The specialized technical knowledge and intense support required by customers in the petrochemical market raise the bar for distributors who serve them.
The oil industry is a world unto itself. It's huge, reaching its tendrils into every crevice of modern life. It's bold, especially on the upstream side, where players will sink hundreds of millions of dollars into wells in politically treacherous and geographically forbidding locations on the educated guess, often proved wrong, that there's oil under that rock. It's complex, particularly on the downstream side, where huge refineries and petrochemical processing plants that are small cities of snaking pipe hiss and rumble around the clock, distilling and blending hazardous substances into the raw materials of household staples. It's lucrative, supporting not only the major petroleum marketers that are household names, but moreso the endless network of specialized companies that manufacture products and provide services to keep the drilling rigs and cooling towers in operation.
Nowhere in North America is the oil industry's character more richly on display than along the Gulf Coast in Texas and Louisiana, where offshore rigs dot the horizon from a Galveston beach and petrochemical processing plants light up like the Emerald City at night. The refineries and processing plants lining the man-made Ship Channel that makes Houston a port city are at once an impressive display of technological advances and a tantalizing market for electrical products.
Talk awhile with some of the distributors who do a lot of business with these operations, and you'll get the feeling it's both an honor and a challenge to do business here. The contracts are lucrative, but you earn it. Petroleum refineries and petrochemical processing plants are extremely demanding, requiring specialized technical knowledge and a level of service and support that few end users could demand or afford. The payoff for a distributor that rises to that level is more than money; it's a pedigree, and a defining focus. The kinds of demands a major petrochemical plant puts on a distributor make a deep and lasting impression on the methods of operation and the culture or personality of a distributorship.
"They're a different breed of cat, but they're our breed of cat, so we learn to do things their way," says Clyde Rutland, chairman of Wholesale Electric Supply Co. of Houston, in Houston, Texas.
Petrochemicals demand a lot from their electrical distributors for several good reasons. The petrochemical business has a heavy focus on safety because of the many potentially dangerous processes involved. The processing technologies have evolved and safety has been improved considerably over time, but there's no way to remove the danger of large-scale handling, distilling, refining, blending, processing and storing of chemicals, many of which are highly combustible, corrosive or poisonous.
Another big factor in the market is that petrochemical plants are continuous-process operations that can't easily be stopped once they're started. The constant, reliable functioning of electrical equipment that keeps the pumps pumping and the valves opening and closing is an absolutely critical bottom-line consideration.
That's why the plants have to be able to count on distributors to have product available whenever and wherever it's needed. That can mean a beeper by the bedside for salespeople and managers, who must be dedicated enough to get out on a stormy night to help a customer in need.
These plants want the best equipment for the job, because the cost of bad electrical equipment in a petrochemical plant is enormous, in terms of safety, in terms of liability and in terms of profitability for the plant's operator. The size of many of the customers in this market is also an issue for electrical distributors. Petrochemicals often have the size and resources to demand t he best in products and in service. End-use markets for the petrochemical industry are everywhere throughout modern life and their applications are taken entirely for granted by most of the industrialized world. Chemicals are the largest single category of export goods in the U.S. economy.
A distributor that wants to take care of these companies has to make some serious investments in money, time, effort and patience to be successful. They make heavy demands on the operations side and on the sales and technical support side of a distributor's business.
"The petrochemical market places a greater value on uninterrupted service, and the availability of material 24 hours a day," says John Peterson, president of Warren Electric Group, Houston.
Petrochemical customers are also keen on the kind of security that comes with deep stocks of primary and backup inventory. It's no accident that there's a huge concentration of electrical goods in warehouses along the Gulf Coast. These plants need that security, but they don't want to own the stock until they have an immediate need for the product. Many of the blanket contracts Wholesale Electric Supply of Houston has with plants along the Ship Channel include some on-site tool-crib management and other services that help the plants track and use their maintenance, repair and operating (MRO) supplies more efficiently, says Red Elder, senior executive vice president and corporate sales manager for the company.
"We have a store on the Ship Channel to respond to their daily needs," Elder says. "We establish blanket orders for what they call their electrical stores. For ease of keeping everything straight, we'll help them develop stock code numbers, and they'll interface with our stock code numbers."
In addition to tracking the plant's MRO products, Wholesale Electric will often place material in the plant's electrical stores on consignment, where bimonthly inventory audits help keep the stock levels at the optimum level to minimize excess inventory while keeping enough on hand for the plant's needs.
"We have systems within our computers that spit out any differences that may occur during a 60-day period so we may adjust up and down," Elder says. "We try not to have a six-month supply of anything sitting in there. It's probably a little better than just-in-time delivery--we cut it that close--and to do that we really monitor those inventories, as well as our backup inventory. We also are asked to stock A to Z, nuts and bolts, whatever it takes to keep these guys on line."
The plants favor consigned inventory because it keeps their stores full while outsourcing ownership of the products until they're needed, but it can put a bind on distributor cash flow, says Elder. "I don't particularly like it, but it's a trend of doing business today," he says. "It's an automatic increase to inventory, and it affects our cash flow. As close as we try to watch it, we're still looking at six turns, no more, so you're looking at 60-day money. Theoretically you would think, 'Okay, we're going to put in $100,000 worth of inventory in some store on consignment; theoretically our inventory here at our stores should decrease by $100,000,' but it doesn't work that way."
Sinking lots of cash into inventory is a part of the investment a distributor must make to be effective serving the petrochemicals. Perhaps an even bigger issue is technical expertise and support.
Oil refineries and petrochemical processing plants typically have substantial engineering staffs and highly trained maintenance and support personnel. It's one area they don't seem eager to outsource. Nonetheless, distributors that supply this market must have top-flight technical people to provide the customer's engineering, maintenance and procurement teams with specific application knowledge related to the products they sell.
"Most have well-versed technical and maintenance people, but these people are not always available to purchasing or materials-management people," so a distributor must be able to provide guidance on product selection to these departments, says Peterson of Warren Electric. "Sometimes there are subtleties of product engineers may not know, but distributor has to know."
For example, specifications in NEC Article 500, which covers hazardous locations, cover both combustible dust and flammable gas. If both are present in the same environment, there are products and applications that qualify under one or the other, but not both, depending on how they're used. Warren Electric's John Peterson points out that some cable listed for applications in hazardous areas under Class 1 Division 2 can be used in Class 1 Division 1, but only using proper cable terminators. If someone recommends the incorrect cable or sealing compound, it could create a hazardous situation, but nobody would know until just the right combination of air, gas, dust and temperature happens to occur. By then you've got a serious problem.
A distributor's technical support helps the customer on many levels. They can help train neophyte engineers about the real world. Prior to entering into a blanket contract with a petrochemical plant, the distributor should go through and evaluate the plant's on-hand inventory, keeping an eye out for what Elder of Wholesale Electric calls gold-plated product. "You're looking for stuff that young engineers, fresh out of college, may have seen in college that's gold-plated and you can't get. We'll show them what they can get that meets the specific requirements and all the specifications."
Technical support is also critical in the ongoing quest to help the customer optimize the safety, productivity and efficiency of the plant's operations. That means keeping the customer's various engineering, maintenance and procurement staffs up to date on the latest products that could offer an advantage. Elder says Wholesale keeps a constant stream of "dog-and-pony shows" going in the petrochemical plants where the company has blanket contracts. A well-informed distributor can also help petrochemical plants standardize on certain products company-wide, bringing added value and cost-savings to a customer that values both.
Key distributors routinely sit on safety task forces at the petrochemical plants they serve. Together the customer and distributor develop emergency action plans to speed response and minimize loss in the case of a catastrophe.
The safety of the distributor's people who make sales calls, check stock in electrical stores and deliver product to the plants is of utmost importance, both to the distributor and to the customer. Peterson says it's important to assign some of the most reliable delivery drivers with the cleanest records to the plants.
"Petrochemical plants are all unique in their safety requirements," Peterson says. "The drivers have to know what to do if they're bringing products into a catastrophe situation, where the exits are; they have breathing devices they carry with them. They have to have a higher standard of driving records and backgrounds that allow them to be acceptable to these customers. The customers are very careful. There have been some disasters in the past where everybody learned that the liability of vendors and contractors can be equal to the operator of the plant."
The profit margin built into a petrochemical blanket contract can be pretty thin, say some distributors who deal with them, but the plants also seem to be open to and willing to pay for new value-added services that improve their operations. This pushes distributors to find new ways of taking care of these customers.
Warren Electric has a program of emergency jobsite trailers that can be deployed on short notice, fully stocked with the products most likely to be needed if a plant goes down. The trailer is monitored and stocked on a continuous basis and the customer is billed for what it uses.
Wholesale Electric has developed a separate operation around petrochemical plant construction projects. Founded in 1979, Wholesale's Construction Materials Management System (CMMS) team monitors and manages product flow for construction projects around the world from a dedicated 40,000-sq-ft facility in the Houston area. The CMMS uses a satellite uplink via the Internet to communicate with engineer-constructors and end users and to coordinate foreign distributors working on capital expansions.
The petrochemical market is moving toward more national contracts on MRO items, which is driving independent distributors to find ways to provide nationwide service. Long a holdout against the tide of distributor buying and marketing groups, Wholesale Electric Supply last year joined IMARK Group, Oxon Hill, Md., in a move driven as much as anything by the need to have national account options, says Elder, who sits on the Imark committee addressing the subject of national accounts.
There are major technological trends affecting the petrochemical market as well. The underlying systems for process automation are shifting toward personal-computer-based control, and the burden is on distributors to have a command of computer software applications and an offering of automation software systems. Automation platforms built on the Windows NT operating system have driven Warren to invest in Microsoft certification for several of its people, says Peterson.
Petrochemical plants are also introducing more telecommunications and data requirements as the move toward more-sophisticated automation and control processes continues, Elder says. Wholesale has invested heavily in expanding its capabilities in this area over the past few years.
The hard work distributors put into serving the petrochemical market pays off not only in better service to petrochemical customers, but also becomes as a sort of pedigree or certification that they can perform to a high standard. The international petrochemical companies have long been among the most progressive industries in pursuit of operations excellence. They were some of the earliest proponents of total quality management, and generally require ISO 9000 registration of all their suppliers. These factors make distributors more valuable to other process industries such as food and beverage, pulp and paper, where many of the technologies are the same, says Peterson.
The international nature of the petrochemical market also opens new markets for distributors who are well established with the major international players. Both Warren Electric and Wholesale Electric have heavy international operations, particularly for construction projects in oil-rich regions such as the middle east, Indonesia and Venezuela. The contacts that took them into those countries came for both companies as a result of their work with the refineries and petrochemical plants on the Gulf Coast.