Other Articles

The Case for Sole Sourcing Coating Purchases

Think of how you shop today, or really, purchase just about anything — even online. Nearly everything you buy brings with it the ability to “opt-in” to receive special coupons, and in many cases, the vendors offer loyalty or “reward” cards. These loyalty cards provide you with the ability to get a variety of benefits, including free flights, hotel stays, meals, gift cards, special discounts, etc. This incentivizes you to keep coming back to “earn” more rewards. For items that are purchased often, such as food, clothes, and business travel, the rewards can add up. For example, I put hardwood flooring in my condo for free using Holiday Inn Rewards Points and purchasing Home Depot gift cards.

In return, vendors get valuable information about purchasing patterns. Spread over thousands of users, this data allows sellers to better predict demand and match it with service volume, or in the case of food, know how often to stock a shelf with a certain item, reducing carrying costs.

Vendors also get the opportunity to influence the buyer’s choice of where and what to purchase, according to an article called “Do Rewards Really Create Loyalty?” in the Harvard Business Review. An example of the exercise of this influence might be found in the choice between two airlines. If both vendors have comparable flight times and prices, the sale will likely go to the airline that gets its fliers closer to a free rewards flight or a higher loyalty tier.

So how does this relate to coatings?

The Problem

Owners often say, “We don’t have money for coating inspectors (Quality Control)” or “That’s the contractor’s responsibility.” The problem is that coating performance is directly proportional to surface cleanliness, and there is no way to easily confirm surface preparation after the coating has been applied. Ask any coating manufacturer if their product works better over lower surface preparation — I bet you a steak dinner that not a single one will say that in writing. In fact, this problem has led to the rise of a number of coating inspector training programs — it created the coatings quality assurance/quality control (QA/QC) market. But I propose that the solution to the money problem is right under your nose.

Coating manufacturers make thousands of products, each with specific applications in mind. Many owners are spending millions of dollars a year in coatings to maintain their structures, yet they allow the contractors that are applying them to use any of the products on the specification, fragmenting the owner’s purchasing power by splitting the products between many vendors. Ultimately, the only winner is the coating contractor who uses the opportunity to push the coatings manufacturers into a “bidding war” to obtain their business for a larger project. At the same time, for the contractor to obtain the project from the owner, they may have to bend the rules on quality in order to price the project to win.

If a company spends millions of dollars on anything, shouldn’t they expect better price and top-quality service? Don’t we all expect this in our “regular” lives as “ordinary” consumers?

A Win-Win

What if instead allowing the contractor to choose the products to be used for each project, the owner first invited five coating manufacturers to compete through a Request for Proposal (RFP) process? The coating manufacturer that offers the best overall business opportunity (e.g., price, availability, range of products, purchase volume rebate, technical support, and warranty) would be awarded all of the coatings purchases for a specified length of time (perhaps one to five years).

A sole sourcing coatings reward program would make sense for the owners because with this type of program the owners could:

• Know the total volume of materials they are purchasing and could begin to track it.

• Ensure that the manufacturers could be paid on time instead of relying on the contractor’s ability to pay in a timely fashion. This could immediately result in savings of two to five percent from the manufacturers to the owners.

• Have enforceable warranties that could extend far beyond the industry standard of one year. This concept is simple: If the coating manufacturer supplies materials and the materials fail in year two, the owner has significant leverage to get the item recoated at little or no cost, because they have the remaining years of the supply contract to hold over the head of the coating manufacturer.

• Eliminate the contractor’s carrying cost of materials, which is typically passed along as a 10 to 30 percent markup on the coating materials by the contractor.

A sole sourcing rewards program makes sense from the coating manufacturers’ point of view because:

• The manufacture of anything has a break-even point, which is defined as the point at which the number of items produced covers the overhead of the facilities, people, and raw materials needed to make the products. Every gallon after that number is generated is profit, and each subsequent gallon provides a larger profit percentage. If a coatings manufacturer can know at the beginning of a year that they will have a contract for a near guarantee dollar or gallon-volume, it can more easily purchase raw materials in larger volume, and have predictable throughput, which reduces the cost of overhead, thereby reducing the cost to manufacture.

• The manufacturer will have the ability to increase sales productivity. If a sales person knows that he or she has a customer that has a multi-year contract with a competitor, it would make sense that the sales person would spend his or her time competing elsewhere, rather than fighting it out for every single project. This should improve the return on sales.

• With the manufacturer knowing better what will be purchased, it can decrease lead time for product delivery, which will speed the time to payment, improving cash flow. This should also reduce the chances of substitutions as the same systems will be used throughout the facility. Given that it is a loyalty program with established rewards and discounts, there will be a predictable price per gallon from the onset of the contract. This should result in a better cash flow for the manufacturer.

Practice in Action

If a facility owner spends $3 million per year on protective coatings projects, 25 percent of that $3 million works out to be $750,000 in material costs. Unless they have their own maintenance division, facilities tend to contract with independent coating contractors, which typically adds a 15 percent markup onto the cost of the paint. Fifteen percent of the $750,000 totals $112,500. That is just material markup from the contractor.

If you add in the savings the owner can obtain by grouping their purchasing power over a number of years, increasing the discount, and increasing the warranty, the actual savings could be closer to $200,000, while decreasing the risk on every coatings application. The amount saved on the markup — $112,500 — could easily cover the cost of having a third-party inspector on the project. Essentially, the savings realized by purchasing protective coatings directly from the manufacturer could mean having third-party inspection for free.

Having third-party inspection on the project from start to completion helps ensure that the project will be properly executed, safety rules will be followed, and the protective coatings properly applied. Everyone — owner, manufacturer, and contractor — will be covered.

Where Do Specifying Engineers Fit?

A specification will still be in place and will need to be written. Further, requests for proposals (RFPs) will still need to be drafted and submitted by all the manufacturers interested in being considered for the project.

A specifying engineer can and should address third-party inspection in the specification. Everything from the pre-job meetings to proper surface preparation to establishing important check points throughout the course of the coating application process should be addressed by a well-written specification. After all, a well-written specification is the road map for a successful protective coatings project — a coatings reward program will merely add a degree of consumer savvy and financial common sense to the process.

It’s Just Paint, Right?

Protective coatings are so much more than just paint. They represent millions of dollars in application and maintenance costs. They are a means for protecting expensive structures from corrosion and premature failure. Protective coatings are a vital component of our infrastructure. It is time that their purchase is recognized and rewarded.

The consolidation of coatings purchases will generate savings, reduce costs, and extend warranties. A coatings reward program will increase opportunities for owners and manufacturers alike — that in and of itself is a rewarding reality.

About the Author:

David is a civil engineer with 20+ years’ domestic and international experience in corrosion control. He is the coatings program manager at Pond & Company. Hunter holds certifications as a NACE 3 Coating Inspector, Society for Protective Coatings (SSPC) Level 2 Coatings Inspector, NACE Offshore Corrosion Assessment Technician, and NACE Cathodic Protection Technician. He is also an instructor for NACE and SSPC and has been teaching classes for more than 10 years and in 16 countries across both programs. For more information, contact: David Hunter, (832) 863-6039, HunterD@pondco.com

comments powered by Disqus