It was interesting to note in the recent C&EN report on the Top 50 chemical companies that among the most profitable was Sigma-Aldrich (SIAL), or colloquially, Aldrich. Sigma-Aldrich controls an expanding complex of companies all targeted for more specialized domains of chemical technology. Anyone who has received an invoice from Aldrich would not find their profitability surprising. But what most customers may not realize is the extent of relatively transparent infrastructure that has been put into place to enable this profitability.
Aldrich is not profitable merely because their prices are, well, high. Aldrich is profitable for some subtle reasons as well. Easiest to recognize is their shrewd choice of market. Aldrich’s customer list includes nearly every research and academic chemistry and biology department in much of the world, or at least anywhere FedEx delivers. What is important about the R&D market is certainly not the volume of chemicals each research group orders- 5 g here, 100 g there, a liter of this, or 50 mL of that. Rather, it is the constant buzz of orders coming in for premium grade (and premium priced) chemicals virtually all of the time. While each order may be modest relative to bulk chemical transactions, a constant stream of orders begins to add up.
What is shrewd about focusing on the R&D supply market is this: Over time R&D money is relatively constant. The big academic and institute money is federal in origin and as such tends to be reliable in supply. Out in the world, projects start and projects end continuously. It may not be reliable to an individual researcher, but overall, the monies are dispersed every year and someone out there gets them. So from a marketing view, the players in the game may change, but the spring of money flows every year.
Other people develop the Next Big Thing and SAFC supplies the raw materials. Just like the gold rush. A few miners hit a big strike. But the more reliable money came from selling supplies to the miners.
As I alluded above, Aldrich charges a premium price for its products and, to my knowledge, has never discounted its wares. It offers a valuable service and is unapologetic about how it does business. Any given product in the catalog has a substantial markup on it. I think that many people find this galling when they compare 25 g unit prices to bulk prices. But I would caution that there is a substantial and unrelenting cost associated with having certified quality material prepackaged and waiting on a shelf in some warehouse.
It’s easy to get bulk pricing- buy in bulk!
A bottle of maleic anhydride sitting on the shelf is functionally equivalent to cash sitting in a bottle. You have to pay up front to have material in inventory and the cash or credit used to buy the inventory could have been used to do other things. It could have been given to Warren Buffett for investment or to the stockholders. Management has a fiduciary responsibility to the stockholders. It is to provide the best possible return on stockholders investment.
Another hidden talent of Aldrich is logistics and distribution. Getting things to where they should be on time does not happen easily. Much of Aldrich’s success depends on its ability to move product into and out of inventory rapidly and accurately. On the input side, purchasing, receiving, quality control, manufacturing, and warehousing are highly organized to assure that orders can be fulfilled when the time comes.
When the order does arrive, the business data system has to issue the right part number from inventory and be assured that there is no shelf life problem that would disqualify the product for sale. Any chemical product must have a certificate of analysis, an MSDS, and be available in the right unit configuration, or SKU- stock keeping unit.
Order fulfillment involves entry of the purchase order into the data system, issuance of a work order to obtain the material, pulling the SKU from the inventory data base, and sending the order to shipping for final containerizing for land, sea, or air shipment. Here, the product must be packed in a way to conform with DOT and IATA regulations. Shipping documents must be packed, boxes placarded, and the parcels must get onto a truck for delivery. Foreign deliveries are complicated by customs issues, which often include inspection and import duties. Customs clearance is a subspecialty in the shipping world.
In many ways, making the chemical is the easiest part. Getting clean product is just the beginning of the adventure in product distribution.
Growth occurs by acquiring new brand loyalty and by expansion of the collection of products. One stop shopping for lab supplies. The “80/20 rule” applies to such collections of products. This rule of thumb states that 20 % of your products do 80 % of the business. Chances are good that this ratio is even more skewed than 80/20.
So, one way to grow is to expand the collection size. This ensures that as much demand is covered with product as possible.
Another way to grow is to dial in annual price increases- say 5-7%. This renders the prices in the catalog obsolete soon after they are distributed, but that is unlikely to be fatal to any given buying decision.
Lamentations on Chemistry 