Chemical and process manufacturers need to purchase chemicals to produce products for nearly every industry sector worldwide — from agriculture to automotive to pharmaceuticals and cannabis. Establishing a clear chemical procurement procedure can help your company stay compliant, streamline operations and better serve customers. But where do you start?
In this post, we’ll cover what chemical companies need to know about the chemical purchasing and procurement procedure, including:
- What is chemical procurement?
- Benefits of ERP software for chemical purchasing
- Chemical procurement procedure for raw materials
- Chemical procurement procedure for MROs
- Chemical purchasing policy best practices
What is chemical procurement?
Chemical procurement is the process of acquiring items and/or ingredients for business purposes. This involves not only the act of hitting the “buy” button, but also includes the considerations leading up to that point and the tools used to complete the process.
These procedures help you keep track of what chemicals you have on hand and follow proper safety measures. There are two types of chemical purchasing and chemical procurement procedures: raw material ingredients, and maintenance repair and operating supplies. We’ll cover both of them below.
Benefits of ERP software for chemical purchasing
Using enterprise resource planning (ERP) software is the best way to create a chemical purchasing policy that all staff members can easily follow. ERP systems are robust, integrated software suites that aggregate, automate, organize and streamline all the major aspects of your business operations.
Choosing an ERP system for the chemical industry, such as Datacor ERP, gives you specialized functionality for chemical purchasing and procurement. There are a number of benefits to using this software, including:
- Enables informed decision-making and cross-departmental collaboration through integrated, up-to-the-minute data.
- Reduces the potential for human error.
- Eliminates manual methods, saving time and effort.
- Automates common calculations and tasks, increasing accuracy and efficiency.
- Inventory, pricing and other key information is automatically updated across all departments and databases in real time.
- Keeps you compliant with health, safety and regulatory requirements at local, state, federal and international levels by automatically generating and sending key documents.
- Enhanced reporting and analysis tools for both compliance purposes and internal insights.
- Connects sales, marketing, warehouse, production and distribution departments for enhanced communication and operational efficiency.
- Helps you create and maintain a clear, documented chemical purchasing and procurement process that all staff can consistently follow.
- Allows you to reliably assess the risks of certain chemicals before purchasing.
Chemical procurement procedure for raw materials
Raw materials are all the items chemical companies are either reselling or using in production. This includes everything from the chemical ingredients used in manufacturing down to the shrink wrap, labels and pallets needed to ship finished products.
While the individual process may vary by company, a chemical procurement procedure for raw materials should include the following steps:
Determine demand. Raw materials should be purchased based on the demand for the finished products in which they are being used. Your first step in purchasing and procurement is determining how many complete products or items you expect to sell for a given time period.
For example, determine how much antifreeze and radiator coolant you expect to sell over the summer and winter. Specialized chemical purchasing and procurement software, such as Datacor ERP, offers demand planning and forecasting functionality that can help predict what products you’re likely to sell to which customers in the future.
Calculate the ingredients needed to fulfill demand. Next, you’ll need to determine how much of a given raw material is needed in order to meet your forecasted demand. This is done by multiplying the number of raw materials it takes to produce one unit of finished product by the number of products you expect to sell.
In discrete manufacturing, this calculation is simple: Simply determine how many finished products you expect to sell, and then multiply the raw material by that number. If your finished product is a car, one of the raw materials you would need would be tires; so, you would simply multiply the number of cars you expect to sell by the number of tires needed for each car: four. You might even order excess inventory if you wanted to keep spares on hand.
In chemical and process manufacturing, however, the process can become more complicated, since the same ingredients can be used for multiple products, and most companies don’t want to keep excess inventory.
If raw materials are only used in a few products: simply figure out how many of those products you expect to sell, and order ingredients based on that number. In our example, if antifreeze and radiator coolant are the only products that use ethylene glycol, you can determine the amount of ethylene glycol to purchase based solely on the forecasted demand for those products.
However, if the same ingredient goes into many different products, then purchasing must factor in forecasted demand for all of the finished products. If ethylene glycol is used not only for antifreeze and radiator coolant, but also for solvent and paint, then the amount you need to order will be based on the number of all of those products you expect to sell over the summer and winter.
That’s why chemical manufacturers and distributors need an ERP system with demand planning and forecasting and material requirements planning functionality, such as Datacor ERP. This software can perform all of these complex forecasts and calculations for you—ensuring accuracy, timely ordering and proper stock levels for optimized procurement and purchasing.
Maintain just-in-time inventory. Chemical raw materials have a shelf life, and it’s often short; if the product goes bad, then you’ve lost the money. This is why most chemical companies try to maintain just-in-time inventory: having exactly enough raw materials to meet demand without storing any excess inventory. In this system, raw materials are ordered with just enough time to replenish stock before they run out.
Returning to our example, this would mean ordering just enough ethylene glycol to fulfill the projected antifreeze and radiator coolant orders for the summer, with supplies being replenished just in time to begin production for the winter orders.
Optimize shipping quantities. Transportation and logistics costs may represent a significant percentage of the landed cost of your materials. That’s why it’s important to optimize purchasing and procurement based on full truckload or shipload quantities: a partial load is often twice as expensive as a full one.
The right ERP software will determine when to order what quantities of raw materials from which suppliers in order to build full truckloads and optimize just-in-time ordering. The system will then suggest orders to the supply chain or purchasing manager. Datacor ERP offers this capability through its demand planning and forecasting module.
Factor in other logistics. In addition to freight costs, you’ll need to consider the logistics of getting raw materials from the source—the supplier—to their final destination, the production facility or laboratory. This can impact not only the overall production cost, but the profitability of the finished product. A good ERP system will allow you to accurately track all of your logistics costs, which may include ocean freight, insurance, duties, tariffs and taxes.
Leverage your human resources. Your supply chain or procurement manager might know something the software doesn’t—for example, that there is a global pandemic happening, and delivery times are now 14 weeks instead of two weeks, or perhaps a hurricane is about to hit the Gulf and temporarily shut a plant down.
A good manager stays abreast of everything that might affect the supply chain. Taking the ERP software’s purchasing recommendations and combining them with their on-the-ground knowledge of the industry and current events leads to more informed decision-making and smarter chemical purchasing.
Place a PO. Once the manager determines what to purchase, they should always create a purchase order (PO) that documents everything they are procuring, including quantities and freight costs—then send an email or a hard copy of the PO to the supplier(s). Since a PO is a legal document, this ensures that pricing and quantities are fixed and guaranteed if there is a problem with the order.
Datacor ERP and other specialized chemical purchasing and procurement software can easily create POs and automatically send them to the appropriate parties.
Chemical purchasing procedure for MROs
Maintenance, repair and operating supplies (MROs) are the products used to keep your company running smoothly, from your warehouse to your production plant. These internal purchases include items such as safety glasses and propane for your forklift as well as office equipment, such as a desk chair or computer.
The procedure for procuring these items is much simpler:
Set up automatic ordering for inventory items. Items that are important to maintain daily operations can be set as inventory, so you’ll always have them in stock when you need them. Maybe you need a pump filter to keep the plant running, and these filters are expensive to order at the last minute. Even though you aren’t selling these items, you can set a minimum reorder point, just like just-in-time inventory for a raw material; for example, when inventory gets down to two filters, the system automatically triggers a PO to order 10 more.
Create a PO requisition for non-inventory items. There are plenty of other materials that you’ll need to procure through one-time orders, such as a new desk chair. The right ERP system can help you create a PO requisition: the prerequisite to creating an actual purchase order.
PO requisitions are often general requests from staff who either don’t know what they need, or don’t have the authority to place the actual order. For example, maybe they know they need a desk chair with wheels, but don’t know the brand name; or perhaps they want to buy a fancy, brand-name chair, but they need approval for this big-ticket purchase.
Using a specialized ERP system with PO requisition functionality, you can also set approvals based on the department or the dollar amount. Perhaps the standard, $30 office chair can be ordered directly by anyone in any department, but a $3,000 Steelcase chair needs to be approved by the CEO.
The right ERP system will offer material requirements planning functionality that utilizes standardized workflows based on the parameters you set, automatically queuing up requisitions for manager approval and turning approved orders into POs.
Chemical purchasing policy best practices
Before beginning the chemical purchasing and procurement process, ensure that you have a clear, documented policy in place that all staff members can easily follow. Your chemical purchasing policy should include the following steps:
- Create a list of common and approved chemicals that can be purchased by Supplier.
- Determine the process for approving and adding chemicals to the list.
- Identify the quantities that are allowed to be purchased.
- Create a receiving process that is linked with inventory management, so quantities are updated in real time (Datacor ERP and other specialized software can do this for you automatically).
- Establish a review process for chemical purchase requests.
- Create standard request, order and approval forms.
- Document all processes and procedures and make them available to all staff who need access (these can be generated and stored within your ERP system).
- Assign roles and responsibilities and train staff.
Now you’re ready to start purchasing. Here are some best practices for chemical manufacturers and distributors to keep in mind in order to stay safe, compliant, organized, efficient and profitable:
- Make sure that all chemicals on the approved list meet safety and regulatory requirements, and have been reviewed against a risk assessment.
- Ensure all chemicals being purchased are on the approved chemical list.
- Purchase orders are reviewed and approved by the proper personnel.
- Staff are properly trained to determine essential versus non-essential and raw material/production versus MRO procurement requests.
- Staff are trained to properly assess and address chemical safety hazards.
- Ensure all chemicals include Safety Data Sheets (SDSs), and are handled and stored according to their requirements.
- Verify that the chemical supplier is knowledgeable about safety and hazards and can be consulted with questions.
- Keep ingredients properly labeled and stored with the corresponding SDSs.
- Have an accurate, reliable chemical inventory management system in place that is linked with purchasing and procurement (Datacor ERP provides this out of the box).
- Follow just-in-time ordering and eliminate excess stock for raw materials.
- Set minimum and maximum order points for inventory MROs.
- Ensure production, shipping, receiving and warehouse facilities follow safety and regulatory standards, including offering proper Personal Protective Equipment (PPE) and waste storage and disposal.
Datacor ERP includes all of the features described in this post, along with many more that chemical manufacturers and distributors need for optimized, efficient and profitable chemical purchasing and procurement. To learn more, schedule a personalized demo today.