cleaner production from chemical suppliers: understanding shared savings contracts

Journal of Cleaner Production 7 (1999) 145–158

Cleaner production from chemical suppliers: understandingsharedsavingscontracts

Thomas J. Bierma*, Frank L. WaterstraatCampus Box 5220, Illinois State University, Normal, IL 61790-5220, USA

Accepted 13 November 1998

Abstract

The ‘chemical chaos’ experienced by many companies today can be linked, in part, to chemical supply strategies that have notkept pace with changes in the business environment. The traditional chemical supply relationship has incentives that promote wasteand expand the ‘hidden’ cost of chemicals. ‘Shared Savings’, an innovative alternative to traditional chemical supply relationships,has proved effective in reducing both waste and the overall costs of chemical use. Supplier revenue is linked to chemical perform-ance, rather than chemical supply, harnessing the resources of the supplier to ensure and improve chemical performance. Fivemanufacturing plants, with over 35 years of combined experience withShared Savings, are profiled. 1999 Elsevier Science Ltd.All rights reserved.

Keywords:Chemical supplier relationships; Management; Shared savings

Bob Hendershott had recently designed andimplemented a new tracking system for the cleaning sol-ution. Hendershott worked at one of Navistar Inter-national’s engine plants, where parts washers are usedat many points in the manufacturing process. The newsystem tracked cleaning solution usage by individualwasher, not just department, and on a much more fre-quent basis than in the past. It wasn’t long before heidentified a problem. One machine was using far morecoolant than the others. A follow-up analysis by Hender-shott found that the washer had a faulty filling mech-anism, spilling cleaner into the overflow each morningwhen the machine was turned on. Because the faultymechanism was inside the washer, no one had everobserved the problem. Without Bob’s new tracking sys-tem, the leak may have gone undetected for years.

Management was thrilled! Fixing the filling mech-anism dramatically reduced cleaner usage as well as cle-aner discharge to the wastewater treatment plant, savingmoney and reducing waste. Hendershott received somewell-deserved recognition for his work. But not just fromNavistar. In fact, he did not even work for Navistar. He

* Corresponding author. Tel:1 1-309/438-7121; fax:1 1-309/438-2450; e-mail: [email protected]

0959-6526/99/$ - see front matter 1999 Elsevier Science Ltd. All rights reserved.PII: S0959-6526 (98)00073-0

worked for the company that supplied the cleaning sol-ution to Navistar, and the supplier, his employer, wasjust as thrilled! [1].

How could a chemical supplier be thrilled about anemployee who helped its customer reduce the amountof chemicals they need? It’s an everyday experience forcompanies using the innovative chemical supply strategythat we callShared Savings. Chemical users have foundthat it not only reduces chemical use, but waste as well,dramatically improving environmental performance.Ultimately it saves money, improves production, andincreases product quality. Suppliers have found that itgives them a critical competitive edge in the chemicalsupply industry.

What these companies have discovered is that tra-ditional chemical supply relationships are inherentlywasteful and degrade overall environmental perform-ance. ThroughShared Savings, they have been able toturn that waste into profit. By sharing the profit, boththe chemical supplier and the chemical user are drivencontinuously to reduce waste.

Consider the comment of a manager at one of the fivemanufacturing plants we feature in this article:

The way it works is that we pay our supplier… fortheir chemicals and services every time we produce

146 T.J. Bierma, F.L. Waterstraat / Journal of Cleaner Production 7 (1999) 145–158

a good car out of the paint department. We don’t ownthe chemicals, [our supplier] is responsible for them.If there is a problem with a chemical, they take itback or do what’s necessary to correct the problem.We don’t own the chemicals until they have workedsuccessfully on our product. The point is that you payonly for a quality finished product. You pay your sup-plier for products that are actually salable [1].

Their chemical supplier explains it this way:

Instead of a vendor wanting to sell more product toa customer, now the vendor is working with the cus-tomer to optimize and reduce the excess in the system.The first year at this plant alone there was approxi-mately a million dollar savings in usages—becausewe’re focused now on reducing costs. Some peoplemight say that’s a detriment to the vendor becausehe’s losing business, but it’s given us an opportunityto expand into other areas that we weren’t in before[1].

In this article we will present the results of three yearsof research intoShared Savings. Some of the companieswe interviewed were already usingShared Savings,others were consideringShared Savingsas a chemicalsupply option. We will explainShared Savingsand howit promotes cleaner production, better business perform-ance, and improved profitability. We profile five manu-facturing plants in the United States with over 35 yearsof combined experience inShared Savings. Finally, weexplore the future ofShared Savingsand how companiescan develop their ownShared Savingsprograms.

1. Chemical management strategies and chemicalsuppliers

Every company that uses chemicals has a chemicalmanagement strategy, whether by design or default. Itincludes the purchase, delivery, storage, distribution,use, and disposal of their chemicals. It also includesancillary, chemical-related activities, such as environ-ment, health, and safety (EHS) programs. In most com-panies, chemical management responsibilities are perfor-med by different personnel in different departments.Unfortunately, these responsibilities are rarely perceivedor managed as a set of integrated activities intended tooptimize chemical performance. In addition, many com-panies do not recognize the importance of the chemicalsupply relationship on the effectiveness of their chemicalmanagement strategies.

Failure to use a chemical management strategy that isintegrated internally as well as with suppliers may havebeen sufficient for many companies in the past. How-ever, business conditions today are characterized by

intense international competition, increasing customerexpectations for quality, technological complexity, andgrowing regulatory requirements. Yet, traditional chemi-cal management strategies are based on a chemical sup-ply model dating back to the early 1900s. This has pro-duced ‘chemical chaos’ in many companies, includingproblems with:

I accurately identifying all the chemicals purchased bythe company,

I maintaining proper chemical safety records and clear-ances on each chemical,

I keeping current with the regulations pertaining toeach chemical,

I tracking chemical volumes for environmentalreporting,

I identifying the volume and content of wastes, andI controlling chemical costs.

The problem is summarized quite well in the com-ments of an environmental manager at one of the plantsfeatured in this article:

To appreciate what this program has done, you haveto understand what it was like here before that. You’dsee what a difference this has made. Before, we mighthave 35–40 different managers spread out over threedifferent shifts, each trying to make their own chemi-cal purchase decisions. We were using 300–400 dif-ferent chemicals, so we had all these different sales-men coming in and trying to sell each manager ontheir chemicals, telling each one how great theirchemicals are. There was no coordination. We mighthave half-a-dozen different chemicals for the samejob.

From a chemical safety standpoint, how do you keeptrack of all this? From a purely logistics standpoint,how do you handle ordering and where do you storeall this stuff? It was terribly inefficient. We had 40or 50 salesman tripping over each other, taking ourtime, and none of them getting enough business tomake it really worthwhile.

By going to the new program, we were able to reduceall that duplication. In the old system, we hadaccumulated these stockpiles of different chemicalsthroughout the plant. Some of it was stuff we hadstopped using. But under the new program, the chemi-cal manager understood how we could use it all,instead of having to pay someone to come and cleanit up and dispose of it.

Really the whole thing comes down to ‘management’.The bottom line is that we put the management of

147T.J. Bierma, F.L. Waterstraat / Journal of Cleaner Production 7 (1999) 145–158

chemicals in the hands of a company whose expertiseis chemicals. Their person is here to manage chemi-cals, not build vehicles. It simplified things an awfullot, and it’s worked out great for us [1].

To understandShared Savingsand how it works, it isnecessary to understand why the traditional approach tochemical supply creates so many problems.

2. Hidden costs of chemicals

2.1. The chemical cost iceberg

Traditional chemical supply relationships tend tofocus on purchasing a chemical at the lowest price. Butconsider how many other ways the chemical can affectthe chemical user. There are often chemical safetyreviews, paperwork to manage, and employee training.The company must be in compliance with environmentaland occupational health regulations. Inventories must bemaintained, and outdated chemicals returned or disposedof. If the chemical does not perform as well as expected,it can slow or stop production, shorten equipment life,increase maintenance expenses, and reduce product qual-ity, resulting in rework or dissatisfied customers. Finally,chemical spills and discharges can increase liability andinsurance rates.

In other words, the purchase price of a chemical isonly a portion—often a small portion—of the financialimpact that a chemical has upon a chemical user. Oneway to visualize total chemical costs is an iceberg (seeFig. 1). The tip of the iceberg, above the water, rep-resents the purchase price of chemicals. The bottom ofthe iceberg, below the water, represents all the other‘hidden’ costs that chemicals create for the chemicaluser. One major North American auto manufacturer esti-mates their ‘hidden’ costs to be five to seven times their

Fig. 1. The chemical cost iceberg. Source: Ref. [1].

chemical purchase costs. However just like real icebergs,it is the tip of the chemical cost iceberg—the purchaseprice—that gets the most attention. This focus on chemi-cal purchase price, and the difficulty in perceiving ‘hid-den’ chemical costs is an important reason why tra-ditional supply relationships contribute to ‘chemicalchaos’.

2.2. Types of ‘hidden’ costs

Most ‘hidden’ costs fall into one of three categories:logistic, EHS/compliance, and/or application.Logisticcostsinclude all those related to acquiring and handlingthe chemicals.EHS/compliance costsare those requiredto maintain regulatory compliance and ensure the desiredlevel of environment, health, and safety (EHS) perform-ance.Application costsare those related to the perform-ance of the chemicals in the production process. All cat-egories include not only chemical-related expenses, butother impacts on competitive strength, such as lowerproduct quality and poor working conditions. Examplesof ‘hidden’ costs from the companies we studied arepresented in Table 1.

As an example of how easily ‘hidden’ costs can beoverlooked, consider one of Amoco Oil Company’s USrefineries in Yorktown, Virginia [2]. Original companyestimates placed environmental costs at 3% of non-crudeoil expenses for the plant. A more thorough study foundthat actual environmental expenses were nearly 22% ofnon-crude oil costs. Of the many ‘hidden’ costs that wereuncovered, one of the biggest was maintenance activitiesdevoted to environmental control.

3. Inherently wasteful relationship

As competition, regulatory requirements, technicalcomplexity and other business pressures have intensified,the ‘hidden’ costs of chemicals have grown. One reasonis that traditional chemical supply relationships havecharacteristics that make them inherently wastefulrelationships. Not only do they inhibit attempts to reduce‘hidden’ costs, they can even increase them! There aretwo primary reasons why the traditional chemical supplyrelationship is particularly problematic: misdirected fin-ancial incentives and an arbitrary division of responsi-bilities.

3.1. Misdirected financial incentives

In a traditional chemical supply relationship, chemi-cals are purchased on a price-per-volume basis (forexample, US$/pound of chemical). Supplier revenue andprofit are directly linked to volume—the greater the vol-ume, the greater the profit (see Fig. 2). This produces astrong incentive for suppliers to promote technologies


Table 1Selected ‘hidden’ chemical costs reported in interviews

LogisticI Maintaining a laboratory and personnel to double-check quality of incoming chemicals, increasing personnel, equipment, and commodity

expenses (in excess of US$1 million/year at some plants).I Extensive purchase order system for re-ordering chemicals (in excess of US$16 000/year at one plant).I Chemicals available only in quantities greater than the amount needed, wasting chemical and increasing purchase costs.I Maintaining chemical inventories, including the cost of chemicals which ‘go out-of-date’ in inventory, requiring disposal and replacement.I Excess paint from maintenance paint jobs collects in storage, eventually requiring disposal, increasing hazardous waste disposal costs.EHS/complianceI A caustic cleaner requiring workers to wear extensive personal protective clothing, increasing expenses for protective clothing and labor,

and increasing process down-time.I ‘Cheap’ wastewater treatment chemicals producing more treatment sludge, increasing hazardous waste disposal costs.I Dermatitis from machining coolant, increasing worker compensation costs and process downtime.I ‘Cheap’ wastewater treatment chemicals, incompatible with sludge drying equipment, reducing drying effectiveness and the life of the

equipment, and increasing hazardous waste disposal costs and equipment expenses.I Collecting data from purchasing, maintenance, operations and others in order to estimate chemical usage for environmental reporting,

diverting EHS time to non-value-added activities.I Odors from rancid machining coolant resulting in worker complaints, increasing coolant and biocide expenses and increasing process down-

time.I High VOC chemicals producing a violation of VOC emission limits, resulting in a fine and negative publicity.ApplicationI Incompatibility between the cleaner and cutting fluid for a metal component produced product spotting, increasing rework.I ‘Cheap’ boiler treatment chemicals producing increased pipe corrosion, reducing boiler life and efficiency, and increasing acid cleaning

expenses.I Rust from an ineffective rust preventative, increasing rework and decreasing customer satisfaction.I Poorly maintained coolants, lube oils, and other chemicals resulting in equipment and assembly line downtime.I Paints which require more solvents for cleaning and more chemicals for paint detackification, increasing chemical purchases, compliance

expenses, and waste disposal costs.

Source: Ref. [1].

Fig. 2. Source of supplier profit in traditional chemical supplyrelationships. Source: Ref. [1].

that increase chemical use and resist technologies thatwould reduce chemical use. It is also in direct oppositionto the interests of the chemical user, who wishes toreduce chemical volumes and costs, producing a ‘vol-ume conflict’.

The price-per-volume incentive can increase thechemical cost iceberg in several ways. First, followingthe incentives of the system, the supplier is always pro-moting volume increases. Second, the ‘volume conflict’contributes to an underlying adversarial relationshipbetween chemical user and chemical supplier, inhibiting

the trust and exchange of information needed to makesignificant reductions in ‘hidden’ chemical costs. Third,it tends to focus the relationship on purchase price, tothe exclusion of the rest of the chemical cost iceberg.Suppliers may reduce purchase prices to make a sale,but then ‘cut corners’ in ways that increase the ‘hidden’chemical costs for the user.

3.2. Division of responsibilities

In a traditional chemical supply relationship, chemicalownership and responsibility typically change hands atthe loading dock, as chemicals are removed from thesupplier’s truck and received by the chemical user’semployees. This simplifies accounting procedures forpayment and inventory. However, it’s a costly way torun a chemical management program. It requires thechemical user to acquire and maintain expertise in allareas of chemical management from inventory controlto regulatory compliance to waste minimization.

However, achieving and maintaining expertise inareas outside a company’s core business can be a costlydrain on resources, reducing competitive power. Mostmanufacturers would agree that chemicals and chemicalmanagement is not their core business. Resources com-mitted to developing chemical management expertise areresources that could have been devoted to expertise intheir own core business. On the other hand, the core


business of a growing number of chemical suppliersischemical management. Because maintaining state-of-the-art expertise in chemical management represents aninvestment in their own core business, chemical sup-pliers can often provide chemical management servicesfar more effectively and efficiently than chemical users.In addition, chemical suppliers often have extensiveresearch and development, laboratory, and applicationsexpertise to draw upon. Such resources would be diffi-cult and expensive to acquire or access for the typicalchemical user.

Consider, for example, the effort it takes to keep upwith regulations on solvents. For a solventuser, this costcould be allocated over the volume of solvents pur-chased. For a solventsupplier, however, the same costsare incurred, but are allocated over a far larger volume.Or consider the cost of perfecting a membrane filtrationtechnology to work with an aqueous cleaning system.For a user of aqueous cleaners, development costs mightbe spread over just a few cleaning systems. For the sup-plier of aqueous cleaners, however, development costscan be spread over all of their customer’s systems.

This is not to suggest that chemical users do notrequire chemical expertise—they do. But the traditionalsupply relationship forces them to devote their ownresources to develop and maintain such expertise ratherthan leverage the resources of their supplier.

Finally, the transfer of chemical managementresponsibilities at the company’s loading dock tends toisolate the supplier from the ultimate performance of itschemicals. While poor chemical performance may pro-duce threats to switch suppliers, there is no directresponsibility or financial association between the sup-plier and the performance of its chemicals. This problemis amplified by the financial terms of traditional con-tracts, where suppliers are paid for chemicals, not chemi-cal performance.

4. Chemical supply alternatives

Fortunately, there are alternatives to traditional chemi-cal supply relationships. These alternatives reduce manyof the problems created by traditional supply relation-ships, and allow companies to tap the chemical expertiseof their suppliers. We have organized chemical supplyalternatives into three categories. Combined with tra-ditional chemical supply (‘price-per-volume’), these foursupply relationships comprise avalue pyramid, rep-resenting increased value from the supply relationship asone moves up the pyramid (see Fig. 3). Each relationshipis discussed briefly, below.

4.1. Price-per-volume

In this traditional chemical supply relationship, thesupplier profits through margins on their sales price. Pro-

Fig. 3. A hierarchy of value-added supply relationships. Source:Ref. [1].

fits are increased by selling more chemicals. Competitionis largely on the basis of price. Suppliers may providesome value-added services, such as timely delivery, butservice is usually not a driving force in these relation-ships.

4.2. Price-per-volume plus services

Chemicals are still sold on a price-per-volume basis,but value-added services play a much more prominentrole in winning customers. Such services typicallyinclude eitherlogistics (ordering, delivery, packaging,inventory, tracking, etc.) orEHS/compliance(shipping,labeling, training, recordkeeping, reporting, etc.).Occasionally, such services may also address chemicalapplications—improving the effectiveness of the chemi-cal in the manufacturing process.

Suppliers benefit from these value-added services bycharging higher prices for their chemicals. Chemicalusers benefit by making suppliers responsible for a widerarray of ‘hidden’ chemical costs. Ideally, the cost sav-ings exceed the increased purchase price, thus shrinkingthe overall size of the chemical cost iceberg. However,the supplier still profits through higher chemical volume.In fact, the higher prices inPrice-per-volume plus Ser-vicesrelationships may even intensify the ‘volume con-flict’.

4.3. Chemical management fee

In a Chemical Management Feerelationship, paymentfor chemicals and services are handled separately.Chemical management activities performed by the sup-plier—including logistic, EHS/compliance, and/or appli-cation services—are contracted for a fee. Chemicals are


purchased through the supplier on a price-per-volumebasis. Chemical prices are often among the lowest inthe market because the cost of supplier services is paidfor separately.

The value of the Chemical Management Fee relation-ship is driven by two factors. First, the supplier is givenmore responsibility for an array of ‘hidden’ chemicalcosts. Second, this relationship begins to reduce theimpact of the chemical sales ‘volume conflict’. Sincemanagement fees are not related to chemical volume,suppliers increase their fees by expanding services ratherthan expanding chemical volume to increase profitabil-ity. However, for many accounts, profits from chemicalsales still exceed profits from management services.Thus, the ‘volume conflict’ can still create a signifi-cant problem.

4.4. Shared Savings

Shared Savingsis fundamentally different from theother supply relationships. The most unique character-istic of Shared Savingsis that the chemical user nolonger purchases the chemicals. Instead, the chemicaluser purchaseschemical performance. The supplier’sprofit is directly linked to the performance of the chemi-cals and reducing the size of the chemical cost iceberg,rather than increasing the volume of chemicals supplied.

This is accomplished by the supplier and the user: (1)defining minimum expected levels of performance; (2)negotiating a price for this performance; and then (3)sharing the financial benefits of improved performance.This eliminates the ‘volume conflict’ and links supplierresponsibility directly to chemical performance, ratherthan simply the supply of chemicals. Chemical manage-ment responsibilities are divided according to the expert-ise of each party. It also provides a critical, built-in fin-ancial incentive for continuous improvement and costreduction.

The typical Shared Savingsrelationship employs afixed fee paid to the supplier (a fee per month, or a feeper unit of production). This simple approach reversesthe traditional financial incentive to increase sales vol-ume (see Fig. 4). Since supplier revenue is fixed, regard-less of chemical volume, profits can only be increasedby reducing costs, including the amount of chemicalsrequired to meet the user’s performance expectations. Inother words, the financial incentives reward increases inchemical efficiency rather than chemical volume.

For companies that have implementedShared Sav-ings, the results have been extremely impressive. Com-panies withShared Savingsprograms have experienceddramatic reductions in chemical usage and waste,improved environmental performance, reduced costs,smoother production, and higher product quality.

Fig. 4. Source of supplier profit inShared Savingssupply relation-ships. Source: Ref. [1].

5. Examples ofShared Savingsrelationships

5.1. Profiles of five plants

Profiles of five manufacturing plants usingSharedSavingschemical supply programs are summarized inFigs. 5–9:

I Navistar International’s engine plant in Melrose Park,Illinois (Castrol Industrial, supplier),

I Chrysler’s Neon assembly plant in Belvidere, Illinois(PPG Industries, supplier),

I Ford’s Taurus assembly plant in Chicago, Illinois(PPG/Chemfil, supplier), and

I General Motors’ Truck and Bus plant in Janesville,Wisconsin (BetzDearborn, supplier).

I General Motors’ Electro-Motive Division plant inLaGrange, Illinois (DA Stuart, supplier).

Together, these plants have over 35 years of experi-ence withShared Savings. Complete case histories forthese plants have been published elsewhere [1].

5.2. Cleaner production activities

The Shared Savingschemical management programsat these five companies produced a wide array of cleanerproduction activities. We will highlight just a few toillustrate the power ofShared Savings. While any oneof these projects could have been undertaken by the plantwithout aShared Savingspartnership with their chemicalsupplier, it is this innovation supply strategy that hasproduced a continuous stream of activities to reduce bothwaste and cost in production operations.

One of the first projects under theShared Savingspro-gram at GM’s Electro-Motive Division (EMD) was tosolve ‘rancidity’ problems with their large-volume cool-ant systems for machining operations. Bacterial growthin the coolant produced severe odors, dermatitis, anddeterioration of the coolant. Bacterial growth had been


Fig. 5. Navistar engine plant case profile. Source: Ref. [1].


Fig. 6. Ford Taurus plant case profile. Source: Ref. [1].


Fig. 7. Chrysler Neon plant case profile. Source: Ref. [1].

controlled by the weekly addition of biocides. A team,composed of personnel from EMD and their supplier(DA Stuart), was created to find alternatives. They founda method to control bacterial activity through pH adjust-ment, as well as a superior coolant with longer machinelife. Together, these changes eliminated problems asso-ciated with rancidity and reduced coolant usage by 60%compared to 1994 baselines (see Fig. 10). A similar pro-

ject between Navistar and their supplier (CastrolIndustrial) produced a 50% reduction in coolant usageand a 90% reduction in coolant waste haulage (see Fig.11). Moreover, the new coolant improved product qual-ity, cutting rework on engine blocks and heads by 93%.Under a traditional supply program, such changes wouldhave meant a significant loss of business for the supplier,limiting cooperation to what was necessary to maintain


Fig. 8. GM truck and bus plant case profile. Source: Ref. [1].


Fig. 9. GM truck and bus plant case profile. Source: Ref. [1].


Fig. 10. Engine production, coolant usage, and coolant waste haul-age, Navistar Engine Plant, Melrose Park, IL, USA, 1989–1996.Source: Ref. [1].

Fig. 11. Coolant usage, GM Electro-Motive Division, La Grange, IL,USA, 1994–1998. Source: Ref. [1].

the account. However, underShared Savings, these pro-jects produced financial benefits for the supplier. At bothplants, supplier personnel took leadership roles in bring-ing about reductions in coolant usage.

At Chrysler’s Neon assembly plant, a team ofChrysler and PPG personnel developed a method tomake minor paint repairs without using chemicals con-taining high levels of volatile organic compounds(VOCs). Typically, post-assembly repairs cannot bemade using the original paint and curing methods sincecertain components of the assembled car cannot with-stand the curing process. As a result, special repairmethods, using high-VOC chemicals, are required. Thenew repair technique uses the original low-VOC paintand produces a superior finish. At the Ford Taurusassembly plant, the supplier (PPG/Chemfil) worked withproduction employees to reduce VOC emissions fromsolvents. By changing containers and work practices, theplant was able to reduce emissions by 57% in 18 months.While other cleaner production innovations have pro-duced greater reductions in chemical usage and waste,these examples illustrate the potential ofShared Savingsprograms. The projects reduced the number and volumeof chemicals needed in the plant, benefiting both chemi-cal user and chemical supplier. But more importantly,the projects illustrate the level of cooperation and inno-vation that is possible in aShared Savingsprogram.

Once the ‘volume conflict’ has been removed, there isa strong incentive for both parties to work closely tooptimize processes. In time, this cooperation producesinnovations far exceeding what either party could haveaccomplished alone.

Another example at Navistar was featured at thebeginning of this article. A new chemical tracking sys-tem, installed and operated by Castrol, was able to ident-ify excessive cleaner usage in one parts washer. A faultyfilling mechanism was spilling cleaner into the overfloweach morning when the machine was turned on. Withoutthe new tracking system, the leak may have gone unde-tected for months or even years. While the volume ofchemical waste reduced in this case was not large, com-pared to overall chemical use in the plant, it highlightsanother strength ofShared Savings. The chemical sup-plier’s personnel are focused on chemicals—improvingtheir performance and reducing their waste. These per-sonnel are never diverted to other tasks in the plant (asoften happens with the plant’s own ‘chemicalmanagers’). They have a strong incentive to develop andmaintain chemical tracking systems that can identifysources of chemical waste.

These are just a few of the many cleaner productionactivities undertaken as a result of theShared Savingsprograms at these plants. They are important not becausethey involve a unique technology or chemical inno-vation. Rather, they are important because they reflecta dramatic and sustained increase in cleaner productionactivities at these plants—an increase produced by mak-ing cleaner production profitable for both chemical userand chemical supplier.

5.3. Contract structure

In these five companies the duration of theSharedSavingslegal agreements range from an annual purchaseorder to a detailed 5-year contract. However,SharedSavingsagreements have a set of basic components incommon:

I Performance expectations—This defines the perform-ance expected of the supplier. They may be in theform of product and process outcomes (e.g. finishcharacteristics, tool life, downtime), services (e.g.chemical testing, equipment maintenance), or chemi-cal characteristics (e.g. viscosity, lubricity). Expec-tations for continuous improvement may also bespecified, including expected annual cost or chemicalvolume reductions.

I Performance fees—The ‘fees’ paid to the supplier formeeting the performance expectations. This typicallyinvolves some sort of fixed fee. The most common is‘unit pricing’; paying the supplier a fixed amount foreach unit of product manufactured by the chemicaluser that meets predefined quality standards. This is


used by GM, Ford, and Chrysler. Some companiesprefer simply to use a fixed monthly fee. This is truefor the Navistar engine plant.

I Shared Savings—This provides the mechanisms bywhich additional savings from the relationship areshared between the parties. Since, under a fixed-feesystem, suppliers can profit by reducing chemical use,some criteria are included detailing how these savingswill be shared with the plant. This may include amechanism for lower fees, or rebating a portion ofsavings back to the plant.

‘Gainsharing’ is a mechanism for sharing the shav-ings that accrue to the chemical user, but not thechemical supplier. For example, the supplier may finda way to reduce sludge from wastewater treatment,reducing hazardous waste disposal costs for thechemical user. Gainsharing provides a formula forsharing a portion of these savings with the supplier,stimulating further innovation.

I Baselines—The ‘baseline’ chemical data includeusage rates, costs, and other production parametersagainst which future progress and performance aremeasured.

I Chemical footprint—The chemical footprint itemizesall the chemicals or production processes covered bythe contract. In the plants that we profile, the chemical‘footprints’ differ markedly. Ford and GM focus onthe full range of ‘indirect’ chemicals: those which dobecome part of the vehicle. Chrysler’s program coversmost ‘direct’ chemicals, including paints. Navistar haslimited their program to only two chemicals: coolantsand cleaners.

I Risk/Reward—This component defines mechanismsfor handling unexpected gains or losses due to unusualevents, including employee errors, equipment mal-functions, substantial changes in the price of chemicalfeedstocks for the supplier.

Clearly, within this general framework ofShared Sav-ings, a wide array of contract terms can work success-fully.

6. The future of Shared Savings

ThoughShared Savingsis an innovative approach tochemical supply, the concept is not new. It has been usedfor many years to reduce energy costs [3–6]. Typically,companies selling ‘energy services’ provide these pro-grams. They offer services, as well as equipment andsometimes even capital improvements, in exchange for ashare of the energy savings they generate. Even chemicalShared Savingsis not limited to the North Americanauto industry. For example, Nortel is implementingShared Savingsat plants in Britain and Canada [7].

Many, if not most, chemical users can benefit from

Shared Savings. Some business conditions, however,may require some innovative mechanisms forimplementingShared Savings. The use of a fixed feearrangement with on-site supplier support personnel isbest suited to large volume chemical users with rela-tively predictable production volume and product mix.Smaller accounts, such as those purchasing less thanUS$200 000 of chemicals per year, may not be able tosupport full-time supplier personnel, and may require apart-time support program.

Companies with highly variable production volumesor product mixes face a different problem. The variablenature of their business makes it difficult to establishappropriate fixed fees. In some cases, process rates (suchas hours of operation for a parts washer), rather than unitproduction rates, may be appropriate for establishingfixed fee rates. Establishing such unit prices will takemore analysis than simply dividing the previous year’schemical consumption by the number of defined productunits. Companies with variable production schedulesmay also benefit by using gainsharing in combinationwith more traditional supplier fees, such as a Price-per-volume plus Services arrangement. This disconnects thesupplier from the volatile production levels, yet rewardsthe supplier for cost-saving innovations through thegainsharing program.

Ultimately, the greatest barrier toShared Savingsisnot production conditions or the size of the chemicalaccount, but difficulty in overcoming the habits andpractices of traditional supply relationships. In our workwith companies that are consideringShared Savings, wehave identified several common reasons why many areresistant:

I ‘We already do that’—Some companies believe thatif they have a component of aShared Savingspro-gram (such as enhanced supplier services), then theyare getting the benefits of a full program. However,these programs typically still use price-per-volumepurchasing, leaving the relationship hobbled by the‘volume conflict’.

I ‘We can’t trust our supplier’—Traditional supplyrelationships create distrust, and it is difficult formany companies to imagine trusting their supplierswith important chemical management activities. Thisis why Shared Savingsprograms start small, and growonly as the companies gain each other’s trust.

I ‘We don’t want to give up control in our own plant’—Giving internal chemical management activities to asupplier creates the illusion of giving up control.However, the companies we studied found just theopposite to be true—they gained greater control overperformance, which is what they valued. In addition,the chemical user always had the final say in anychemical management decision.


7. Conclusions

The ‘chemical chaos’ experienced by many compa-nies today can be linked, in part, to a chemical supplystrategy that has not kept pace with changes in the busi-ness environment. The traditional chemical supplyrelationship has financial incentives that promote waste,and divide chemical management responsibilities arbi-trarily which significantly reduces efficiency. In today’smarkets, few companies can afford such a drain on com-petitive strength.

‘Shared Savings’, an innovative alternative to tra-ditional chemical supply relationships, has proved effec-tive in reducing both waste and the overall costs ofchemical use. Its advantages over traditional supplyrelationships are numerous. Supplier revenue is linkedto chemical performance, rather than chemical supply,harnessing the resources of the supplier to ensure andimprove chemical performance. Financial incentivesreward chemical volume reduction, promoting continu-ous improvements in chemical use efficiency. Responsi-bilities are divided according to the core competence andexpertise of each party, reducing overall chemical costsand allowing the chemical user to devote more resourcesto its core business.

Companies have structured theirShared Savingspro-grams in a variety of ways, depending upon their ownneeds and circumstances. Programs usually begin small,and expand as both parties build trust in each other. Thebenefits have been dramatic, with significant decreases inchemical use and waste, as well as reductions in overallchemical costs. The success ofShared Savingshas beendemonstrated in many manufacturing plants, with somehaving over 10 years of experience.

Some creative changes inShared Savingsmay beneeded to apply the strategy to smaller manufacturers,or manufacturers with a highly fluctuating production

rate or product mix. However, it appears to be currentlyapplicable to a large number of manufacturing plantsthroughout the world. The primary barrier limiting appli-cation ofShared Savingswill be resistance to the typesof changes this relationship entails. However, the com-petitive edge will go to those companies who are firstto overcome this resistance.

Acknowledgements

The authors are grateful to the many companies andemployees who so generously donated their time to oureducation. This work was supported by grants from theUS Environmental Protection Agency and the IllinoisWaste Management and Research Center. This articledoes not necessarily reflect the views or policies of theseagencies. The mention of company names does not con-stitute an endorsement.

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cleaner production from chemical suppliers: understanding shared savings contracts

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