a cross-functional team with representatives from operations, procurement, engineering, waste management, EH&S, information systems, and other areas. The team defined the facility’s chemical management needs and assessed the potential for a CMS program to meet those needs. They used environmental accounting tools to: 1) estimate the true, life-cycle financial costs of current chemical management practices; 2) uncover savings opportunities within each facility from improved chemical management; and 3) provide a baseline of chemical costs and usage.

The Raytheon Example
Following the first round of materials accounting, the facility took steps to improve its paint application efficiency in its main painting area, resulting in an estimated 71 percent decrease in paint waste. Subsequently, they planned to install a system to virtually eliminate solvent use and VOC generation for many products, as well as eliminate redundant inks and paints.

They then went through the same process i
n the printed wiring board production area. The analyses revealed that management attention had been focused on reducing the more hazardous waste streams but overlooked the facility’s high volume general industrial waste stream, an under-managed cost driver as well. Significant changes were proposed to the facility’s waste treatment process to result in reductions in energy use, treatment chemical use, and hazardous waste generation. Conservative estimates suggest annual operating savings of $400,000 with minimal capital investment. They identified six different information systems and more than 20 discrete organizational functions supporting chemical management, revealing again the diffuse, complex, and surprisingly costly nature of chemicals in production processes. A conservative estimate is that the facility incurs management costs nearly equal to the purchase costs of the chemicals.

A corporate-wide team then developed a CMS program for the company’s U.S. operations. In February, 1999, a five-year $200 million contract was awarded to Radian International to purchase, manage and dispose of chemicals and gases for more than 50 of Raytheon’s facilities. The contract includes strong incentives to reduce chemical use, process efficiency and the unit price cost for chemicals.

Rooted in the quality movement of the past two decades, servicizing presents a rich opportunity to bring operational expression to many of the key underpinnings of industrial ecology: a life-cycle approach to product design; de-materialization of production systems; and closed-loop manufacturing processes. Servicizing facilitates all of these, but it does something even grander. It prompts business organizations to ask: What business are we in? What do our customers really want? What organizational configuration will best allow us to meet customer needs?

Edward Reiskin, Allen White and Thomas Votta, Tellus Institute, Boston, MA.
Contact Allen White at:
Jill Kauffman Johnson is a senior associate with California Environmental Associates, San Francisco, CA.

Chemical Strategies Partnership: The CSP Manual takes you the process step-by-step.
Read the article, Servicizing: The Quiet Transition to Extended Producer Responsibility.

Excerpted FROM the Journal of Industrial Ecology, Volume 3, Number 2&3, 2000.

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