Category Archives: Economics

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.

Market Pull and Technology Push

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The chemical business is, after all, a business.  You have to make something that somebody wants. Brilliant ideas are a dime a dozen. Getting a new product to market is harder than you might expect, even if you have a purchase order in hand. The transition from bench to 1000 gallon reactor is often full of unanticipated problems.  The process of forcing a new product or technology on a market that didn’t exactly ask for might be called “Technology Push”.  The process of responding directly to a clear market demand is called “Market Pull”.

Market pull is a force that business types, especially the MBA’s, feel best about.  It is easy to justify the allocation of resources to launch into a product development cycle that addresses a clear and quantifiable demand.  Duh. It’s a no-brainer. That is, if there are no bottlenecks to get through. The merits of market pull are only valid if the proposed technology has been shown to work to specifications. Beware of the inventor who cannot produce a prototype to back his/her patent.

Technology push is a circumstance wherein a company has a product or technology that might stimulate demand if it were marketed properly.  Now, an economist might say that there is no such thing as stimulating demand. They’ll patiently explain that this only stimulates an underlying demand that may not have been articulated. Whatever formalism you prefer, it is possible to dazzle potential customers with a new capability.  Clever people can dream up applications that the original inventors could have never anticipated. Look at Symyx with their fantastic technology package for high throughput experimentation.

It is a bit easier to write a business plan based on market pull because the job of forecasting revenue flows should be based on measurable market conditions. Again, the assumption is that the proposed response to the market pull is a technology that works.

A business plan based on technology push has to incorporate estimates of acceptance of change. You see, technology push is the realm of the paradigm shift.  Predicting outcomes from the early side of the timeline is very tricky.  Customers for paradigm shift technologies may be scarce.  Not all companies are interested in being an early adopter or a buyer of first generation technology. 

Market pull is the domain of orthodoxy, of the rightous and proper company president who is also a CPA and who worked his way up the ladder from the accounts receivable department. Technology push is the domain of the engineers and scientists.  These are the dreamers who know in their hearts that if you build it, they will come.

Successful technology companies are somehow able to give a voice to the technology people in the allocation of resources.  Very often, these companies are managed by chemical engineers. While ChemE’s may not be trained in advanced synthesis R&D, they are involved in the scale up and economics of new processes.  Chemists live in a 2-dimensional world of space and time.  Chemical engineers live in the 3-dimensional world of space, time, and money.  Their knowledge of economics is what causes them to rise to the top of the corporate ladder more frequently than chemists.

It seems to me that companies that thrive today are those who do both market pull and technology push. Market pull is the cash cow.  Technology push is the seed corn for next years crop.

The 80/20 Rule

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Having done my tour of duty in chemical sales and having travelled over a good bit of the northern hemisphere buying & selling, I’ve picked up a few insights into the B2B and “retail” chemical business.   Everyone has the major chemical catalogs on their desk. You know, the thick tomes from Aldrich, Spectrum, TCI, Matrix, Strem, GFS, Gelest, Fisher, etc.  There is considerable overlap in content, though some specialize in their chosen niches. While Aldrich makes no bones about total world domination, others are pleased just to dominate certain cul de sacs of chemistry. 

SAF is clearly the colossus of international catalog companies.  The Aldrich wing was started by Alfred Bader, now a retired art collector. To hear him tell it, Bader was frustrated by the limited availability of reagent chemicals and spotty service (by Eastman Chemical, if I am not mistaken).   Anyway, Bader was the right character at the right time.  He had a single-minded drive to give chemists what they needed and make a few bucks doing so. The slogan “Chemists Helping Chemists” was a the result of a sincere calling.  Bader visited university chemistry departments and asked professors what they needed.  Over time the Aldrich catalog collection grew and so did the company. Eventually, Bader was quietly forced out of the organization.  Founders can become “problematic” evidently.

Today SAF offers a vast collection of products and makes a sizeable fraction of what they offer.  Most professors don’t know it, but interesting materials from the lab might be saleable to a catalog company. If a prof has developed a new reagent or some useful fragment or pharmacophore, for instance, it might be worth contacting a catalog company to see if they want to stock it. You never know until you ask.

But we business types know that dealing with professors can be sticky, so Herr Doktor Professor, don’t get too high handed or greedy!  Academics are often missing the merchant gene and as a result badly price their wares.  The typical mistake is to over-estimate the demand and hike the price up to the astronomical numbers that you see in the catalogs. 

Here are the problems. Catalog companies do not pay the prices that you see in the catalogs. Buying material for inventory is equivalent to putting a stack of money on the shelf.  They have to pay lots of money up front before the first purchase order for your wonder product is faxed in. They have to pay for those damned fat catalogs, the inventory, salaries, the facility, regulatory compliance, certification, labeling, packaging, the time value of money, taxes, and they have to make a profit for the shareholders. So if the catalog price of something is $10 per gram, figure that they’re likely to keep their costs to $2 to $3 per gram for it, tops.  Obviously, this is subject to variation due the type of material or special negotiated deals.  But a 3x to 5x markup is not uncommon and is necessary to stay in business.

Then, after you ship the product to the catalog house and they put it into the collection, it might not sell.  It could be a dog.  The rule of thumb is that 20 % of your inventory will do 80 % of the business.  So, one of the ways to grow is to increase the number of products. Their interest in your product may be of a statistical nature rather than a firm belief in it’s viability.

I’ve heard many people go off about high catalog prices. I don’t like to pay the high prices either. But it is the cost of convenience.  If you need some obscure material, chances are that you can order it and have it in a few days. That is worth something and the catalog companies know it.  Hell, I’d do the same thing.

Scathing Diatribe on RTIL’s

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The 2006 ACS meeting in SF was interesting. In a much earlier post I lamented the recent trend of boring ORGN section meetings. That was definitely not the case this time around.  Of course, there was the usual assortment of faculty rockstars with their fawning groupies (OK, I’ve done that too). A lot of interesting insights into obscure stuff.  But I have to say that there was more buzz in the air in the ORGN talks.  My favorite profspiels included Toste, Doyle, Knochel, and Trost.

This time I noted a distinct lack of talks on room temperature ionic liquids (RTIL’s). After far too much breathless ballyhoo, the worker bees in this “area” seem to have hunkered down a bit.  Do I sound cynical? I have actually developed a manufacturing process for a commercial RTIL species. I can say that the economics of RTIL manufacture and certain kinds of applications of these expensive solvents can be awful.  At least awful in direct comparison to solvents like THF, toluene, ether, etc. If you’re using an RTIL, say, in a two-phase catalytic extraction process, then the comparison is faulty and the RTIL may be quite efficient to use.  However, if you need batch reactor volumes, i.e., 50 to 1000 gallons, then the batch process costs may require scientific notation.

Even pharma companies with deep pockets extending to the MOHO layer will worry about these economics.  In order to justify an $50-$250/kg solvent (!!), there has to be some whiz-bang process improvent to justify such costs.  In batch processing, RTIL’s are prone to the concentration of ionic species or water from the previous run. The practical consequence of this is that the RTIL may be a different material from one run to the next. It may or may not be an issue. But you’ll have to investigate and qualify it. You may have to polish the solvent (!!!) after each run to qualify the subsequent use of the RTIL. How green can that be?  

I cannot speak from the perspective of a pharma industry chemist. But I can speak as someone who makes specialty products for the pharma business. From bitter experience I can testify that the last thing you want to be is the supplier of the most expensive reagent in the customers process.  It is like a rock in their shoe. They’ll squirm and fitch around until they find a cheaper supplier or engineer a way around the offending reagent. Hell, I’d do the same thing in a heartbeat. Nothing wrong with that. But it is this sort of raw cost pressure that makes the commercial viability of RTIL’s difficult. 

The disposal of bulk RTIL’s may be expensive too.  Since as a group they are resistant to incineration, the natural question is- How do we safely and ethically dispose of bulk RTIL’s?  I’m sure that someone out there in the blogosphere has a comment on this.

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