Economic Concerns

Introduction
 We have largely completed our description of product design.
 So far, we:
 Discussed the customer’s need for a product
 Saw how this need could be converted into quantitative
specifications.
 Described the generation of ideas.
 Outlined and edited the ideas, using matrix screening methods.
 Selected the best product using detailed scientific and engineering
calculations of the alternatives.
 If the product is a chemical, we can manufacture it in batch,
using generic equipment.
 If the product is a device, we can use manufacturing techniques
established by mechanical engineers.
 But we have not talked about money!
Introduction
 We have mentioned that costs and prices are important, but we
have not included them in a systematic way.
 Those with business training may find this omission
overwhelming.
 They may argue that chemical product design must include
detailed discussions of financial issues.
 They are correct to stress this, but the goal of this course is to
focus on the chemistry and engineering central to chemical
product design.
 Making detailed financial projections for technically infeasible
products is clearly folly.
 If the product does not work, what good is it?
 Anyway, several excellent sources exist for product economics
than for the technical aspects of product design.
Introduction
 Here we will give the briefest outline of the finances of chemical
product design.
 This will give chemists and engineers a flavor of the financial
arguments likely to be made.
 We surely need to know the language of the financial people.
 Also, the economics of chemical products is phrased in different
terms than the economics of chemical processes.
 We will begin with a discussion of the differences between
products and processes.
 These differences are important in accurately assessing the
economic potential of chemical products.
Product versus Process Design
 The growth in the chemical industry depends on new products
as well as new processes.
 This is reflected in most current corporate strategies.
 With few exceptions, the large chemical companies are tending to
deemphasize the commodity chemical business.
 They are tending to focus on specialty chemicals and other
chemical products.
 Some companies have left the commodity chemical business
altogether.
 Other companies planning to make commodities have become
private.
 Presumably because they can handle the market cycles better.
 In still other cases, public companies plan to continue
manufacturing commodities though with increased commitment to
specialty products.
Product versus Process Design
 What is the difference between specialty and
commodity products – from the financial point of
view?
 We will focus on specialty chemicals rather than
other specialty products.
 This is because specialty products provide the most direct
and obvious comparison with commodities.
Commodity Products
 Let us look at three criteria:
 How much is made? Commodities are normally
made in quantities greater than 10,000 tons per
year.
 What equipment is used? Commodities are
normally manufactured in dedicated equipment
that is operated continuously.
 Which producer makes the most money? As a
general rule, the one with the lowest
manufacturing cost will be the most profitable.
 These generalizations deserve discussion.
Commodity Products
 The choice of 10,000 tons per year is the rough consensus of
those in the chemical industries.
 Many of these chemicals are made from petroleum.
 Ethylene, butanol and vinyl chloride are examples.
 To make commodity chemicals, we must be prepared for a huge
capital investment.
 The capital investment per employee is larger in commodity
chemicals than in other industry.
 This is why we are forced to operate continuously – we cannot
afford to have so much expensive equipment sitting idle.
 We will normally be most profitable if we operate all day,
everyday of the year.
Commodity Products
 Chemical commodities have been made for decades, using technology
that does not change much from one year to the next.
 Moreover the commodities are chemically well defined.
 There is no difference whatsoever between propylene made by Exxon or by
Hoechst.
 There is no difference between urea made by W R Grace and Cargill.
 Hence very large, dedicated chemical plants must be run efficiently to
make a profit.
 Hence process optimization and computer control are very important to
the commodity chemical business.
 We are faced with a mature technology in a huge but competitive
market – we have very limited options for growth.
 Even small incremental advantages (discovered with computers) have
been so important.
Specialty Products
 Again let us look at three criteria:
 How much is made? Most specialties are made in
quantities less than 10 tons per year.
 What equipment is used? Specialty chemicals tend
to be made in generic equipment.
 Which producer makes the most money? The
company that first markets the product tends to
get 70% of the total sales.
 Again these generalizations merit discussion.
Specialty Products
 Small amounts made usually imply manufacture in
batch process, not continuous processes.
 These batch processes will not run 24 hours a day,
and rarely run all year.
 Production is usually in “campaigns” in which the
product is made for a few weeks, and then stored as
inventory.
 In drug industry, for e.g., inventory may never
exceed a few hundred grams.
 When the inventory gets smaller, another campaign
is started.
Specialty Products
 The small amounts of specialty products are made in
generic equipment used for several different
products.
 In the pharmaceutical industry, the same equipment
may be used for as many as twenty different
products.
 The generic equipment consists of stainless steel
reactors, stills, extractors and holding tanks.
 They are not optimized for any one specific product.
 Instead, they are designed for flexibility, for many
different chemistries.
Specialty Products
 The generic equipment often mimics the original lab
equipment used for product discovery.
 The reactors, for e.g., tend to be large scale analogs of
round-bottom flasks.
 Different reactions do not use several different reactors, but
rather one pot, cooked again and again.
 Such things make engineers react with horror.
 They immediately see many ways to make process
improvements.
 These changes are rarely welcomed, because the
complex reactions may be difficult to control.
Specialty Products
 Especially in the drug industry, improvements may be
legally difficult to implement.
 This is because of the conservative FDA regulations.
 When clinical trials for a new drug prove successful,
the FDA will approve the drug, but only for the
process used to make the original material.
 The fact that the drug can be made in another way,
more efficiently and without carcinogenic solvents,
does not matter.
 If we change the process, we must again petition the
FDA for a new approval.
Specialty Products
 Note: the producer who makes the most money is
usually the first to market, not necessarily the low
cost producer.
 Specialties tend to be high value-added products.
E.g., antibiotics made from agricultural waste
streams can be sold in excess of $ 100/kg.
 In conventional B.Tech courses, we teach economic
tools that imply continuous dedicated plants.
 The economic tools for specialty products are
different.