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Changing the Way Some Independents Conduct Business

— 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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