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Chemical Services Contracts Save, Yet Still They Languish

— As printed in Vol. XI, No. 12 of Business and the Environment
The substitution of services for products dubbed the “servicizing of industry,” appears to be a profitable alternative for chemical suppliers and their customers. But even though they hold out the promise of significant cost savings and environmental benefits, chemical management services (CMS) contracts are best viewed as a good idea according to a new survey by the Chemical Strategies Partnership.

The Chemical Strategies Partnership is a nonprofit organization launched in 1996 with funding from the Pew Charitable Trusts and with additional support from the Heinz Endowments and the US Environmental Protection Agency (see BATE, August 1997 and May 1999). Under the CMS model, chemical suppliers shift away from traditional contract relationships involving the delivery of bulk products. The vendors forge strategic alliances that require them to optimize their customers’ processes. A combination of compensation mechanisms reward efforts that lower lifecycle costs and reduce toxic chemical use.

Chemical Management Services Industry Report 2000 released by the Chemical Strategies Partnership, is based on interviews with 15 CMS providers, including some who have been in business for more than 10 years. It also surveys 15 CMS customers from industry sectors CMS has penetrated the most: automotive, metalworking, aerospace/airlines, and electronics. The respondents are DaimlerChrysler, Delta Air Lines, Ford Motor Co., General Motors, General Dynamics Corp., GE Transportation Systems, Honeywell International, Motorola, Navistar International, Nortel Networks Corp., Northwest Airlines Corp., Raytheon Co., Texas Instruments, Toppan Electronics, and United Technologies Corp.

The partnership’s three-month survey of the CMS industry, which ended in September, finds that, across the board, customers are enthusiastic and claim a number of financial benefits leading to net savings of 5%- 25% per year. They cite improved data management and reduced chemical purchase costs. They are also “keenly aware” of some environmental benefits.

But driving the choice of a CMS provider is the desire to reduce costs. Information from the customer about environmental performance is often absent or anecdotal.

As the Ford assembly plant in Chicago, Illinois, USA, where a CMS relationship with PPG/Chemfil exists for most chemicals used at the facility, emissions of volatile organic carbons fell 57% in 18 months and wastewater sludge generation dropped 27% for an annual savings of more than US $50,000 a year. Delta Air Lines, which has a contract with Interface LLC Chemical Management and began its CMS program in 1995 targeted at hazardous materials management, says it has cut material use by 25%-30% year after year and avoided $200,000 in risk of insurance in the first year.

“Every place we have put in a chemical management program, the total chemical usage reduction averages around 30%,” says Raj Mishra, environmental services manager at General Motors (GM). “In some cases, it is more, in some it is less. But an average chemical usage reduction of 30% is a very achievable goal. Additional continuous improvements, though at much smaller increments, are possible. There is also the {benefit’] of substitution of chemicals by using less harmful chemicals.”

Mishra is credited with starting the CMS movement about 12 years ago when he set about managing emissions and wastewater treatment at GM facilities. At the time, GM used “probably more than half a million different chemical products,” Mishra tells BATE. For example, GM bought about 50 different products from each of 1,200 lubricant suppliers. “That’s 60,000 lubricant-type materials alone,” Mishra recalls. “I said, no way can I manage this as an environmental emissions issue.”

Barriers To Progress
CMS contracts cover an estimated 50%-80% of the market for chemicals in the automotive sector, the survey concludes. CMS may have garnered up to 40% of the electronics market. But the estimate for aerospace manufacturing ranges from 5% -15%, and textiles and apparel, paper and allied products, and primary metals industries purchase a large amount of chemicals and are considered to be prime candidates. But CMS has made little or no headway in these sectors.

“Reducing chemical use and chemical management costs is generally not a corporate priority,” the survey states. The cost of purchasing and managing chemicals is often calculated as comprising less than 1% of a company’s operation costs. However, the Chemical Strategies Partnership believes that conventional accounting systems do not reveal chemical management costs that can range up to 10 times the purchase cost of the chemicals.

“Most customers do not know their total chemical lifecycle costs so they have difficulty valuing a contract. In many cases, customers cannot even provide an accurate list of all chemicals currently purchased,” the study says.

CMS providers are not clear what the role of e-commerce will be or how it will be applied in the context of their contracts. They have begun to explore the question. Other means to expand on the current base of 253-300 corporate CMS customers involves education and better tracking of financial and environmental results from the CMS program.

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chemical strategies partnership

What is Chemical Management Services? Chemical Management Services (CMS) is a business in which a customer engages with a service provider in a strategic, long-term contract to supply and manage the customer's chemicals and related services... more »

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