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Opinion: Assessing Threats to Raw Material Supplies
By: Barry Dowles, Berje Inc.
Posted: September 12, 2008, from the September 2008 issue of P&F magazine.
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We can equally cite the emaciated US dollar, which shows little sign of a comeback. Now pile on top of this mayhem the closure of several factories and the cessation of large segments of commercial traffic, as the Chinese government sought to create an environmental and security Shangri-La, if only for a moment, during the Olympics. But, before we dispatch sympathy cards or organize support rallies for the industry, a little historic perspective is in order.
Metamorphosis of the Buyer
Back in the 1970s when gas was 50 cents per gallon and a loaf of bread half that, raw materials were in such short supply that an allocation system emerged and for a brief moment—and I mean brief—sellers dispensed favors like lofty potentates. In what we elder statesmen (a euphemism for the really old guys that turn up at Fragrance Materials Association meetings) would refer to as the good old times, sellers literally set the prices and delivery schedules, with buyers gratefully accepting them in joyous relief at having actually found materials.
Then followed just over three decades of unrelenting price erosion made possible by the burgeoning capacity of Chinese manufacturers and by the subsequent necessity of finished goods houses to wring more profit out of each business cycle. It is worth noting that the average buyer was undergoing a metamorphosis during those 30 years; today’s spreadsheet-wielding, multitasking, harried category manager has no time for lunch and only seven minutes to contemplate purchasing 150 tons of menthol. These beleaguered buyers are 24/7 slaves to laptops, often working away their weekends and vacations just to stay ahead of the game.
The modern buyer is the person initially responsible for demanding the equivalent of a CIA-like, documentrich case file for each product and then forced to ponder whether it is Halal (due to a booming global Muslim customer base), organic compliant, and “please let it be naturally derived, sustainable and the sole source of income for an indigenous tribe of adult workers in some distant corner of the world.”
Today, buyers have immense portfolios and are compelled by numerous business forces to dump huge demands on the market, issuing complex request for purchase (RFP) documents that seek to buy 25 kilos with the same imperative and gravity as 50 tons. The mere suggestion of these massive price requests is often sufficient to drive up costs as the many recipients of these RFPs seek to cover the same materials.
Buyers are often required to travel extensively in order to find the Holy Grail of purchasing—a direct source excluding all intermediates and the bothersome costs they add. While the grail eludes us, it is possible to buy material directly from a source only to find there is often the inconvenient matter of physical distance, to say nothing of what to do with a container of citronella you would like to reject and myriad other logistical problems. On this last point: when will a corporate accountant finally connect the dots and realize the cost of cleaning up those import horrors is rarely, if ever, realized in the purchase price, and is instead lost in plant expenses?
Other topics discussed: China and Today’s Supply Realities; Environment, Labor and Naturals; Market Volatility: Nothing Lasts Forever; Solutions
This is only an excerpt of the full article that appeared in P&F Magazine, but you can purchase the full-text version.