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— By
Katherine Bui, Lubricants World As printed in the ILMA Report,
February 2000
Independent lubricant manufacturers accustomed to working
in a stringent competitive market may have to rethink their way
of conducting business. A trend popular among original equipment
manufacturers involves contract chemical or fluid management.
The move means lubricant suppliers may find themselves
working beside their competitors under the direction of a chemical
management firm. Haas Corp. (West Chester, PA), for example, has
spent the past several years working with independent lubricant
manufacturers such as Elf Lubricants North America (Linden, NJ)
and Castrol Industrial North America (Downers Grove, IL) and with
other tier II suppliers to provide chemical-managed programs to
such customers as General Motors (Detroit, MI) and other assembly
plants.
The Cost of Conducting Business
Thaddeus Fortin, Haas’s chief executive officer, says his
company’s experience with a system of consolidated lubricant
suppliers has worked to the benefit of the end-user. Fortin says
the program can save customers as much as 10%-15%. According to
Fortin, the savings do not include reductions in “soft costs,”
such as paperwork, material handling, inventory carrying, waste,
and environmental, health and safety requirements.
Because proprietary information is involved, Fortin
is restricted from revealing specific contracts or company names.
However, he is able to provide hypothetical examples of gradual
cost reductions in lubricant products and services.
Before evaluating the scope of a program or the cost
reductions, Fortin said, an internal team from Haas collects the
technical requirements and the chemical scope, which might include
a 2-year history of the chemicals or lubricants a plant has been
using. The team plugs the information into a pre-set Haas formula
in order to come up with several options for reducing costs. The
company might, for instance, guarantee the savings under a 2-or-3
year plan.
“For example, if the lubricants and services
cost $2 million, we work with the suppliers to reduce the cost to
$1.75 million the first year. Then we reduce it to $1.65 million
the second year, until we reach $1.5 million in the third year,”
Fortin says. “Normally, it would involve the suppliers’
basing their cost structure on services rather than pounds or gallons.
The process results in less emphasis on products and more on the
quality of the service. In one case, [a manufacturer] might be compensated
for every car or truck produced rather than for it’s individual
products.” Despite the reduced sales, he says suppliers may
see up to a 50% increase in margins.
Fortin says that on the surface the system appears
to discourage product development, but optimizing the product line
is actually the single most important feature in chemical management.
“If our customer has been purchasing 100,000 gallons/year
of cheap hydraulic fluid at $2/gallon, the cost of eventual repairs
and downtime might not be worth the savings,” Fortin says.
“We might advise our customers to use fluid with a longer
life that might cost a little more. At $5/gallon, of which we would
only need 20,000 galons/year, we might save $100,000.”
Another aspect of chemical management involves waste
treatment and reduction. “At times, we have to consider that
the cost of a product could increase seven times its purchase price
because of the waste treatment,” Fortin says. “The acquisition
cost is small compared to the total cost of usage, inventory handling,
and health and safety. That’s another reason we prefer products
with longer life.”
Opening Opportunities
In a chemical management system, a tier I supplier, such as a chemical
management company, would contract lubricant suppliers called tier
II suppliers to provide the services and fluids in the maintenance
of a plant’s equipment. For grease or specialty fluids, for
example, a tier III supplier may even have to be called in to provide
the products that the tier II suppliers cannot.
"Independent Lubricant suppliers might initially
perceive us to be a threat to their way of conducting business,"
Fortin says. "They should see this process as a business venture
that opens up more opportunities. If they provide a good service
or product, we might be able to reward them with other businesses
or bids they might not know about."
Outlook
“It used to be that sellers wanted to sell as much of their
products as possible, even if the customers did not need to make
the purchase. At some point, lubricant suppliers will not be able
to sell to end-customers anymore,” Fortin says. “End-users
are moving toward chemical management. That is not to say competition
will not be as stringent. Suppliers will still have to optimize
their operations in order to provide more services and be attractive
to chemical managers.”
However, Fortin says, chemical management opens more
opportunities for suppliers, while relieving them of responsibilities
they may not be able to handle. He says it also reduces the cost
of operations for end-users. Fortin says that in the end, chemical
management benefits both suppliers and their customers.
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