The Risk Adjusted Home Run

The Uncertainty of Chemical Product Development

In my last issue on the topic of chemical product development I ended things on the topic of uncertainty. I ended on short anecdote:

Marketing/Sales Person:“So which one of these R&D projects can you guarantee will work?”

Chemist: “You don’t really understand how this process works do you.”

I wrote that many companies want a risk adjusted home run, but what does that really mean? In commercial language this indicates X dollars from Y investment within Z time. Typically the dollar value is high, the investment is minimal, and it happens not only in a defined amount of time, but an acceptable one to shareholders (i.e. 2 years or less). These are the guaranteed projects that “work” and are “on time,” but they often deliver incremental value with incremental advances in science. As scientists it can be hard to guarantee anything will work because things do not always work out the way you intend. Even if you can make it in a lab it doesn’t mean that the chemical engineers can scale it.

Uncertainty of even “low risk” projects can be difficult for established commercial enterprises to handle.

In the risk adjusted home run product innovation you can deliver on three categories to your customers and shareholders:

  1. Productivity

  2. Lower material costs

  3. Higher performance

Productivity is how much output a customer can get from their process or manufacturing operation. A customer might use a polymer or a specialty chemical in their process that takes 10 hours to complete from start to finish. Perhaps they run two shifts in their plant at 12 hours per shift and they have enough orders to run 6 days a week. This customer is at what many would consider “capacity,” in that they cannot get anymore output from their operation without investing into additional capacity such as expanding operations. 

A new chemical company might come in and tell this customer, “I’ve got a product that will let you complete your process in 7 hours, but it will cost you 20% more than what you are paying now.” If the specialty polymer represents even 10% of the total cost of their product the customer is ecstatic because the new product increases productivity by 6 additional product cycles per week with a marginal increase in cost. Perhaps even lowers overall costs by reducing overtime of their labor. Productivity increases can also happen internally, which can reduce costs, increase margins, and expand capacity on existing products and this is why corporations love Six Sigma (in theory anyway).

Lower material costs for specialty or commodity polymers might involve putting a filler into the product. Specialty polymers are being made from commodity or commoditized starting materials so raw material costs typically fluctuate with oil prices. Thus, it can be difficult to find a lower priced supplier if costs need to be reduced. Instead of lowering prices the other options are to either move manufacturing operations to lower cost labor countries or to find a way to reduce waste or to put something cheaper into the polymer.

An example of low cost material might be in filling paints or polymers with things like talc, glass beads, or calcium carbonate. The technical objective typically in these projects is to not influence the final properties and lower the raw material costs to get 1-5% of margin. If your polymer costs $1 per pound to make and you introduce 5% filler which cuts costs by 3% and you sell ten million pounds of it a year then that's an easy $300k of margin for minimal work. Likely, the customer buying the product is never informed either of the small change to the product which is why no change to the final properties is important. 

Higher performance projects are the most exciting of the three types of “risk adjusted home run” projects. Higher performance products are also the riskiest and the most difficult to understand if it will be successful of the three I’ve listed. They are also the most fun because someone like me gets to try and create something that doesn’t exist in the world and the rush of seeing something new never gets old. These projects typically only get done if a large customer is asking for it and the demand and potential reward is worth the risk of investment.

An example might be a large customer of your company is a category leader in their space, but their competition is closing the gap in market share. This customer comes to you and tells you that they have tried everything within their power to maintain their position, but the last piece of the puzzle is on the polymer that you provide them. They want ABC from you, tell you they are willing to pay significantly more for performance, and they will buy a minimum of a million pounds a year (this is a good volume for a new specialty polymer). 

Sounds like a great opportunity right?

It definitely is, but there is a large amount of uncertainty that the commercial team doesn’t fully comprehend when the project starts. Achieving ABCmight be possible with 2+ years of work, but it might also take 2+ years to understand that it’s not possible. In a best case scenario it is possible, you file a patent, but then it requires a million dollars of investment into production facilities to make it, which could take years. 

How many years of production of this new product will it take to recoup that initial investment?

Perhaps it will require permitting a new chemical for the production site and installation of a storage tank, and a new motor for an agitator on a reactor?

Will this big customer wait 2-4 years for you to deliver on the product that only they want and no one else?

Is this big customer also asking your competition the same thing?

Is there going to be a weird IP situation where your customer patents products based off of your product and restricts you from selling it to their competition?

It’s hard to know the answer to these questions because the process of innovation has a lot of uncertainty. There is a lot less uncertainty in cutting costs to improve profitability or making things run more efficiently. Pushing the boundaries of what is possible is often too much risk and uncertainty for large companies. In a recession there is no money and in a roaring economy it’s all about returning money to shareholders.

If you want to develop something that could change how the world works in polymer chemistry or just chemistry in general my experience tells me that graduate school is the best time to make this happen. High risk is for venture capital and academics, but don’t take my word for it. 

Tony