Chemical Companies Becoming More Comfortable with Outsourced Contract Manufacturing
Chemical companies both large and small are more comfortable today than ever before with outsourced contract manufacturing, or tolling, as it’s commonly called. For many tolling is a first resort unless they have a proprietary product and want to handle the production on their own for intellectual property (IP) reasons. But when you look at the world of contract manufacturing, there are many trends, as well as compelling factors, that impact the supplier-customer relationship.
Recently, Lawrence D. Sloan President and CEO of the Society of Chemical Manufacturers & Affiliates (SOCMA) reached out to three global leaders who maintain hundreds of tolling relationships around the world to gain their insight on what customers and suppliers are looking for in a partnership. These industry leaders shared several tolling trends from the perspective of a US toller:
On the positive side:
- Rising wage rates and tightened environmental regulations have resulted in Chinese products being priced almost on par with the US, which has helped domestic tollers become more competitively priced around the world.
- These days fewer domestic specialty chemical plants are being built (there is a greater emphasis on building new petrochemical plants due to the fracking phenomenon). This is resulting in a greater demand for US tollers.
- Many larger chemical companies are going “asset light” these days with fewer fixed capital investments planned; this, too, is driving more domestic tolling business.
- Tollers have accrued a healthy mix of customers – ranging from small independent entrepreneurs to big multi-national conglomerates. This diverse customer base helps buoy tollers against the capricious nature of some international business.
On the negative side:
- China’s booming economy has cooled off, resulting in reduced demand for tollers overseas. Some tollers have experienced a decline in business in the US
- European companies have recently begun to export some of their tolling business to the US where their end customers are located; this in turn is creating new low priced competition for domestic tollers. There is widespread belief that the US economy is stronger than other global markets, thus helping to fuel this trend.
- Increasingly, more private equity money is chasing specialty chemicals. Private equity likes to invest in companies with proprietary technologies, but may view the tolling operation as “less attractive” and try to spin them off. Existing tollers could secure new bolt-on business as a result, or see heightened competition.
When it comes to the customer-supplier relationship, there are many factors to consider. First, a toller can offer the advantages of flexibility and time sensitivity due to just-in-time customer needs. A toller can also respond more quickly when it comes to putting “steel in the ground” and setting up pricing strategies.
“For a customer expanding into a new market that demands a new product, this new business may not be sustainable,” Sloan said. “From a risk perspective, it is better to rely on a toller who can make the exact quantity. A toller also has the ability to put in a capital project at a fraction of the cost and time. The value a customer can extract from a toller is much higher than what can be extracted internally.”
A toller can also offer a customer a complete technology package (the formulation recipe plus production of a new chemical), or just lease production equipment and other hybrid equipment. There is ample flexibility in the scope of work provided by the toller.
For customers managing capital re-investment, it is more reasonable to pay a toller 10 cents a pound extra for tolling rather than putting their own capital in the ground. “A toller’s internal decision process tends to move more quickly than that of a customer, especially for a large company that requires multiple levels of approval,” Sloan said.
What Customers are Looking for in a Tolling Relationship
Customers are looking for a strong environmental, health, safety and security (EHS&S) track record and exemplary history of regulatory compliance. Many factors go into this, and having a certification through program’s like SOCMA’s ChemStewards gives a positive indication. However, the certification does not automatically put them in a low-risk category.
Also, customers are looking for ways to maximize the utility of their assets. If companies require ancillary needs, they must go outside and procure the services of a toller; and finding the right fit is key.
Other key factors include: intimate knowledge about the process chemistry, responsiveness to requests for information, product stewardship accountability, emergency response protocol, and financial stability – this is particularly important criteria for longer term supply agreements. One interesting new requirement that applies to overseas tollers is a “no child labor” mandate that was put into place a few years ago.
“For those looking to outsource, here are the top five factors to consider: EHS&S record, product quality, reliability of supply, security – both IP protection and physical –, and financial stability,” Sloan said. “Remember, a tolling partnership can be a smart business decision if companies do their homework and choose a partner they can work with to meet their manufacturing needs, both today and tomorrow,” he said.
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