Introducing ChE Business

     Industrial business practices are not always (if ever) taught in colleges or universities.  Yet, they remain an important part of many engineers' daily job functions.  Young engineers or people just beginning a different type of career that suddenly involves the responsibility of choosing equipment and providing input into purchasing decisions may begin asking themselves questions such as:

What is a "P.O."?

What does "F.O.B." mean?

Who are all of these saleman that keep calling me?

What equipment vendors are reputable?

What is spot price versus a contract price?

What are "consequential damages"?

....and perhaps many others.

     To engineers who have conducted business before, these questions may seem trivial.  A course in business or marketing may help expose people to the general ways of business around the world.  But the consumer business world does differ from the industrial business world.  Let's begin exploring the general transaction process.  It's important to realize that the business transaction will be guided by the goods to change hands.   For example, the transaction of equipment is different than the purchasing of commodity chemicals.

Purchasing Methanol on the Spot Market

     A small company has a need for a moderate amount of methanol.  Once they've identified their needs, they assemble a request for quotation or RFQ.  In this case, the request for quotation may include specification such as the needed purity of the methanol, specific gravity requirements, or other physical property requirements.  They will be soliciting bids on what is called the "spot" market.  If they're need for methanol was constant (for example, if methanol was a main feedstock to their process) they would almost certainly have "contract" pricing with a major producers directly from the plant.  The spot markets can be filled directly from the plant or via chemical distributors, depending on the quanitity needed. 

   
Figure 1: Typical Chemical Spot Market Transaction

     Once the RFQ is finalized, it can be posted on internet trading sites or sent directly to distributors or methanol producers.  The end user may require items such as certificates of analysis (COA's) or samples of the product to conduct their own testing.  Certificates of analysis act much like a "promise of quality" from the producer to the buyer.   For each batch of methanol produced (referring to a stock of methanol produced during a specific time period), each one is tested and certified by the supplier.   Certificates of analysis usually contain all of the qualities that most buyer are interested in, but some buyers may request additional information. 

Figure 2: Sample Certificate of Analysis for High Purity Methanol (courtesy J.T. Baker)

     Once all of the end users requirements have been evaluated, each prospective supplier will submit a proposal of their specific offering.  The end user will evaluate each proposal carefully and may request additional information from the supplier.  There may be several discussion regarding commercial terms before a winning bidder is selected.   For example, perhaps the end user would like the chemicals supplier via a different packaging method than proposed.  Eventually, a winning bidder is selected and the sale awarded.

    While buying a commodity chemical such as methanol is a relatively simple matter, you may have found that there is more involved than simply picking up the phone and placing an order.

Some Basic Terms

     Some basic terms used in the world of industrial business can include:

P.O. or "Purchase Order" -- A purchase order is essentially a legally binding agreement to purchase goods or services.  It is not accompanied by payment in most cases.  Payment will generally follow the delivery or shipment of goods or a graduated schedule based on previously agreed upon milestones (equipment or engineering services).

F.O.B. or "Freight on Board" -- Items are typically shipped from Seller to Buyer under a combination of shipping terms.  For example, "FOB Orgin, Pre-Pay and Add" means that once the Seller transfers the goods to the shipping agent, ownership of the product transfers to the buyer at the seller's plant or factory (origin).  The shipping costs will be paid by the seller and added to the cost of the product being sold.  As another example, "FOB Destination, Freight Collect" would mean that ownership of the goods remains with the Seller until the good are delivered and accepted by the Buyer.   The freight bill would be settled between the shipping agent and buyer.  Of course, these conditions are interchangeable and sometimes sellers will pick up the tab for shipping, invoking "FOB Origin, Full Freight Allowed".  One thing to keep in mind is that different abbreviations can mean different interpretations.  For example, "PPA" is a common abbreviation for "Pre-Pay and Add", but it's also used to refer to "Pre-Pay and Allow" which is basically the same as "Full Freight Allowed".  Do freight terms sound confusing?  They can be at times, so if you're unsure, ask!

Consequential Damages -- There are damages that the Buyer may suffer as a result of a Seller's lack of performance.   Imagine that a chemical plant has to shut down because a feedstock shipment was late.  The Buyer would suffer tremendous "consequential" damages.   Mainly, the cost incurred to shut the plant down and the value of the product that could not be produced.  Or, perhaps a plant will experience downtime if a particular piece of equipment arrives late.  There are notable exceptions to these damages.   Imagine that a flood or other "act of god" delays a shipment...the Buyer would not be eligible to collect damages.  Labor strikes and acts of terrorism are also common exceptions to this clause.  It should be noted that nearly every seller, no matter what they're selling, will nearly always state that they do NOT agree to any type of consequential damages in their sales agreement.

Representatives -- Many companies that sell goods in the industrial world have a sales force consisting of local representatives.  These representatives are individual businessmen who are contracted by the companies they represent to find sales opportunities.  Usually they will represent between 7 and 15 different companies.  Although you may be skeptical at first of these sale people, do not underestimate the value that they can provide.  A knowledgeable sales representative can be a huge asset for engineers.  They'll lend insight, experience, and advice in order to build a strong working relationship.  An honest exchange of information can lead to a mutually beneficial working environment between end users and representatives.  Most representatives for equipment vendors are engineers, so they not only appear to know what they're talking about, they often do!   As for the representatives who wish to make a sale regardless of your needs....they'll expose themselves relatively quickly.

Closing Remarks

     We wanted to take this opportunity to give you a broad view of the types of topics that we'll cover in this section of the site.  We'll cover topics that will be elementary to some people, yet much needed information to others.  We'll also cover topics that we hope will appeal to even the most seasoned engineer.  Some of the topics currently being considered for "ChE Business" include the anatomy of a quotation, negoitating skills, project lifecycles, writing requests for proposals, evaluating proposals, post-order communications, market analyses, and others.  We'd like to hear what interest our visitors as well, so email us with your feedback on this new section.

By: Christopher Haslego, Owner and Chief Webmaster (read the author's Profile)
chris.haslego@cheresources.com