Every business has its own goals, which help it grow. But what makes a company successful is establishing financial stability. One of the ways to do this is to minimize the expenses. That’s why, when it comes to making a decision about certain purchases, keeping the price low often is a top priority. There is one other aspect though, which should be noted as it has the power to demolish any company in the chemical industry: the security of supply.
If the purchasers constantly try to lower the prices of specialties, this pressure could motivate the producers to cut their costs. In the long term, however, this situation affects the producers’ budgets for maintenance, re-investments, and innovations. As a result, they might decide to step out of the business to avoid significant losses. This vicious circle leads to a lack of raw materials and development, which can create a critical catch twenty-two situation.
For instance, after being pushed to lower the prices for years in a row, one of the leading sodium percarbonate (SPC) producers in Europe, representing 25% of European production capacity, decided to close their factory. It didn’t make financial sense to keep on manufacturing SPC from hydrogen peroxide (H2O2), so they focused solely on selling H2O2instead.
These circumstances led to a confusion between the SPC customers, some of whom had to disrupt their production processes. To make things worse, the first SPC producer who stepped out was the one who offered an expensive product with the highest quality. Furthermore, the demand is constantly growing. For example, the courier companies require enormous amounts of SPC to bleach all of the recycled cardboard they’re using daily.
This is only an example that while the low price directly benefits the buyer, it might bring some issues as consequences. All of us – producers, suppliers, customers – should take into consideration the supply chain security as a whole. Today we’ll take a look below the surface of the topic, revealing details that have a significant impact on the stability of all the parties involved.
The times of excess production are over. The market is no longer demand but production driven. Nowadays, the demand for some commodities is growing so fast that it’s difficult to find them when they’re needed the most.
Due to the nature of the chemical products, there’s no place for compromise when it comes to safety. Maintenance and investments are crucial for this aspect of supply chain security, but communication and understanding also play an important role.
For example, the producers should be transparent about the challenges they face when complying with all the safety regulations. At the same time, the distributors might initiate a dialogue with the producers and the customers. This way, the awareness of all the inevitable costs would increase while the pressure for lowering the prices would decrease. As this happens, some common breaches might be avoided, and our clients would be able to explain to the end users why quality equals costs. Furthermore, all the stakeholders would be more aware of the reasoning behind the supply chain reality, and the evenly spread responsibility would cause the price pressure to diffuse.
The safety topic goes hand in hand with the new warehouse regulations, which are very strict when it comes to storing certain products together. Therefore, most of the customers face a great challenge. They can’t make sure they’ll have enough of the product by just buying more of it as they don’t have the necessary space to store it properly. They need to buy smaller batches, and this fact puts the stability of their business at risk.
Quality is another part of the supply chain, which is more important than the lowest price. The packaging should be complete, the delivery – reliable, and the goods – of perfect and stable quality. There’s no other way to ensure that the high industry standards are met, while decreasing prices, without making any damaging compromises.
When it comes to innovating, most companies prefer to choose long-term partners. The reason behind this is simple: innovation means improving sample after sample until a raw material finally makes the difference. Therefore, innovation can exist only in the long run, in an environment which doesn’t apply price pressure or commoditization. However, as we know from our own experience, it’s almost impossible to build a reliable connection when working occasionally, with small quantities, and spot prices.
During the SPC crisis, Sirius International could arrange an alternative supply of SPC, providing enough ADR warehouse space and a facility to load Britebleach SPC into bulk silo trucks. All of this was possible due to our worldwide network of partners, ready to come up with an innovative solution to any issue.
But this situation was also a valuable lesson for all the parties involved. The truth is, we can achieve our business goals only if we understand and respect the delicate mechanisms which keep the whole supply chain up and running.
The Sirius Effect
Sirius International supervises the supply chain from the moment a new raw material is developed, or an existing one is delivered. We supervise and communicate the whole process: from sampling, up-scaling, manufacturing, and stocking all the way to delivering on time the right quality at the right cost. Your part in the across-the-chain communication is at least as important. The next time a supplier offers you a price reduction, begin by asking what, apart from profit, they sacrificed?
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