Many industry readers will at some point have faced a force majeure attributed to industrial action at an asset, plant or supplier further up the chain. This is another instance where the benefit of off-site warehousing comes into play, and it is prudent to ask about it even if the supplier is not in an area prone to natural disasters.

One chemicals company, which asked to remain anonymous, found a solution to striking logistics providers by reducing the number of trucking contractors from tens to three. The company reportedly added a no-strike agreement in drivers contracts in return for better operating conditions and quickly saw an increase in on-time and on-spec delivery as a result. While this may not be an option for smaller operators, they may have other advantages when mitigating transport strikes for packed additives. Many smaller blenders in relatively developed countries send their own vehicles to collect additives from distributors.

It may not be possible to replicate elsewhere the examples cited above, leaving the issue of how much inventory a company holds at its own facility needing another solution.

Planning Ahead

Plants that over-order additives face significant downsides. First is the short (and getting shorter) shelf life of additives relative to the time that contingency stocks of slow moving additives would be held. Holding contingency stock ties up extra working capital and may require investment in temperature-controlled storage to prevent the deterioration of drums or intermediate bulk containers to keep inventory outside. Some may consider these steps to be unaffordable. This is where risk assessment plays an important part in deciding which mitigations are worthwhile.

Importing and Customs

Many buyers find that their consignments are often stuck in customs. The reasons for this can be myriad, and a strong supply security policy should seek to address each of them. A few examples of impediments to clearing customs include: no appropriate health, safety and environmental inventory registrations for imports into North America, the European Union, China, Japan, South Korea, the Philippines, Australia and New Zealand; no full-disclosure safety data sheet for import into South Korea; the importer or shipping company filed for bankruptcy and the goods were impounded (chaos was caused by the collapse of the Hanjin Shipping Company in 2016 when its ships were seized); or no clear statement from the marketer that an imported lubricant meets the performance claims.

All major additive companies are aware that all this paperwork is required, so it usually only requires a call to representatives, provided buyers tell them in advance the package, base oils and country.

When importing products, be aware that REACH is implemented outside the EU in Switzerland, Croatia and Serbia, while Turkeys Chemicals Management Regulation and K-REACH in Korea place a similar onus to REACH. Much mandatory health safety and environment information can be used to satisfy other import legislation.

Purchasing terms and conditions can also be relevant. The International Chamber of Commerce set out a list of incoterms, a universal system of three-letter codes that provide a framework for contracts relating to the transportation of goods, export and import clearances and the division of costs and risks between parties. Agreeing to the correct terms can be very important for supply chain security.

In the second half of 2014, during the U.S. West Coast ports strike, some of our key raw materials that were imported from Asia were held up from arriving in a West Coast port and we could do nothing about it, said Glenn Mazzamaro, vice president of petroleum additives at Vanderbilt Chemicals. This was because the material was ordered under CIF, CIP, or DDP incoterms. We had no control over the freight and which U.S. port to choose for entry. Our global logistics group found much more flexibility by ordering our key raw materials under EXW, FCA, or FAS terms, or in some cases requiring our vendors to utilize only the ports that we recommended. This way, we are able to choose how and where the material enters the U.S. to avoid those ports that may experience delays due to any future dock strike.

Conflict Resolution

Aside from the immense human cost, armed conflicts destroy crops and commercial assets, such as mineral processing plants, disrupt normal commercial activity, making places too dangerous to transport goods through and cut power supplies, even in areas not directly affected by the conflict. Knowing where a suppliers raw materials are sourced can help a company discuss alternative sources and avoid complications.

Conflicts can also provoke trade sanctions, which can cause issues if they are not considered at the right time, and these laws may be found in unlikely places. One example is the Dodd-Frank Wall Street Reform and Consumer Protection Act, a piece of U.S. legislation to regulate the financial industry. Section 1502 of the act concerns the trading of minerals from the Democratic Republic of Congo, minerals that may be used in lubricants. While the provision only requires disclosure of the trade to the Securities and Exchanges Commission, it does mean companies must undertake detailed due diligence of their supply chain.

Danger on the High Seas

North American oleochemical distributor Acme Hardestys recent advertisements include the slogan Handle the unexpected. In addition to natural disasters and strikes, they have also dealt with pirates, which can still be an issue for those whose products must navigate the coasts of Africa and the Arabian Peninsula.

Piracys cost to the lubricants industry itself would be hard to calculate, but estimates put the price of Somali piracy alone at U.S. $1.7 billion in 2016. This includes the cost of inflated insurance premiums, better onboard protection measures, ransoms and naval deployments.

Mitigation

So what have suppliers done about supply security? For many companies in the lubricants supply chain, many lessons have been applied since the hurricanes in 2005 and 2008, the damage from which was mentioned in last months story. Infineums Bayway plant in New Jersey was closed before tropical storm Sandy struck in 2012 and was back to full production in two weeks. Lubrizol reported on September 8, 2017, that its Deer Park facility was back in full production, 12 days after suspending operations due to Hurricane Harvey. Some were not so successful. Motiva and Dow Chemical (albeit not for lubes-related products) implemented force majeure in mid-September.

Disaster recovery is only a small part of business continuity planning (BCP). Oronites BCP approach has evolved substantially in the last decade, and I think we are better prepared than ever to manage potential supply disruptions from various sources, stated Curt Anderson, vice president of manufacturing and supply for Chevron Oronite. We take a much more global approach, monitoring inventories across all plants in our supply chain and executing necessary movements of critical components and finished products, not only from off-site storage locations, but also among the plants.

Anderson added that Chevron Oronite also recognized the importance of strong communication and contingency planning with our suppliers and our customers, ensuring their BCP plans are fully aligned with ours. A weak link anywhere along the entire chain of supply can easily disrupt even the best BCP plan at an individual plant.

Oblique Strategies

During the consultation process with clients, the question is rarely asked: Could the supply chain security mitigation be to rebrand someone elses product? It would be a rare agreement between competitors that allows full disclosure of componentry and sources that would allow substituting their product for yours in all circumstances. However, the market may not require full disclosure and the company rebranded from may not be a direct competitor, perhaps in a neighboring country where it has no sales presence. Such an agreement would probably be two-way and could lead to broader collaboration based on purely commercial criteria.

Risk Assessment

Careful consideration of risks is required before entering into active dialogue regarding mitigations. A good first question is: What is the value of my business affected by loss of each individual component in my component portfolio? This can bring some small volume additives high up a companys list of priorities, as they happen to be in products that are sold to high-value customers.

Some customers may remain loyal only if a company can maintain uninterrupted supply. Thus, a small volume product with a poor margin could become the key product in retaining a significant customer, whose portfolio is otherwise serviced by additives that have robust mitigation in place. The additives for this product become the focus.

Armed with a priority list of components and costed self-mitigation activities, such as ordering well in advance, companies should now approach their suppliers. Fortunately, legislation like REACH has already encouraged and enhanced communication up and down the supply chain. The questions asked should usually go back to the mine or field for the mineral or natural product; the refinery for some oil products; and the chemical plant for unique chemical building blocks. Then, companies should ask: Is the mine/refinery/chemical plant a unique supply point or does this product pass through a uniquely weak point in the chain between there and me?

While the weaknesses are listed in this article, mitigation steps could be to ask:

Do you approve a second source of component or do they approve a second raw material source?

Does the second source meet all the criteria for the first?

Do you insist they (or their supplier) hold contingency stocks? If so, where?

Do you hold contingency stocks? If so, will the supplier modify your credit agreement?

Do you decide to build product stocks? Again, if so, where? And what negotiations do you have with your customers about sharing the cost? After all, you are doing this for their benefit.

During the process, companies should consider stress testing with various scenarios. Asking themselves any and all of the following questions is a good starting point:

Are any of the supply sources, plants or storage depots in the supply chain in areas at risk from natural disasters?

What happens if there is a general strike in a certain country?

Does any existing or forthcoming legislation affect availability of the additive or any constituent chemicals in one or more countries?

How quickly can a supplier recover from loss of over-the-fence raw materials or utilities, in the event of a catastrophe or strike in the plant next door?

What happens if the political tension in a country breaks out into civil war?

The potential for general strikes and civil wars should, of course, be periodically reviewed, as the politics of many countries changes dramatically in a short time.

With these questions answered, companies can now build a risk matrix covering the value of the downstream business affected by critical additives and the likelihood of supply disruption that allows prioritized discussions with their suppliers and customers about mitigations.

Final Thoughts

Armed with these sets of questions asked in both articles, companies should be able to prioritize their components portfolio and then discuss with their suppliers the mitigation steps that they can take individually or jointly to ensure no catastrophic loss of supply to the customer at the next step in the supply chain.

Trevor Gauntlett has more than 25 years of experience in blue chip chemicals and oil companies, including 18 years as the technical expert on Shells lubricants additives procurement team.