New Environmental Regulations Driving the Industry
Within the automotive and rubber industry, gases are an essential part of the production process and make up a spend area that is often overlooked. Due to the complexity of handling this category, many purchasers prefer to renew existing contracts indefinitely – and let themselves be convinced that there is no better option on the market than their current supplier. While this could be true in some cases, we invite you to step outside of your comfort zone and challenge your current supplier. In this article, we will share some of the key learnings from running large tenders on industrial gases and will offer you tips on how to approach this category from a strategic sourcing perspective. A good understanding of the current market situation and the particularities of the gas production and distribution could help you challenge your existing suppliers and get fair prices and transparent contracts.
The industrial gases market suffered from the global economic crisis of 2008-2009, but has recovered steadily since 2012–driven by new environment regulations and advanced production methods in its dependent industries. According to a recent report on Researchmarkets.com, Nitrogen is projected to be the fastest-growing market for industrial gases in the plastic and rubber industry. This gas dominated the industry in 2014 and is expected to grow until 2020, with injection molding being the primary driver.
Market Segmentation for Plastic and Rubber Industry
The major global competitors are: Linde Group (Germany), Air Liquide (France), Praxair (US), Air Products and Chemicals (US), Messer Group (Germany), to mention a few. The market is segmented geographically into North America, Europe, Asia Pacific and rest of the world regions. Within each country or area, the main players also share major existing customers and tend to avoid stepping on each other’s territory.
The Gas Industry Products and Usage
The principal gases provided by the industrial gas producers are: nitrogen, oxygen, carbon dioxide, argon, hydrogen, helium and acetylene. A huge variety of gases and mixtures are also produced and uniquely branded by different companies. In the automotive and rubber industry, there is a large consumption of pure gases and mixtures for the production processes such as: injection molding, blow molding, extrusion, foaming, sterilizing, tank blanketing.
Gas Storage, Transportation and Distribution
Most gases are delivered in gas cylinders while others are also sold as liquid or as bulk liquid. Alternatively, the industrial gas company may supply the equipment to produce the gas rather than the gas itself. In either case, there is a dependency on the provider for maintenance and operations, since it usually has the “know-how” and experience of running such facilities for the production or handling of gases.
Challenges in Running a Tender and Implementing a New Supplier
The task of evaluating the current spend over different countries is a difficult one in itself, let alone trying to replace your incumbent supplier with a better provider. Below are a few learnings from a recent tender for over 10 production sites located in 3 countries for one of Elemica’s customers in Eastern Europe.
1. Gathering the product specifications is a tedious task. Details such as product names, purity levels, consumption, packaging or delivery peaks are hard to track among various production sites. Those details are usually stored in old contracts or periodic invoices and are rarely checked or reported properly.
2. Mixtures may be labeled under different names depending on the supplier or some mixed products may also vary in purity levels, demanding extensive testing before they can be replaced; incumbent suppliers will try to convince you that their products are unique and customized to the client needs, making them irreplaceable.
3. Replacing current bundles when changing suppliers risks to interrupt the production, since they require adjustments to the piping and set-up of the cylinders while connecting them to the production machinery. Because of this complication, many clients give up their initial urge for change and decide to stay with the current provider.
4. Supplier operated On-site tanks installed at the customer factories are often charged under “administration fees”. These fees are not always justified are a means of overcharging customers. On the other hand, replacing the current tanks will require an initial investment from the client side, which will affect the overall potential savings of the project.
5. Consumption Reports – while one supplier will provide them free of charge on a regular basis, another will charge you for them and will only provide them on request. Beware of suppliers that never provide reports, since they want to have total control on your spend offer little visibility on hidden costs.
6. Cost Components such as bottle rental, transportation, handling fees and environmental surcharges add up to the gas price. You would be surprised to find out that the presence or absence of some of those components make huge differences in the overall costs calculation from different competitors.
7. Administration fee is a term used broadly for anything from emailing, monitoring operations, providing reports, solving issues, etc. Make sure you have a clear definition of what they mean and that you are not being overcharged under such general terms.
8. Price Adjustments - a sourcing tender will give you the opportunity to compare the different methods in which producers are handling price adjustments that can be included in your future contracts. Fixing prices for a long period in the gas category can be a challenge due to the market fluctuation linked to transportation costs, but you can compensate by setting up a fixed rate for rental costs for example.
9. Payment Terms are one way of achieving savings without actually getting lower prices. Payment terms also depend on national regulations; therefore, you should not accept an offer that is too good to be true – such as a supplier that offers you 120 days instead of the legal maximum is 60 days.
10. Contracts differ from one country or location to another, even when they are signed with the same provider. Cancellation fees may work in the advantage of the supplier, and simply stopping your current contract could lead to absurd charges and legal issues if not verified properly. Always check conditions in detail with your legal department before signing contracts.
How can we help you?
In the tender given as an example above, each site sourced gases differently: different suppliers, different gas types, different bundles and cylinder sizes, different price components included in the price, different contracts altogether. Despite these clear differences between sites in the way they purchase gases we were still able to run a multi-country tender, while our customer was able to benefit from synergies and get higher savings than if the countries managed the tenders locally.
Your purchasing team can also save time and effort in gathering data and creating price templates for your project and exploring the market for the best available solutions. Besides getting a clear overview of your spend and cost components on this complicated category, you will most certainly identify savings areas and choose the most suitable industrial gas provider for your company.
Please contact us to know more about our experiences and how we can support you in your sourcing process: firstname.lastname@example.org.