The Shifting Roles of Chemical Distribution

Chemical distributors have always been an important component of the supply chain. Over time, however, the landscape of the distribution business evolved. In particular, consolidations within the distributor network over an extended period of time reduced the number of regional or specialty third-party distributors available to supply chain managers.

For many corporations, the strategic value that resulted from this shift was a consolidation in their supplier base with the goal of reducing the overall costs associated with managing a much more complex supply chain. At the same time, it also reduced the number of regional and more specialized distributors. These distributors were frequently the ones that offered a high level of customer support and service, especially to medium to smaller-sized, local manufacturers.

During and following the COVID period, the dynamics of the distributor relationships are shifting in certain ways and for a variety of reasons. These reasons include:

Impact of the Pandemic

Supply chain disruptions, created by the pandemic, started in early 2020. Globally, this event caused many manufacturing companies to rethink how they manage their supply chain going forward in order to ensure ongoing supply to their customers.

Manufacturers who suffered a significant loss of business from shortages or scrambled to find alternative sources for key raw materials began modifying their outsourcing strategies.

Principals are currently strengthening their relationships with their current distributor network. This includes aligning their third-party sales strategies with distributors that best complement their own direct sales efforts. At the same time, the trend has been for principals to reduce the number of secondary distributors while focusing on those distributors which are able to effectively support sales to their key strategic markets.

Geopolitical Climate - Regional Trends

The geopolitical climate today continues to modify how companies are positioning themselves with regard to supply chain outsourcing strategies. These events include the aggressive territorial actions of the Chinese government across the entire Asia Pacific region, the impact of Ukraine-Russian war, and the war between Isarel and Hamas and its impact on European and the Middle East.

Each of these situations is altering regional approaches to supply chain management and how principals select their distribution partners. A key goal is to reduce risk while securing relationships with key accounts in a particular region or country.

In the Asia Pacific region, the retreat of many Western manufacturers from China along with the decline in China economy is evident. It has created a need for Chinese manufacturers to expand and grow their distributor network outside of the country to compensate for the decline in domestic demand. The goal in this case is revenue growth through expansion of offshore sales coverage.

In the European region, the uncertainties brought about by regional conflicts are driving principles to focus more on direct sales going forward. Distributors that provide strong technical support and maintain close customer relations in strategic markets within a target region or country are used to complement their direct sales efforts.

Distribution increases sales coverage and technical support at the small-to-medium size companies. For Europe and across the EMEA region the importance of addressing country-to-country differences in markets and product requirements is a key value of distribution.

In North America, principals are focused on working with distributors that can provide a wide range of services and technical support. They want their distributors to function as an integral part of their business and operate as a partner in supply chain management.

Supply Chain Management - Logistical Support

Following the COVID period, as inventories began to return to more traditional levels, logistics in supply chain management needed to be re-assessed. This is especially true for manufacturers that want to operate on a just-in-time basis. The capability of distributors to integrate inventory levels and supply chain activities with their principals was again a priority.

Principals want key distributors to integrate their supply activities with their own. This includes communicating inventory levels, shipment and transportation details, analytics that provide data on trends in demand by account, etc.

Employing supply chain and accounting software compatible with their principals is an increasingly important element of supply chain management. Principals want to have available real-time data that they can refer to and analyze. As much as possible the trend is toward digitalization of communications and business activities between distributors and their principals.

Value-Added Services

Manufacturers are increasingly looking for distributors that can provide a variety of complementary, proactive services. The objective is to have their primary distributors function as an extension of their sales team. This includes participating in setting sales targets where the distributor has accountability for pipeline account deliverables. The goal of the principal is to integrate the sales effort of their key distributors with their own sales strategies and business strategies.

Principals are also looking to gather market information and competitive intelligence from their key distributors. In general, they want to develop a closer, longer-term working relationship with their distributor’s sales and marketing team.

Regulatory Compliance

In today’s market, chemical distributors bear significant responsibility for maintaining compliance with local, national, and international regulations. This includes the labeling, packaging, handling, storage, and transport of the various chemicals they supply.
When hazardous chemicals are involved, compliance with safely standards such as OSHA, are critical distributor responsibilities.

The difficulty of accomplishing this task is amplified by the complexity of the product mix involved. Principals expect their distributors to maintain compliance in all aspects of safely compliance.

Sustainability

Sustainability represents a global movement by major manufacturers and governments to address a variety of environmental issues. These include climate change, waste recycling, circularity of use, and waste disposal.

This movement has been led by major global manufacturers who have made a proactive commitment to take actions that improve the environment. The chemical industry, in particular, has seen many initiatives put in motion by leaders in our industry intended to advance more sustainable processes and manufacturing practices.

Globally, government agencies are also getting behind the importance of supporting activities that address climate change, recyclability, and waste disposal. Distributors are often in a unique position to work with their principals and customers to provide waste management services including dealing with returns and chemical disposal.

The European Union has long been the global leader in this area through their REACH regulations. Recently, the EU announced a new initiative with the “Green Deal.” The “Green Deal” accelerates the timeline for manufacturers to be “Carbon Neutral” by 2030. In this regard, the EU has pledged financial support to assist manufacturers in making the investments necessary to switch to alternative manufacturing process technologies that will accelerate this process.

At the distribution level, the sustainability movement has increased interest in expanding their product portfolio. This includes products that support the sustainability objectives of their principals. Examples include the addition of bio-based chemistries and the addition of products lines that support sustainable processes such as those that are 100% solids, use zero-water, or have a low-
energy demand.

Outside of the EU, distributors are paying attention but less proactive in pushing for a change to more sustainable materials. The exceptions are for distributors that have a strong involvement with principals who serve markets where sustainable materials are in high demand.

Global Inflation

The escalation in prices for chemicals was primarily spurred on by the global impact of the pandemic on the supply chain. The dependence on offshore sources of supply, especially in the case of China, manifested itself in a shortage of various raw materials during 2020.

The scramble to quickly find alternative sources of supply by manufacturers and their distributors saw raw material prices escalate 30-40% over pre-COVID 2019 price levels within a short period of time. Volume sales, during the same period, remained relatively flat.

In the post-COVID period, overall volume growth for chemical distribution has continued to be low to moderate in both North America and Europe. For the Asia Pacific region, however, growth rates have rebounded somewhat but not to pre-COVID levels. This growth is mainly attributed to the increased role of other countries in in the Asia Pacific region, other than China (e.g., India), who are gaining share in servicing the global supply chain.