Minimize Supplier Mayhem

March 10, 2017
A well-managed preferred vendor list can yield significant savings.

A typical chemical plant has a wide variety of instruments and equipment. At a larger facility, a number of different people may specify and purchase these devices. Without guidance, this quickly can lead to the use of a host of diverse brands, models and even technologies for similar applications on the site.

Such a situation can create a nightmare for spare parts inventory and for the people responsible for maintaining these devices. To minimize such issues, the best practice is to develop a preferred vendor list with designated brands for given applications. Once established, the facility then can stock parts for these brands and train staff on how to maintain and repair the specific vendors’ devices. With the promise of enough business, vendors often may agree to provide repair training and to stock parts locally or even on site. This saves the facility both in training and inventory costs.

[callToAction ]

Spare parts inventory can incur significant cost. A rule of thumb is that any part stored for three years or more has been paid for twice, once when it was originally purchased and a second time through inventory carrying costs. Clearly, keeping the plant operating requires some spare parts — especially ones that are critical to the unit but aren’t readily available and require a long lead-time.

One of the best ways to reduce inventory costs is to standardize common parts and instruments to the greatest extent possible. Always remember that purchasing a lower-price alternative for a project may end up costing significantly more if it’s the only one of its kind on the site.

Preferred vendor arrangements do have downsides. They can make entry difficult for competitors and for newer, better technologies. Also, they may tempt established preferred vendors to raise their pricing once they feel they have a lock on business, or to promote options and upgrades to standard models to justify a price increase. These features may appeal to the operators using the device or the maintenance staff repairing it but often can be hard to justify based on any financial return.

Unnecessary Upgrades

Savvy salespeople can be very adept at convincing maintenance and purchasing managers to upgrade requirements in the company standard to include features that may make sense in a few limited locations but aren’t needed in the majority of applications. Thus, the site owner must remain vigilant against “over-specifying” the standard models. Simply because one or two particular applications require a higher-temperature-rated model or a special alloy doesn’t mean this version should become standard for the entire site.

One case that comes to mind is a new automatic block valve that a local salesman was advocating. The valve, explained the salesman, recorded a time stamp for when it was operated and then logged percent of time open and the overall frequency of operation, so an engineer could have a complete record of the valve’s operation. This may be useful, for example, if the valve is used to switch a process vent from a fume incinerator to a flare — often the time to the flare must be known for permit compliance. However, in most cases, no one needs this type of information.

The standard should be the lowest cost model that would be acceptable on the site. For a valve, this might be carbon steel, rated for 150 psig and 250°F. For an instrument, this would be one with normal temperature and pressure ratings and minimal self-diagnostics. High temperature and pressure models, as well as instruments made from expensive alloys or with special diagnostics or memory should be specified on a per-case or per-application basis.

Alternative Suppliers

As mentioned earlier, a downside of a preferred vendor system is the barrier to entry for rival products. So, the site owner must ensure the company always is getting the product at a competitive price. For very common items, such as carbon steel valves, it’s typical to have two or three qualified suppliers, both to guarantee ready availability and to enable price comparisons. However, for more sophisticated instruments or types of equipment, such as mass flow meters or centrifugal pumps, it’s often better to settle on one brand for normal use. This can make entry for competitors impossible under normal conditions.

The best time to look at alternative suppliers is when the company has a large project and needs to order many of a particular item. A competitive bid is appropriate and often required by corporate policy in such a case. This also is an opportune time to determine if the company has been getting a good deal on this item. If your primary supplier feels its business is at risk, it likely will offer a good price. However, if a competitor comes in with a better price or better product at a similar price, the company must consider the purchase and adding this supplier as a preferred vendor. It is not ethical or good business practice to ask a competitor to bid for the sole purpose of ensuring your primary supplier is giving you a good price. Vendors often will refuse to quote or not put much effort into a bid if they suspect that they have little chance of getting the business. This practice also would likely eliminate the potential for future business with this particular vendor — and with justification!

Another good time to consider a competitor’s product is if the existing technology isn’t working well or there’s a significantly improved product over what’s in current use. A sensible option is to buy a single such device for a particularly challenging application to see how it works. This gives all groups an opportunity to evaluate the item from their viewpoint and decide the merits of future purchases.

Changing suppliers can be a difficult decision; it’s best made by a multidisciplinary team. Often Maintenance wants to stick with the familiar product, Purchasing wants the best deal for the company, Engineering wants to try a new technology, Stores wants something for which spare parts already are stocked, and Operations doesn’t care so long as it works. Each group has very good reasons for its opinion; the best choice requires input from them all.

Be wary of purchasing prototypes or pioneering the use of an upgraded version of an existing device. As is commonly seen with new software, the first users often encounter problems that didn’t surface during product development and design. So, unless the new product specifically addresses a critical issue, it’s usually better to wait until the supplier has worked out the initial “bugs” and the equipment gains greater market acceptance. While ongoing upgrading of equipment is essential for a company to remain in business, avoid being the test case for the newest technology.

Another option that may be worth considering is to form an alliance with a particular vendor. If done correctly, this can benefit both the process owner and the vendor. In an alliance, the site owner allows the vendor to be the exclusive provider of a certain technology. In return, the vendor promises the product at a competitive price and often provides a higher level of technical support and training for the product. This is ideal for products or systems that require specialized expertise and have a high cost of entry — e.g., fired equipment, solids conveying, or automation systems.

Some alliances allow the vendor to test new products or upgrades at a manufacturing site. This gives the site access to the very latest technology while providing the vendor a full-scale testing platform. The process owner obviously must ensure the product testing doesn’t put its process at risk — but it’s clearly in the vendor’s interest to make the test successful. The process owner and vendor even can work out an agreement to permit the site to be used as a sales platform in exchange for better pricing, training or access to further technical support.

Regular Review

Typically, the engineering department owns the preferred vendor list but solicits input on any changes to the list. It’s always a good idea to review the list on a regular basis, perhaps annually, to ensure the site has adequate suppliers for critical parts. This should involve checking two equally important aspects: commercial and technical. For the commercial side, evaluate pricing, delivery, order errors, response to complaints, and availability. For the technical side, assess if the product performs the intended function, how its mean time between repair (MTBR) compares with expected maintenance or, if data are available, against competitors’ products, and if any performance issues need to be addressed. A review of the preferred vendor list may require a survey of Purchasing and Stores for the commercial side and Operations and Maintenance for the technical side to gather all the information necessary for an informed decision.

A typical chemical plant spends a significant amount of money annually on instruments, valves and common process equipment. It’s essential to look at the lifecycle cost for frequently purchased items. These costs include initial purchase price, spare parts requirements, frequency of replacement, maintenance staff training needs, emergency availability and ongoing maintenance costs. The cheapest model may wind up being quite costly if it requires frequent repair or replacement.

Another cost to consider, of course, is process availability. This can be difficult to estimate unless the plant is in a sold-out situation. Unreliable equipment may force the owner to carry more finished goods inventory to ensure meeting orders. This cost can substantially outweigh any money saved on the cost of equipment and, so, always deserves attention.

In summary, a well-managed preferred vendor list can enormously impact the economics and reliability of a chemical manufacturing site. Developing and updating such a list requires a cooperative effort from many of the site’s departments. Regular review and revision is essential for success.

FRED GREGORY is process safety and risk manager for Lubrizol in Deer Park, Texas. E-mail him at [email protected].