Two well-recognized drivers are sparking this outsourcing trend, say industry experts. Manufacturers want to focus their resources on their "core competency," the activity at which they excel. For most chemical companies this means concentrating specifically on production trains, not ancillary operations. Also, companies are looking for an opportunity to cut costs. Going to an outside provider with a core competency in an ancillary area promises to make plant operations more efficient. Neither rationale is unassailable, if only because such service suppliers are not likely to be as deeply invested in the well-being of a plant as its owner is.
But the painful downturn that the chemical industry experienced during the past three years and the high energy costs that it faces during the current recovery are pushing corporate managers to do whatever they can to improve company margins. "The chemical industry has been forced to restructure for cost reduction," says Charles Bailey, Greenville, S.C.-based vice president for operations at Fluor Corp., Aliso Viejo, Calif. Bailey's group has long provided contract maintenance services to plants. The company consolidated its contract maintenance activities into one division four years ago. Since then, that division has posted 20% sales growth per year; it now brings in more than $1 billion annually and employs more than 10,000 workers. "We've aligned with the growth opportunity," he says.
Not treading water
One of the best-known contract services throughout the chemical industry is water and wastewater treatment. Providers have made a winning argument that they offer an efficient option for running a facility's water resources.
Perhaps the biggest trend in this area is not the nature of the service, but the corporate alignment of the providers themselves. A case in point is GE Water & Process Technologies, East Trevose, Pa., which came into being after GE acquired BetzDearborn, combined it with earlier acquisitions, Glegg and Osmonics, and added internal equipment and service capabilities. "Over the past two years we've built out our footprint in this business," says Bryan Richforth, business leader for the group. "We want to be the leading OEM equipment supplier combined with the leading services provider, and thereby optimize the total life cycle of water systems for our clients."
The services offering is straightforward, Richforth says: A team of GE water and wastewater professionals develop an operational baseline for the water system. The company then proposes equipment upgrades, dosing programs and operational improvements, and offers a contract to provide an agreed-upon level of service, based on water quantities, quality and other performance objectives. Sister company GE Capital can finance the capital improvements if desired. "We can offer the entire range of services, from conventional customized services to designing, building, owning and operating the facility, under the client's ownership or as a sale-leaseback," Richforth says. "At the end of the day, the key question is how to save money for our clients."
Dan Cicero, senior product manager at Nalco Co., Naperville, Ill., counters that argument. "I don't know of many industrial companies that have sold or leased their water systems." But Cicero notes that, beyond a conventional fee-for-service outsourcing arrangement, Nalco engages in what he calls "gainsharing" contracts, in which the company is rewarded for cost savings or performance improvements in the water treatment systems it manages.
Some of that gainsharing is expected to come from Nalco's recently introduced 3D Trasar program, which combines scale or biofouling control with a monitoring system that precisely measures the activity of the treatment chemicals in cooling water systems. The technology (which builds on an earlier version called Trasar that has been on the market for more than a decade) uses chemical taggants in the treatment chemicals. A fluorometer measures the presence of the taggant, factors in other water-chemistry measurements and computes precise chemical loadings.
"Every cooling system we're seeing is under stress, either from being required to run more actively, or from the widely varying quality of inlet water," Cicero says. "So you can think of this as a stress-management measure for cooling water systems." He adds that plant managers in water-restricted areas have to pay particular attention to inlet water quality, as the use of, for example, well water in place of treated municipal water can throw the cooling system out of whack. In perpetually water-short California, the use of "gray water" (untreated water), also known as Title 22 water (for the state regulation defining it), is popular as a cost-savings action, but this, too, can raise the stress level on the cooling system.
GE also has launched new service offerings. One is a mobile water-treatment service, intended for providing temporary or emergency backup. Another is a nondestructive-testing (NDT) technology for monitoring pipeline corrosion to replace metal coupons. A third, named InSight, is a comprehensive control and monitoring system that makes use of automated data collection and Web-connected communication devices to provide a continuous picture of the water system's costs and performance.
There are many other water service providers, including Ecolochem Inc., Norfolk, Va.; USFilter, Palm Desert, Calif.; Severn Trent Services, Fort Washington, Pa.; and the Drew Industrial Division of Ashland Chemical Co., Cleveland.
Greasing the wheels
Business relationships comparable to those for water-treatment outsourcing have arisen in lubrication for rotating machinery. Many of the leading lubrication manufacturers, including Castrol, Swindon, England; Shell Lubricants, Houston; and ExxonMobil, Plano, Texas; in recent years have extended their business lines to include outsourced lubrication management. While these service arrangements primarily have targeted discrete manufacturing firms, such as automotive and aerospace companies, and utilities, they are getting more attention within the process industries. For instance, food processors, which require biocompatible machinery lubricants, are becoming regular customers, industry experts say.
Dow Corning, Midland, Mich., which manufactures silicone-based specialty and high-performance lubricants, has recently begun rolling out a service business. The first step was to develop dozens of additional formulations to fill out its product line, says Phillip Grillier, solutions manager for its Molykote Division. "The cost of lubricants is less than 5% of an overall maintenance budget, yet better lubrication management can pay off in lower equipment replacement, fewer breakdowns and optimization of maintenance practices," he says.
At one chemical plant, simply rationalizing the inventory of lubricants saved nearly $50,000. "Typically, each capital-equipment purchase comes with specific lubrication requirements," Grillier says. "We look first if those are the right lubricants, and then if a variety of pieces of equipment can be managed with the same lubricant." Another key step is assuring good housekeeping , looking for where lubricants can become unnecessarily contaminated by water, dirt or other materials. With better housekeeping (verified by regularly scheduled oil analysis), lubrication schedules may be extended, cutting lubricant and waste-oil disposal costs.
Predict, then prevent Dow Corning and other lubrication service providers emphasize the value of sophisticated oil analysis to measure contamination, lubrication quality, the types of metal contaminants and other characteristics. These tests, performed onsite or at the supplier's laboratory, can aid in predictive or "condition-based" maintenance , the ability to forecast the operating condition of machinery and adjust maintenance schedules accordingly.
That's a big theme of Fluor's overall contract maintenance services. When condition-based maintenance is managed properly, maintenance costs can go down even as plant reliability and performance go up, Bailey says. "We typically enter into three- or five-year agreements for contract maintenance," he says. "The first year, you'll see savings in MRO (maintenance, repair and operations) costs , the manpower requirements of the maintenance staff, and the cost of consumables such as oil and replacement parts. The second year, you'll see reliability improvements and capacity increases out of existing equipment. The third year we're able to do things like root-cause failure analysis that can lead to process optimization and the like." Bailey says that after several years, a project undergoes "regrounding" to develop a new baseline of performance and maintenance requirements before the client considers renewing the contract.
The trend is definitely moving toward pay-for-performance, he adds. Three years ago, hardly any such contracts were awarded to Fluor; now, 50% of all new contracts include that component. Bailey boasts that, on average, clients can see a 5 to 10% improvement in uptime while experiencing a 20% reduction in maintenance costs.
A new formula
An evolving business practice for the chemical industry , both as potential customers and potential vendors , is chemical management services (CMS). This approach evolved first in the automotive and electronics industries, where the major manufacturers pushed chemical suppliers to take over management of the chemicals used in their plants, especially paints and surface treatments in automotive, and process gases in semiconductor fabrication. It's now common practice in these industries. Paint suppliers such as PPG and DuPont now handle many chemical inventories besides paints in the automotive industry, and gas suppliers such as BOC, Praxair, Air Liquide and Air Products do the same in microelectronics.
The concept is straightforward: with rising regulatory requirements for storage, disposal, workplace safety and emissions, manufacturers hire chemical suppliers to manage their inventories, gather necessary regulatory data and optimize material use. According to a variety of estimates, for every $1 a company spends on chemicals, it may spend an additional $1 - $10 to manage this inventory.
In the past few years, so-called "pure-service" CMS providers , those that do not manufacture the chemicals they manage , have popped up. "We've had a 30% annual growth for the past few years," says Thad Fortin, president of Haas TCM, West Chester, Pa., and this does not include the impact of its acquisition of another leading CMS company, Radian TCM, in 2002. Other players include a Boeing spinoff, AvChem, St. Louis, Interface Corp., Greenville, S.C., and Chemico Systems, Birmingham, Mich. Meanwhile, companies that are big in chemical distribution, such as Henkel, Gulph Mills, Pa., and Ashland, Dublin, Ohio, have similar business units.
CMS is getting a boost from an environmental group, the Chemical Strategies Partnership, San Francisco, which has organized a trade group, the CMS Forum. "This is a proven concept in industries like automotive and aerospace; we want to help promote it in other industries," says Jill Kaufman Johnson, executive director. She concedes, however, that "this works best in companies that do not consider chemical management to be a core competency, and most chemical companies don't want to give that up." Haas TCM's Fortin says his firm has had discussions with chemical manufacturers but no deals have been completed yet.
Nick Basta is editor at large for Chemical Processing magazine. E-mail him at [email protected].
