Edward Huller is vice president, global supply chain for Borden Chemical Inc. He joined BCI in 1999, with the task of developing a world-class, integrated supply-chain strategy for the company. He began his career in corporate logistics with Dow Chemical Co. in 1970. His responsibilities have included production planning, logistics, purchasing, international distribution, economic evaluation, order fulfillment and process design.
Q: What is the greatest supply-chain challenge that you face today?
A: It's increasing productivity within our supply-chain operation. In general, we're focusing on taking cost out of our system, both in terms of the cost to procure raw materials, which represents a very high percent of our cost of goods sold, and logistics and inventory costs. Those are three of our primary drivers.
Our customer base is primarily in the forest products and chemical industries, which are going through very difficult financial times. We are strongly focused on reducing our customers' overall cost of supply - to allow them to remain competitive over the long term - as well as on reinforcing our market leadership position.
We have a particular emphasis on freight and logistics procurement costs. We run a supply-chain model that involves a number of small plants located in end markets close to the customer base, and which is driven by logistics economics. Over the last couple of years, our business units have been focusing on sales and operations planning, and how we optimize that network of regional plants. This is an industry that's experiencing a lot of consolidation, both within customers and our supply base.
Q: A lot of this would be considered good business practice anytime. Is it more of a concern now?
A: It's about survival today. Historically, the customer base of our industry has been made up of a lot of small and mid-sized companies. As products become more commoditized, the survivors have to be extremely process-focused, and live with ever-greater pressure on margins. We're looking to leverage larger volumes, both in terms of purchasing raw materials and logistics, and optimizing our asset base. For us, these are basic fundamentals that we have to excel at, to simply survive going forward.
We have also reorganized to create a global business focus for those units serving global markets. There had been an earlier attempt to move upstream, back to some more basic raw materials - that was the Melamine [Chemicals, Inc., a maker of melamine crystal] purchase. Clearly, the company is focused on the industrial thermoset resin business. We are the classic market leader, number one or two in most of the markets we're in, and that is what we're choosing to focus on going forward. We have also had some relatively recent management restructuring in the company, which has helped us to create that new focus.
Q: In a business that has historically been extremely price- sensitive, what have you done within the supply chain to maintain or improve margins, and keep costs down?
A: It is very price-sensitive. It is a volume operation. Again, raw materials represent a very high percent of the cost of goods sold in this business. Logistics is another major component. Part of what the company has done is create a supply-chain focus, starting in mid-year 1999. We're nominally $1.4bn in sales, and we will spend between $800m to $1bn in our supply chain. What our owners recognize is a need to focus on the supply chain. In our definition, "supply chain" includes purchasing, logistics, customer service, production planning, inventory control, etc.
We've had a very strong effort on increasing our purchasing effectiveness over the last three years, with a lot of success. We've installed a corporate purchasing program, leveraging our buy across multiple plants, and for some products globally. We have combined outside talent and skill sets from upper-quartile companies who are skilled in logistics, procurement and operations, with some of our best internal resources.
The implementation of a sales and operations planning cycle across the company has improved our ability to forecast, plan and schedule, not only for individual plants, but across multiple plants. We operate 50 plants globally. We've gone through a pretty aggressive process-redesign effort, because we really didn't have that two or three years ago. We've installed across multiple businesses advanced planning and scheduling tools. We happen to have chosen Aspen Technologies' suite of products, to layer on top of our SAP R/3 platform. And we're in the process now of mining the improvement opportunities. Getting control of demand helps us to run our plants better, and improves the asset utilization of those facilities. It also allows us to plan our logistics and purchasing requirements, rather than being reactive site by site, as was the model in the late '90s.
Q: In a commodity-driven business such as yours, how is your supply chain adding value to the customer experience?
A: There has been a major consolidation going on at the customer level. Our customers today are looking for several things, particularly from us as the market leader. One is assurance of supply. Because we're in a marketplace where some of our competitors are struggling, they're looking to us as one of the long-term winners in our space. They want to align themselves with suppliers who will be there five and 10 years from now. We have to prove that by focusing, not only on cost reduction, but also on product innovation. In thermoset resins, there is a lot of technical in-plant application work that our sales force works on. So we are constantly bringing new products to them.
They are also looking for us to create an effortless environment in which to do business. We have some large-volume, repetitive customers who simply want to place their orders, get the product, and have it work as it did for the previous shipment. Their processes are very sensitive to environmental issues, such as humidity and climate. We also have some customers who are interested in e-business capabilities. We've spent a fair amount of time developing our e-business readiness and platform, both with customers and suppliers. We find it rather slow-going, however, particularly with our customer base, in terms of their willingness and readiness to do a lot electronically. So we're helping them to understand why they need to do this from a cost standpoint, and how they can do it without major capital investment. Because many are either unwilling or unable to make large capital investments for electronic connectivity.
Q: How have the demands of your customers changed in recent years?
A: The biggest change is the focus on price. I would characterize many of our marketplaces as local-for-local activity. Our plants were serving a variety of regionally based customer plants, with very strong connectivity from our plants to theirs. Our technical sales people were spending a lot of time in the customer's plant, helping with how our products processed through their operations, and providing some real value to them.
As our customer base consolidated, we saw the introduction of centralized purchasing operations at our customers' locations. They got bigger, buying a variety of small and medium-sized companies. And their road map to success, unsurprisingly, was much like ours. So the renewed emphasis on price from a centralized purchasing operation, versus the local plant manager being the sole decision-maker, was a dramatic change that has occurred over the last three to five years. That consolidation has created a lot more leverage among our customers, and the separation of buying decision from plant to purchasing has created new challenges for us. We've had to modify our focus, which was heavily customer-oriented, to also understand our cost and how we're going to get it down. Because now we're dealing with a two-fold approach by our customers, the local site manager still wanting the service and product innovation, and the centralized purchasing group wanting the lowest price. It requires a level of sophistication that we've had to develop and improve over the last few years.
Q: How have you utilized the internet-driven exchanges or marketplaces that have cropped up in recent years?
A: They've helped somewhat, but generally they've been a big disappointment. Borden was an initial investor in one of the two big transaction hubs in the chemical industry, Envera, which has since been sold to ChemConnect. The chemical industry is stuck right now, in that it has two major hubs [ChemConnect and Elemica] which won't talk to each other. What you're seeing is suppliers and customers, between which there's a lot of overlap in the chemical industry, caught in a dilemma. They've each invested or taken positions with one of the two hubs, which are independent companies. And the two hubs aren't connected. So that has quite frankly slowed down a lot of the progress. We have done connectivity with some of our major suppliers, either through our hub, or with others through a private exchange, which we have just begun to develop.
This was a very hot topic two years ago, as was e-procurement, etc. The bloom is off the rose a bit. Companies have struggled to find the economic model that encourages them to go forward with that. The forest products industry is having an even greater struggle finding the economic value in making the investment to connect. The biggest hurdle today is cost. Despite the marketing statements, it's still expensive for companies to connect.
Q: What progress have you made toward internal collaboration - tearing down walls between departments that might previously have functioned as "silos"?
A: That's an area where we've probably made our greatest progress. Prior to establishing our supply-chain focus, there was not much internal collaboration. There were, however, lots of small plants, managing quite well on their own locally. First we went through the classic process redesign using the [Supply Chain Council's] SCOR model - with its Plan, Source, Make and Deliver components. That involved getting different functional groups here to understand what their impact was beyond the walls of their own operations. By installing a demand management and planning process, we're now able to look across plant sites and businesses. We are beginning to get transparency, which has broken down a lot of those barriers. We've also had an infusion of people from companies with much more of a process mindset - the Dow Chemicals, DuPonts, AlliedSignals, etc. Coming in with that expectation has helped break some of that [resistance to change] down.
Q: What's the progress report on achieving better collaboration with outside partners?
A: Not as strong. We're taking the classic approach - when your internal processes are not well under control, it's always a high risk to start to take it to your customer. Despite advances in customer connectivity, our progress there has been slow.
We have done more on the supplier side. As you start to collaborate more, you test it out with your suppliers, because it's safer to work out the bugs on that end. Then you move into your customer base. We have been working the last couple of years in varying degrees with some key suppliers. We have a few raw materials that are very large components of what we buy. For those, we have instituted vendor-managed inventory programs. We have a program we call Channel Captains, where there may be two suppliers at one location, but one is handling all the replenishment for both. Those programs are moving reasonably well.
We've developed our web site for ordering, and that type of electronic input has worked with a number of customers. We're not doing any formal planning or forecasting collaboration with customers yet. We are beginning to move some planning activity onto our suppliers, but our progress there is in the early stages.
Q: Have you been able to take a global approach to your logistics requirements, by aggregating your total spend or reducing the number of providers that you use?
A: If you talk about logistics in a transportation sense, other than establishing general performance requirements, we don't have a lot of global logistics. While we operate in Europe, Latin America, Asia Pacific and North America, most of our business is regionally located. We don't ship a lot of product between regions, so we manage our actual transportation, warehousing and storage fundamentally on a regional basis.
If you talk about logistics in its broader sense, including planning and other elements of the supply chain, we are looking at planning on a regional basis first. But we do some high-level global balances of supply and demand. Purchasing is probably the area where we've done the most from a global standpoint, initiating some specific global long-term deals. It allows us to take advantage of regions where we are very large, and extract some of the value in other parts of the world by dealing with global suppliers. We've been able to extract value for our business units in that regard.
Another thing we're doing in a global sense is transferring the knowledge and process about how to improve logistics or planning. We're developing standardized approaches on a global basis, then applying them in each of the regions. If we've done it in North America or Brazil, we're not spending the time to recreate it elsewhere. We simply have those people go to those regions and transfer the knowledge.
Q: In your years as a supply-chain executive, what is the most important lesson you've learned?
A: I've been in the supply chain/logistics world now for 32 years. As I look at what's going on today, despite all the technology that we can apply to improve our supply chains, what still differentiates world-class or upper-quartile performers is the quality and commitment of its associates. We can all read the same books. We can hire the same consultants. And we can buy the same software. As I've worked with world-class companies and benchmarked others, it is, at the end of the day, a people game. Those who attract and retain the best people, who are motivated to excel at what they're doing - that's what I see as the constant throughout the last three decades. It's still all about people.
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