Back in grad school, when I was a younger and more innocent chemist, I never gave the matter of purity specifications much thought. Well, let me qualify that. If my Aldrich reagent was 98 % or greater, I was usually happy. Yeah, there is the matter of water and a few other things, but for the most part specs didn’t pop into my radar very much. The other cats and dogs in the material usually washed out somewhere along the reaction sequence.
The issue of specifications in the fabulous world of industry, however, is a really big deal. Indeed, for a company that does custom synthesis or is otherwise agreeable to starting up production of a new product, the matter of negotiating specifications is strangely complex. Customers have expectations of how pure their product should be and the manufacturer, that is, those who are grounded in the bitter reality of chemical processing, may be far less certain as to what constitutes a reasonable specification. This is nothing new or secret. All other manufacturing industries have the same issue.
I previously said that the matter was strangely complex. Before the customer and the manufacturer can agree on a deal, they have to resolve the matter of what is needed vs what is wanted.
Here is a case study: the customer initially specifies 99.0 % purity, white crystalline solid, and no greater than 0.2 % residual solvent. And they want it for $100/kg for a metric ton. Fine, you say, it’s a hundred kilobucks worth of business. We’ll go in the lab and front run a process. This way we’ll be able to give the customer a qualification sample, and just as importantly, get an idea of the process economics.
The chemist does a representative front run and reports the following. The process produces 68 % isolated yield of off-white powdered solid that has clumps, 1H-NMR shows that it is 98.3 % pure and it has 0.5 % residual solvent. The product is a first crop and the solvent is a high boiler like toluene. Analysis of the mother liquor shows that there is an additional 21 % of product remaining with the balance of the mass as unidentified colored components.
This is a node in the decision process for the manufacturer. From this result, we have to make a business case to go forward or decline and offer a “No Quote”.
The customer has expressed a preference for a pricing set point of $100 per kg for a metric ton. It is hard to know if this price and volume are just posturing or if they are firm numbers. More often than not, the customer will decline to disclose an upper price limit. Remember, the buyer’s job is to get the lowest price and the sellers job is to get the highest profit. It is common for a buyer to ask for a quote on a volume higher than they intend to order just to see where the price/volume curve flattens.
The first thing to notice is that the first crop fails to meet the specifications all around. Low purity, high residual solvent, off color, and clumps of powdery material instead of free flowing crystalline product. A estimate of the cost of manufacture suggests that the raw material cost is about $38 per kg and the labor and overhead cost is $52 per kg. The first pass doesn’t look good- estimated costs are ~$90/kg for off spec stuff. Irrespective of the product’s compliance with the spec, if your sample is truly representative it might be worth sending a sample to the customer anyway. You never know. The customer may recoil in horror or find that it works in their process despite being “off-spec”.
It is at this point that the sales or business development manager has to make a decision- Are there any insurmountable problems with the front run? If not, we have to decide if we want to risk R&D time to do process development to tweak the process to give product that meets the spec. Remember, time = money.
The good news is that the purity is only slightly low, the residual solvent can be pumped down in a vacuum oven, and the clumps can be sieved out. But remember, too much “polishing” will tend to increase labor costs per kg of product.
The color appearance is another matter. It might be resolvable within the customers price constraint, or not. The transition from off-white to just white can be a difficult change. Whiteness is surprisingly subjective and dependent on particle size. And, particle sizing can involve a lot of art. If the product were a $100,000 per kg pharmaceutical, there would be much more motivation to get the color right. Remember, it is only a $100,000 sale. One could easily burn up all of the profit in an prolonged period of process development and pilot plant time before you even sell the first kilogram.
Product appearance would be a good candidate for negotiations with the customer. Try to get them to give up white for “white to off-white”.
The price is another problem. It is too low. It is desirable to have 20 % profit after interest and taxes, just like the pharmaceutical folks report. A good rule of thumb is that the total manufacturing cost should be approximately 50 % of the price or less. This is highly variable and subject to the company’s accounting practices. So, just for arguments sake, let’s say that we need to get the price to equal twice the cost.
To come in with a reasonable profit, we have to get the manufacturing cost down to $50 per kg. The raw material costs were calculated at $38 per kg. Raw material costs are the least flexible, so that leaves little room for labor costs at a targeted $50/kg mfg cost. The good news is that the labor costs are higher than the raw material costs, so at least there is some hope for bringing the total cost in line. Labor costs can be brought down with processing experience and innovation. The learning curve is real and good plant manager can bring labor costs down over the product lifetime.
In this circumstance, I would vote that we go forward with the product if we can initially keep the mfg costs at 65 % of the price or lower. I would also vote that we send a representative sample to the customer for evaluation. In the mean time, we can do a bit of R&D to find a better process.
Finally, one of the business risks for a manufacturer is the issue of “specification creep”. Initially, a manufacturer will agree to produce a new product with a particular set of specifications. However, if the customer is simultaneously developing their use of this chemical in their new product while you are developing this chemical process, a gap in specifications might occur. In other words, the customer might begin to tweak the product specs while you are in the middle of process development.
The customer will call one day and try to add a specification. They will find that a previously obscure side product will present a big problem for them and they’ll indicate that the project will require higher purity. Well, this might be a big problem, or not. If it requires a tighter fractional distillation, assuming you can do it, this will probably add labor costs. If it requires further decolorization or reduction of residual solvent, R&D will be required to validate the changes to your process. It is actually a big deal.
So, why not just say “NO”? Well, in all likelihood, you have not been paid yet. Few customers will pay for development in advance. Those costs have to come out of future sales. It is a lot like boiling the frog. You just ramp up the temperature imperceptably and the frog never notices that he is being cooked. The same effect can happen with specification creep. By being willing to work with the customer you’ll find that at some point it becomes too costly to go forward at the arranged price.
At this point you have arrived at the hardest part of doing business- the part where you have to say NO to a customer. Some people can’t do it. Honestly. But if you want to survive, you have to set boundaries. The customer will understand. This is where good communication skills come in. It is always desirable to give bad new earlier than later.
Lamentations on Chemistry 