Category Archives: Business

Chemical Logistics

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Any chemical company manager will have to admit that order fulfillment isn’t over until the product is in the hands of the customer.  Chemical manufacturing isn’t just about running reactions in big pots.  It’s about attracting a skilled, reliable, and safe work force. It is about building a supply chain for the timely delivery of raw materials. It is about executing the manufacture of products in spec the first time through. It is about warehousing raw mats and products and keeping the stream of wastes moving through the system.

Chemical manufacturing requires the careful management of cash flow by minimizing costs and maximizing profits. The business office must attend to receivables and collect payments in the most expeditious way that customers will tolerate. This is no different that any other manufacturing arena- sprockets, fur caps, or rocket motors.

One of the key jobs required of any chemical company is the matter of managing logistics.  That is, managing the timely transport of raw materials onto the site and the transport of products off the site. So how does this affect the chemist??

The tender shoot studying chemistry in their junior year of college may not know it yet, but if their path is in the fabulous world of business, then some aspect of logistics may be in their future.  What kind of chemist would need some knowledge of shipping? Well, project managers, sales managers, business development managers, plant managers, procurement managers, etc.  All these positions are often filled with chemists and all have to have some knowledge of this topic.  And how does one get this knowledge? Why, on-the-job training, of course.

If you have read many of my posts, you know that I tend to prattle on about this. There is a reason. It is not uncommon for a sales person or a business development manager to spend no small amount of time with a customer trying to work out how the product will be delivered.  The transport of materials is complicated in proportion to the hazard and the chemical sensitivity to decomposition. 

Let’s say that you are in the chemical business and you are just starting the custom mfg of a trialkylphosphine.  The customer will state that they want say, 100 kg, of their R3P with a list of specifications (e.g., 99% in R3P, oxides < 0.1 %, etc, Karl Fisher water 200 ppm) for their new product. The customer has accepted the quoted price and the delivery date. Hmmm. Price, delivery, and specs. Sounds like everything is in place.

So, the question then arises: How are you going to ship it? Glass bottles? Drums? Polyethylene totes? Whoops, the material is excruciatingly air sensitive, so charging and discharging the product will have to be done airlessly. Sounds like a cylinder is just the thing. But what are the materials of construction? I seem to recall that phosphines are ligands, so can we really use a steel cylinder? Soft steel? Stainless steel?

But there is yet another question.  Do we offer the phosphine neat or as a solution? If the neat R3P is a liquid, we can move it around airlessly and charge a cylinder with it. If it is a solid, then it could be a serious problem to transfer it from a filter to a shipping container. How will you or the customer actually handle it? This is the kind of detail that chemists might find themselves groping with. If it is a solid, the customer might have to consider receiving it as a solution in a non-interfering solvent.

Then the matter of transporting it arises. In the present epoch of security theatre, air transport of any quantity might be banned. So, surface shipment will be needed. The matter of heated shipment may arise if freezing or precipitation is an issue. The last thing anybody needs is a cylinder full of precipitated solids in it.  Remember, if you are shipping product in a heated trailer in the winter, you may have stiff competition from other customers who need to ship their lettuce or strawberrys. In some locations, reefer trucks as they are sometimes called may be in short supply.

OK. So you’ve specified a reefer trailer for heated transport of the goods. Let’s say that the product solution will crash out precipitate at 15 C. In the trailer everything is just fine. Fine that is until the shipper reaches a transfer point and moves the product out onto the loading dock where it sits in the freezing weather for a few hours waiting to be put into another trailer. Or it sits in unheated warehouse space for a while.

Eventually, the cylinder of R3P solution arrives and, sadly, has precipitated and won’t come out of the cylinder. So there you are. The customer is unhappy and you now face having to haul it back and recover the product. These are the kinds of problems that chemists on the business side (the plow horses) can find themselves dealing with. Of course, the R&D chemists (the show horses) are rarely bothered with such things.

On Extracting Abstractions from the Abstracts

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One of the chores that must be done when developing a new technology is “Due Diligence” as applied to intellectual property.  In the fabulous world of industrial chemistry, there is an overlapping of the three great magisteria- Business, Chemical Science, and Law.  In order to get a new product or process on stream, we must find a line of sight through the many hoops and past the many gatekeepers of those magisteria that can obstruct our path the fame and fortune. 

First, allow me to pay homage to two great and wondrous database services- the United States Patent and Trademark Office (USPTO) and Chemical Abstracts Service (CAS).  They are the custodians of data generated by some of the most cantankerous and unruly people on earth- lawyers and chemists.  Their task is complex and effectively endless. 

In actually trying to do a reliable due diligence analysis, a searcher must ascertain that a proposed bit of IP does not conflict with claims in valid patents owned by others.  In a chemical IP search, one can divide the claim universe into 2 domains- composition of matter claims and process claims.  In the patent, the first sentence will state whether a composition is being claimed or that a process is being claimed. Some patents have both composition claims and process claims.

So here is the problem.  Let’s say that you are trying to determine whether or not you have the right to manufacture a particular molecule. This apparently simple question actually deconvolutes to two fundamental questions: 1) Is the composition of matter in the public domain? And, 2) are there claimed processes for it’s manufacture? 

There is a third domain and that relates to the use of the composition.  However, this does not impinge on the right to manufacture the material, just it’s use.

If the material is claimed as a 1) composition of matter in a valid patent, then you cannot lawfully make it or possess it (for commercial use, though precendence is being set for a bar on R&D use as well) without the permission of the assignee of the patent. Note that the owner of the patent is the assignee, not the inventor(s). If the composition of matter is not claimed, then it is in the public domain, assuming that you did not learn of it under trade secrecy. 

So, let’s say then that your target material is in the public domain. Now the question is 2); does your proposed method for its manufacture infringe on claimed methods? This may be a hard or expensive question to answer, and the reason is plain.  When you execute a search for IP issues related to a substance, you search path is limited to fields, key words, structures, CASRN’s, etc. that are flagged in the major databases. 

A CAS search on a given compound will lead to patent families that mention the compound, its preparation, or its use. But you have no way of knowing whether the patent reference claims the composition, its preparation, or its use.  It could very well be that there are no claims pertaining to the compound of interest- it was just cited as an example of some sort.

A CAS search is highly accurate in terms of the focus on a particular compound.  However, a USPTO search is not. A chemical search of the USPTO public database (USPTO.gov) is pretty much limited to a search for specific character strings.  It is possible to narrow down the scope of a search by concentrating on classification numbers, but I have never been convinced of its thoroughness.

After all of this set up, here is my point.  The problem we all face in doing our IP due diligence is that there is no direct means for determining from an indication in a database search report whether or not a composition is in the public domain. A CAS search will not yield a clear yes or no, and the USPTO database search only retrieves hits that have the requested strings.  Despite the advances in database technology, the user still has to collect all of the patent citations pertaining to the material and sift through them and interpret the claim language. 

Wouldn’t it be useful to the public if an applicant for a US patent were required to collate the claimed compositions for uplink into a database?  With such a “field” in a CAS or Beilstein search, you could tell in an instant if the composition was claimed. The same argument holds true for processes.  At present, the “retrievability” of claimed art is poor.

Patent attorneys are likely to object along the following arguments: not all patents that you retrieve from a search on CAS or USPTO will be valid.  Some patents will have expired naturally, others will have expired for non-payment of fees, and still others will have serious weaknesses that will only be apparent from an examination of the prosecution history as revealed in the file wrapper.  Abandonment may be difficult to detect for abstracting services, as would flaws in the prosecution as documented by the wrapper.

Another objection that is unlikely to be openly identified is the matter of clarity.  There is may be advantage conferred to assignees when a claim is a bit fuzzy.  This may afford some manuevering room during an infringement action, though it might be hard to say who the beneficiary would really be. I would estimate that whomever had the most persuasive attorneys would prevail.

It would be interesting to hear from others about this matter.

Importing Chemicals From Asia

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When you are involved with sales, you have to wake up with three words on your mind every morning- Sell, Sell, Sell. In the fabulous world of chemical business you can either make stuff or re-sell stuff. Sometimes you do both. After all, you can’t make everything.

A well run mature chemical business will have more opportunities than capacity. By contrast, an immature company may have more capacity than opportunities.  Many companies get to the point where they have to start choosing which customers they want to make the happiest because they are low on capacity. During the ups and downs of the business cycle, plant capacity goes from abundant to slim and back. It is the job of the sales person to keep the plant booked solid.

When your plant is at capacity, a funny thing happens.  It occurs to people that not all products are equally desirable. That is, some products are more profitable than others. When this is the case, management will start to wonder why they are spending scarce reactor time with products that are the least profitable.  Suddenly, products that have been steady money makers over the years begin to look a little anemic.  Pretty soon, these products are seen to be liabilities of a sort.  There is loose talk about pushing them back on the timeline; of offering 12 week lead times rather than 4-6 weeks. Then one day, they are off the production schedule. It has been decided that we can no longer afford to “neglect” other products because of these lower dollar products.

So what do you do? There is still a market out there for these orphaned products. Here is one option.  You outsource the product and resell it.  The trick is to find a supplier whose price is low enough to allow for a decent profit when you resell it.  In fact, this is a way to increase plant capacity without having to buy any real estate or pots & pans. If you can pull it off, you might even come out looking like a flippin’ genius.

The trick is to find a low cost source- preferably one whose selling price is less than or equal to your old manufacturing cost. This allows for the profits that are the same or better than before. So where do you go?  Commodity feedstock costs tend to be similar around the world. But in some countries, labor costs and overhead may be dramatically lower.  At the present time, Asia- China and India- are attractive locations for low cost manufacturing.

But, buying from Asia may be trickier than you think and for reasons that you have not considered.  Neglecting import duties which may add 0 % to 10 % (or much higher) to the cost, and neglecting tranportation costs and delays, you have to think about how the actual business transaction is going to work. 

Here is the problem:  You want to start buying from a new manufacturer or trading company in Asia.  Now, I’m not talking about the the pharma business- I’m talking about fine chemicals. There is a good chance that whomever you contact on the web is not going to be a factory person. It is likely that your contact will be a trader of some kind. This is very common in Asia. My experience has been that these traders will represent a “stable” of manufacturers who have some kind of agreement with the trading firm.  In fact, making a direct manufacturer could prove to be difficult if you are limited to internet searches.  The best way to meet manufacturers is at a trade show.

The contact is likely to want prepayment at least initially, unless your name is Pfizer or DuPont. So, you will have to send a purchase order and do a wire transfer of some funds. That’s easy enough.

The question is, do you really want to do a prepayment? What if there is a SNAFU and your payment is taken, but the product isn’t shipped? In the US, you’d have some recourse in the civil courts.  Or, what if the quality is inferior?  You might find that getting a replacement or a refund is … difficult.

I have not yet had a really terrible experience with importing. At least not involving anything underhanded. Most of the problems that I have seen involve logistics. Yes Mr or Ms chemist, if you are to be involved with outsourcing in a non-trivial way, you will have to learn about the transport of hazardous goods. International transport of chemicals, hazardous or not, is a multimodal affair involving ground transport on both sides and air or ocean in between- trucks, planes, container ships, FedEx, UPS, DHL, etc.  Some things you can ship internationally by air and others have to go by boat. Remember, there is no overnight to Asia or Europe. At least without hiring a private jet.

Outsourcing involves way more than just finding a vendor and a good price.  Before you commit funds to the purchase, you MUST ascertain that the stuff will arrive in a timely fashion.  It has been my experience that Asian chemical suppliers I am familiar with  have gotten really good in the manufacturing part, but they are often lacking in the logistics part. 

When you contact a new Asian supplier from the USA, it is critical to drill in to find out just how they intend to ship the materials and what the Incoterms are. And here is a really important part, so put down your yogurt and pay attention. You have to get familiar with Incoterms. It is critical that you understand who is responsible for arranging for what and where you take ownership of the goods.  The sellers price will vary depending on the Incoterms. 

A common term might be “Ex-Works”, meaning that the seller makes the goods available on the sellers premises, and it is the buyers responsibility and risk to arrange for transport from there.  EXW strongly favors the seller.  Other terms include CFR, “Cost and Freight”; CIF, “Cost, Insurance, and Freight”; FOB, “Free on Board”; DDU, “Delivered, Duties Unpaid”; and DDP, “Delivered, Duties Paid”.  All of these terms have specific meanings with the responsibilities and liabilities defined. These terms may be negotiable.

For an R&D sample, these transportation details are not a big deal.  But for bulk materials, you can experience failure modes you never dreamed existed. There are companies that specialize in the international movement of materials. It is always best to engage a logistics firm to help with the coordination. For example, if you were going to send a cylinder of butyllithium to Argentina, how would you do it?  See what I mean?

Chemical Advertising

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For the past eight years I have been involved in advertising the goods and services of my company.  I have designed a series of ads you’ve seen in C&EN and I’ve just recently gotten a trade name through the trademark process at the USPTO.  I have been deeply involved in the design several iterations of chemical catalogs and web-sites. 

What has been interesting about this experience is the chance to witness up close how the advertising business works.  I have been an industrial chemical sales manager, so I can spot salesmanship a kilometer away.  In some respects, my chronic exposure to it has built up a resistance to the enchanting ways of the art.  But I have nothing over advertising account managers (a.k.a, advertising sales people).  These people are smooth.

It has been said that 50 % of all advertising is wasted effort and money. The trick is to figure out which 50 %. Advertising is something you know you should do, but the question is, how much should you spend and what should the message be?  Ah, that is the trick.  An advertising rep will encourage you to spend as much as possible.  They understand your uncertainty and trepidations, but they are in the job of selling ink & space.

The uncertainty over what and how to advertise is always there, but it is possible to put some boundaries around it. You do this by having an advertising budget. At minimum, this limits the cash bleed out in advertising costs.  Pretty elementary so far.  Next you have to decide on a message and an image.  Sometimes the image is the message. Other times, you will want to trot out specific goods and services. 

Within your company, just as everyone believes that they are an expert in pricing, everyone will have the same certainty that they are an expert in how to design ads.  I bring this up because rarely will someone have complete and solitary control over the design of an ad campaign.  There will be input from all levels- from the janitor to the CEO- however, some opinions are more important than others. If the CEO or other officers of the company don’t like the ad campign, then no matter how brilliant or clever it is, the thing is dead.  Like death and taxes, it is an elementary fact of life.

Selling chemicals is not quite like selling fragrances, apparel, or cars.  In advertising chemical goods and services, you can’t overtly appeal to the vanities controlled by the gonads.  People do not buy chemicals to fulfill some notion about their identity.  They buy chemicals for the same reason people buy cordless drills, 2×4’s, and bolts.  They are going to make something else or use the chemical to achieve some purpose other than simply being in possession of the material.  Owning a pile of KOtBu or a drum of DMF does not confer any upper eschalon status that I am aware of. It might alarm the local authorities, though.

But there is one vanity that a chemical sales campaign can appeal to: that is the need to have achieved a good “buy”.  Being a smart buyer feels good. Having a track record of being a smart buyer will help your company and will give bouyancy to your career.  People are always looking for a good deal and the advertiser needs to focus on this need.

But a smart buy isn’t simply about low unit price.  Availability and quality are important as well.  Nothing sours people quicker than the realization that they have been duped with an inexpensive purchase of low quality chemicals or late delivery. So there is always the need to balance price with quality and delivery.

Some companies are very smart about this.  Take SAFC (“Aldrich”) for instance.  Aldrich tends to be a premium supplier of chemical products.  While their catalog prices tend towards the higher side of average, at least by my observation, you can depend on high quality and fast delivery. They have built a successful institution on high quality and excellent service.  When you pay $80 for a gram of something, you are paying for good quality stuff and the price of near instant availability.  The fact is, most people are willing to pay the price for availability.

So, while you can’t take the “Give Her Diamonds” approach of DeBeers, your chemical advertising campaign can appeal to the need to be smart and to look smart.  The way to make a buyer look smart is to offer a service that gives competitive pricing and timely delivery of quality goods.  Buyers always have a list of difficult-to-find materials as well, so advertising unique reagents and intermediates is often worthwhile.

The Most Important Reaction

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The most important reaction in industry is the one in which you transform chemicals into money.  It’s about adding value to feedstocks in some way.  A chemical is valued because of some property.  For instance, heptane might be valued because of it’s hydrophobicity, it’s inertness, it’s moderately high boiling point, the solubility (or lack therein) of some material in it, or all of these attributes.  

Heptane is a useful example because it is often used as a substitute for hexane. It has a higher boiling point than does hexane, which raises an interesting point.  The art of synthetic chemistry is in managing reactivity.  In R&D work, when faced with sluggish reactivity, we might be tempted to find more reactive components.  For instance, if sodium tert-butoxide isn’t basic enough, try n-BuLi.  If that isn’t basic enough, try t-BuLi. This series of bases from NaOtBu to n-BuLi to t-BuLi increases in basicity, but it also increases in cost on a $/mol basis.  The hazards also increase.  

But another way to increase reactivity is to increase the reaction temperature.  It is probably the easiest and cheapest way to do it, in fact. Of course, petroleum chemists have known this for quite some time.  Hydrocarbons that are normally inert in the ordinary range of temerpatures, say -78 C to 200 C, become reactive to HF or H2SO4 or zeolites at 300 to 400 C.

A reaction that is sluggish in refluxing hexane may perk up in refluxing heptane, xylenes, or mineral oil.  Most people seem to have an aversion to running a reaction at elevated pressure. This is unfortunate and may be due in some small way to lab culture.  If monies haven’t been provided for a Parr reactor in the past, then there is an “activation barrier” to trying reactions at elevated pressure.  Also, high pressure processing in scale-up is hampered by the requirement for bigger pots & pans with higher pressure ratings.  The practical limit for high pressure in a common metal reactor vessel might be 70 or 90 psi.  general purpose production reactors have mechanical limitations that bench chemists may not have considered.  The agitator shaft has a mechanical seal that is prone to leakage.  The pot will have numerous ports with valves that can can be weak points. General purpose reactors have heating/cooling jackets on them that can leak. All reactors have pressure relief devices called rupture disks that are set to predetermined relief pressures.  Glass lined reactors may have pressure limitations due to the brittle glass that lines the interior surface of a metal pot.

It turns out that in the chemical processing industry, high pressure capability is a capacity that relatively few company’s have.  High pressure capacity is niche work and is nice to have.  Most of us have to manipulate reactivity by other means. 

Lotsa TSCA

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One of the banes of life for a scientist in fabulous industry is having to deal with regulatory compliance.  And, in my opinion, one of the thorniest to contend with is TSCA– Toxic Substances Control Act. Now, for those people who make the same thing day-in and day-out, TSCA is practically invisible. In this mode, your product is either on the list and therefore approved for manufacture, or management has applied for and received some exemption from the EPA.  But for those intrepid characters who are in the business of making new stuff or just lots of different stuff on a regular basis, the question of TSCA compliance is an ongoing minefield concern. 

TSCA is promulgated by the EPA.  Basically, TSCA regulates what isn’t already covered by food, drug, agrochemical, cosmetic, and nuclear material regulations.  TSCA covers chemicals and formulations used in R&D and in general manufacturing.  The TSCA inventory is maintained by Chemical Abstracts Service. With certain exceptions, what is on the TSCA list can be manufactured freely and in any quantity.  The TSCA inventory has a group of listings for public viewing and a confidential group of listings. The balance of chemicals in the universe are those that are not on the TSCA inventory. These are problematic for manufacturers.

One important complication for chemicals that are on the inventory is the SNUR– Significant New Use Rule.  Even though a chemical may be on the list, certain uses may be restricted. So if you plan on manufacturing a product that is on the TSCA inventory, you really should look for SNUR’s.

A chemical product that is not on the public or confidential TSCA inventory cannot be sold for commercial use in the USA. Perversely, you can manufacture for export only.  Products that are not on the inventory can be sold at any scale for R&D use only, however. 

Let’s say that something is on the confidential inventory.  Unless you know this, you would conclude that a chemical is not on the inventory. Well, guess what? You can’t just call the EPA to find out if a chemical is on the confidential inventory. You have to submit an application as if you were going to file for real. If it is confidential, then the EPA will notify you on the normal application timeline.

In order to manufacture something for commercial use that is not on the TSCA inventory, you either have to get it listed by filing a PMN (Premanufacturing Notice) or you file for an LVE (Low Volume Exemption).  Also, any raw materials and isolated intermediates in the process have to be listed. If not, you have to file for those as well. So, initiating the manufacture of new chemicals is complicated by the requirement of performing numerous filings.

LVE’s have a 30 day evaluation period. If you screw up the application, you have to resubmit it and the clock restarts at zero again. The EPA folks look at the chemical process and all of the chemicals and evaluate the potential for harmful exposure to people and the environment.  They use numerous modeling programs to estimate toxicity and potential environmental insult.

In parts of the physical world like the lab or a production area, it is possible to have a physical disaster like a spill, fire, or explosion. In the regulatory world, you have administrative disasters.  And these administrative- or compliance- calamities can be just as costly and career threatening as an actual disaster in the plant. Fortunately, in an administrative disaster the body parts lying around are just metaphors.

[Note: I am not a regulatory specialist.  I acknowledge that I am a mere laboratory wretch and therefore deeply marbled with imperfections and inhomogeneities.  As god dog is my witness, I am prostate prostrate in supplication before those with superior understanding of this topic. I welcome- nay, beg- corrections, comments, and lashings from those with superluminal understanding of this most sacred codex.]

Processing on Demand as a Business Strategy

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Process development is one of the jobs I do.  Take an existing process and find ways to make a compound faster, better, and cheaper. The matter of condensing multiple steps into fewer steps is called “telescoping”.  One of the most desired outcomes of process development is to find a way to execute a reaction with fewer labor hours and maybe even higher yield.

My comments are in the context of specialty chemical manufacture. In this domain of industrial activity, it is not unusual for a specialty chemical to be campaigned for production on demand (POD).  That is to say, instead of building an inventory and letting it sit for some time period, it might be more desirable to make material when an order comes in.  This is a valid strategy for products that have a poor shelf life or for compounds whose demand is sporadic. 

But, there are economic arguments for and against POD. On the negative side, the lack of inventory can cause customers to go elsewhere for orders that have to ship immediately. Not every customer can wait until the next hole in the production schedule for a shipment.  Also, unless one has confidence in projected demand patterns and has made a successful business case to management for excess production, POD esentially dooms one to a perpetual cycle of smaller scale production runs with the concommittant smaller economies of scale. 

On the vendor side, getting an accurate picture of demand can be very difficult. The reason is that the manufacturer of a specialty chemical is not often connected to the “final” end use of the product, so timely and accurate market data might be considered proprietary information that the direct customer is not willing to share.

On the positive side, POD assures that the dollars invested in inventory are kept to a minimum.  Management has to be watchful of inventory levels.  It is possible to accumulate large dollar investments in inventory.  Having a million dollars of slow moving inventory is equivalent to having a milllion dollars of working capital sitting on pallets that you can’t use for other applications.  But for POD to work well, the plant must have some excess capacity. And one of the reasons we have sales people is to fill up that excess capacity. So, POD may not be a strategy that works all of the time.

A fair question might be the following- why should an opportunity for process development even exist on an current process? In other words, why wasn’t it done to begin with?  Fair question.  There are a few answers. 1) In the race to get a product to market on schedule, there usually isn’t time to explore all of parameter space. Often, to meet obligations that our friends in the sales force have made, the development timeline can accomodate only a certain amount of R&D activity before something has to go to the pilot plant for scaleup.  2) The reality is that any given R&D group is likely to chose certain favored synthetic approaches from their particular tool bag.  The solution to a scaleup problem is not automatically a global solution to the problem.  A great many syntheses have alternative approaches that may find favor in a particular group. Especially if the literature search was truncated in some way.

In science it is always good to reevaluate your fundamental assumptions, and in manufacturing it is the same.  No process is perfect and every one can be tweaked in some way to optimize the economics.  Some companies have special staff to do just this thing.

Many of us have joked that it is possible to make anything in a single step if only you had the right starting materials.  True enough.  But manufacturing as a profit generating activity requires that value be added to raw materials to produce profitable finished goods. This forces manufacturers to vertically integrate a process to some extent so as to allow for sufficient added value in the finished good. In other words, the more art you can apply to the manufacture of a product, the greater the chance that several of the steps may be highly profitable. 

One way to think about high $ per kg boutique products is as follows.  A product that requires considerable art (skill) is likely to be one that has a mfg cost driven by labor costs.  Products whose costs are driven by labor are products whose costs can be driven down more readily than those driven by raw material costs. A labor intensive product stands a better chance of cost improvements than does a raw material cost intensive product.  The reason? Improved throughput in units per hour already cuts unit labor costs.  You get the picture.

Chemical Pricing

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I never cease to be amazed at how the market can drive down pricing on even the oldest, most venerable products on your product list. I’m not talking about the prices in the Aldrich or Strem catalogs.  Catalog prices are basically of a retail nature and are set in an atmosphere of open information. That is to say, pricing can be set against a background of easily available competitive intelligence. If you want to be competitive, you can match or undercut your competitors pricing. 

This discussion pertains to specialty chemicals, as opposed to commodity chemicals. There is a large difference in the pricing approaches in these two market domains. Commodity chemicals are the domain of high volume, low margin.  Raw material costs tend to be price drivers.  Commodity chemicals are frequently made with continuous flow processing and the economy of scale has been maximized to the fullest.  Many commodity chemicals are actually economic indicators- sulfuric acid, superphosphate, hydrocarbons, etc.

There are several ways to set prices of a chemical product.  One way is to calculate your unit costs and add your profit by applying a predetermined multiplier for the markup.  This is the cleanest way from the accounting point of view. It allows for easier sales forecasting too.  If you can estimate the unit sales for the year, you can estimate the expected profit as well.  This helps immensely if you need to plan for capital expenditures with your future cash flows.  And if you are in a growth period, this can be critical.

In a rational setting, pricing is optimized to afford maximum profit.  Pricing needs to be low enough to attract a maximum of orders, but high enough to afford a maximum profit. Notice the use of the word “maximum”.  Profit is about extrema on curves.  You seek to find the cost minima and profit maxima. Sounds straightforward enough.

But pricing is rarely a purely rational decision. In the commodity arena, raw materials are also commodities and their rough pricing is readily available to all players.  Their negotiated prices may not be, though. But by and large, commodity raw material costs are fairly well understood by all.  In the commodity arena, pricing should be most “rational”.

In the chemical specialty arena, that is, the arena of non-commodity chemicals, there is a greater chance that pricing may not be entirely rational. That is to say, absolute or global cost minima may not have been found and profit maxima may not have been realized. 

Specialty chemicals are for the most part lower volume, higher margin, products where labor costs are often the driver. They may be “Fine Chemicals”, which I’ll define as public domain products that are above what you might call a “technical grade”.  Public domain products are those products that are free in composition to any and all buyers. However, while many chemicals are public domain in composition of matter, they may be severely restricted in “use”.

A specialty chemical, by it’s nature as a lower volume domain, is subject to pricing complications that commodity chemcials may not be.  Many chemical catalog companies have a bulk chemicals division that isn’t easliy visible to the R&D scale consumer.  While their bulk product list may be generally available, pricing is often obtained only through a quoting process.  In other words, bulk pricing isn’t posted for all to see. To get a bulk price you have to ask for a quote, which means revealing your identity and how much of what product you need. Bulk specialty chemical business tends to be fairly secretive about pricing. One way around having to disclose yourself to a vendor is to use a sourcing firm.  But this comes at a price. Minimally you’ll spend ~7 % or more to do your purchasing this way.

Here is some insight into the process.  Specialty chemicals are frequently used in proprietary processes by a customer.  There is an understanding that a vendor will not disclose the details of who inquired about what.  Mainly, it is because the vendor does not want the competition to court the potential customer and take away the business. Another reason is that the customer regards secrecy as important because costs and volumes can be a giveaway to their competitors as to intimate details of their business. You just don’t blab about who wants what.  It is a silo effect.  It is quite difficult to find out who is buying what.

The secretive nature of bulk pricing means that a company is often poorly informed about the competitive pricing picture of its products. In order for a market to be rational on a short time frame, there needs to be prompt feedback, particularly on why a bid was not won.  This seems obvious, but in practice, a sales group may be quoting many more bids than that can follow up on.  It is easy to fall into the trap of being more busy chumming the waters with bait than hauling in the fish. A properly operating sales force is busy sending out quotes and doing follow up communications to see how the quote was received.  This allows the sales people to adjust prices and terms on the fly.  This is absolutely critical to maximizing sales. And a really good sales manager is one who insists on followup data to energize the feedback loop.

Bureaucratic Stem Cells

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In some ways a company in it’s early years is like a stem cell.  It has the capacity to grow into many types of organizations. At some critical juncture a signal comes along that points it one direction or another. It can grow into a free form organization like the legendary Silicon Valley startups where imagination is expected, there are free cokes in the fridge, and there are open spaces where employees can toss Nerf balls. On the other extreme are organizations that wear a more grim decorum.  My experience has been that the petroleum and automotive industries are a little tighter in the puckerstrings.  Companies evolve in response to their circumstances and in response to the people who run them.

As a company grows, it has to take on more people to manage the workload. But a bigger head  count means more degrees of freedom; that is to say, there are more nodes in any given decision tree; more ways of doing things; more preferences to be managed.  A bigger head count means that more failure modes are possible. More ways of having a disaster.  More ways of having people problems.

In response to this, even the most well intended business founder must develop systems to contain and direct the energies of its people. Some people naturally pitch in and contribute to the good of the whole. Others specialize in gaming the system to their advantage.  But the overall tone of any organization is set by the leaders.  Some are old testament and others are new testament.  Some require stonings and blood sacrifice and others use the redemption approach.

Business isn’t just an math exercise. There is a lot of anthropology to it. Unfortunately, anthropology isn’t on the curriculum of most MBA programs.  MBA’s worry me. They seem to be hustling the rest of us into an Orwellian future with methodologies taught by faculty that may not have actually been business people. 

Readers may doubt the merits of this conclusion.  But, wait until you take a personality profile test to qualify for promotion or a job.  The examiner will sit you down afterwards and tell you that the numbers say that your path has already been determined by this profile.  What do you think the psychology graduates have been doing the last 30 years? Not all of them have been doing marriage counseling all this time. Many have been developing these test “instruments” for consultants and HR departments.  It’s a scary world.