Coping with spiraling material costs, heightened security demands rank as priority issues for distribution industry.

In the coatings industry, one could easily add raw-material price increases to death and taxes as representing the only certainties in life. And like the latter two inevitabilities, no one looks forward to getting that latest notice about another round of higher raw-material prices.

But coatings manufacturers are far from alone in bearing the burden of recent skyrocketing costs for materials, and coatings makers may have no choice but to join the price-hike parade in seeking to pass their higher costs along to the ultimate product user.

That's the frank assessment offered by William R. Hough, senior vice president and director of Marketing of Chemcentral Corp., the major national chemical-distribution company based in Bedford Park, IL, outside Chicago.

"We're all -- customers and distributors and suppliers alike -- we're all are being swamped with massive amounts of price increases -- natural gas, crude oil, raw materials. So many suppliers are being squeezed and have no choice but to pass their price increases along," Hough says.

The price pressures are so great that in some cases, suppliers are being forced to shut down production, Hough says. He cites the case of surfactants, where reports have indicated that some suppliers are converting production to alternative materials such as ethylene glycol rather than take a financial bath administered by escalating raw-material prices and resistance to higher surfactant selling prices.

For Hough, the situation represents more than a simple matter of paying a higher price. The customer, he says, may ultimately suffer the adverse effects of reduced supplier competition and shrinking investment in product development and production capacity if raw-material suppliers opt to discontinue production rather than wage a futile battle to muster acceptable margins.

"We all could be in trouble if we don't recognize that we have a certain level of stewardship, and allow suppliers to recoup their investments," Hough says. "Otherwise, the result could be the loss of suppliers and distributors. And coatings-manufacturing companies are also the losers if supply is taken out of the marketplace."

The way Hough sees it, spiraling costs over the past year have emerged as the dominant issue faced by chemical distributors. Other issues also command attention -- security, consolidation, regulatory initiatives -- but prices and costs, for now, are trumping all other business concerns.

"For the first time we are seeing distributors close their doors," he says. "There have been a number of consolidations, but now we are seeing some distributors simply closing." Adding to the challenges faced by these distributors is nationalization of distribution contracts by some suppliers and the phenomenon known as "reverse auctions," where suppliers bid for sales to major customers looking for a rock-bottom deal. In some cases, Hough says, Chemcentral is opting not to participate in these auctions.

These reverse auctions, industry sources say, are a product of the onset of the e-commerce era. While e-commerce has, for now, amounted to something less than the revolution widely forecast, the technology has made inroads in the chemical buying and selling marketplace.

Also exerting pressure on suppliers and distributors in some cases is reduced demand attributed to weak industrial-manufacturing levels, putting those companies in a squeeze between higher raw-material costs on one hand and lack of pricing power on the other. As a result, price increases viewed as necessary to retain margins often don't stick.

"You're taking an industry where margins are already at a break-even point and squeezing margins even further," Hough says.

Hough says Chemcentral is working to make operations as efficient as possible in an effort to minimize the effects of price hikes. "We continue to look for ways to add efficiencies. We're streamlining our organization to be more responsive to customers needs. That's all we can do. "The company recently implemented a new organizational strategy, called Regionalization, that is designed to provide enhanced service. The program has centralized support functions in five regional centers, allowing the company to put more sales and technical support personnel into the field, Hough says. The results are improved logistics, faster service and superior responsiveness, the company says.

Hough's views are shared by others in the distribution sector, says James L. Kolstadt, president and chief operating officer of the National Association of Chemical Distributors (NACD).

"Raw material costs, particularly for natural gas and oil, have created some very serious pressures on margins, so distributors must manage fixed and variable costs while navigating a very uncertain landscape with respect to profit margins," Kolstadt says. The resulting pressure on customers such as coatings manufacturers makes reliable relationships and partnerships with distributors more important than ever, he says.

For its part, Kolstadt says the distribution industry must "convey and amplify the value that distributors provide, both to the (chemical) manufacturer and the customer. Distributors should be vigilant in educating the manufacturers and customers about the real value distributors bring to the supply chain." He cites technical service as a prime example, where a solid relationship with the customer allows the distributor sales representative to convey "new needs or changing needs the customer might be looking for that the distributor could very well provide."

Consolidation, too, is changing the face of the distribution industry, just as it has dramatically altered the chemical and coatings manufacturing sectors. NACD says an estimated 49 of its member companies have been acquired since 1995. The group's total membership in 1996 stood at 336 companies; the current count is 287.

Security Issues High on Distributors' Agenda

Spiraling chemical prices and sluggish economies may have taken center stage as high-priority issues for chemical manufacturers and distributors in recent months, but the distribution industry has also been significantly affected by security issues in the wake of the Sept. 11, 2001, terrorist attacks.

"A lot of changes have been made to make sites more secure," says Kolstadt. "But we are going to see some of the most serious changes mandated this year by legislation or regulation. And the industry believes it is warranted."

New regulatory initiatives getting consideration include possible requirements of vulnerability assessments, fingerprinting of all hazardous-materials truck drivers, new employee-training programs, and possibly even global positioning satellite (GPS) tracking of hazardous-materials trucks.

"Some members are already doing it, but it is not cheap," Kolstadt says of GPS technology.

"The cost of security is not really appreciated," he says. "What's happened in the past is only the tip of the iceberg, although some companies have been concerned for a long time pre-9-11."

The NACD last year issued a series of enhanced security guidelines to member companies under the organization's "Responsible Distribution Process" (RDP) program. NACD members are required to adopt the program as a condition of membership.

These security-related enhancements issued in 2002 require all NACD members to continuously upgrade safeguards by:

  • Placing security among the highest priorities in all existing and new company operations, products, processes, and facilities;
  • Including in carrier selection criteria the evaluation of a carrier's ability to provide secure transportation;
  • Addressing facility and transportation security and taking necessary action;
  • Establishing customer legitimacy;
  • Utilizing an existing requirement to undergo independent third-party verification to ensure that security improvements have been addressed.
Also last year, the American Chemistry Council, the NACD and The Chlorine Institute issued new "Transportation Security Guidelines for the U.S. Chemical Industry" that outline elements of security programs and suggest security practices that managers can consider and tailor to a company's specific transportation needs.

Separately, the NACD distributed extensive new "Site Security Guidelines for the U.S. Chemical Industry" issued by the Chemistry Council, the Synthetic Organic Chemical Manufacturers Association (SOCMA), and The Chlorine Institute. The guidelines address a range of issues, including risk assessment and prevention; management issues; physical security; employee and contractor security; and information, computer and network security. The guidelines also provide sample policies and procedures in handling suspicious letters and packages, civil disturbances, bomb threats, pre-employment screening, workplace violence, and employee misconduct.

The Responsible Distribution Process as a whole, Kolstadt says, gives chemical suppliers and customers of NACD members -- such as coatings producers -- the confidence that the distributor is doing the job properly.

"Manufacturers can rely on the fact that the distributor is approved for the process. The manufacturer knows they can send their product to the distributor with a great sense of confidence that the distributor can handle and transport the product in a safe and responsible way.

"For customers, it's knowing they can be assured that the product being sold is exactly what they need. They can rest assured they're getting what they called for and the necessary documentation that goes with it."