Value chains materials

The principal objective of technical service in the chemical industry is to provide timely and professional information and support to downstream customers regarding chemical products and thek uses. It is neither cost-effective nor necessary for a consumer of chemical products to develop a staff of speciahsts having detailed expertise in all aspects of chemical raw materials and thek uses, particularly in a time of increa singly complex and rapidly technologically driven economies. Rather, this variety of expertise is provided in the chemical marketplace by technical service professionals whose knowledge and skills are made available by chemical products suppHers. As such, successful chemical companies provide technical service as a critical element of thek offerings to the marketplace making use of this aspect of the value chain to enhance thek competitiveness. 

Additional challenges exist specifically for chemical commodities. Commodities are standard products with a defined quality, where price is the key buying criterion. Commodities are often volatile in sales and purchasing prices as well as volumes increasing crude oil prices lead to higher raw material prices in procurement while dynamic customer markets specifically in Asia lead to a sales price and volume volatility. These dynamics in volumes and values through the value chain directly impact company s profitability as shown in fig. 1. 

Cause-effect-relations of these dynamics in the value chain may still be obvious, when operating a simple value chain comprising few products, locations and production steps. Considering the global multi-stage, multilocation value chain network, price changes in raw materials cannot directly be related to intermediate or even sales products and their prices. This problem requires specific planning models and methods. 

Porter s value chain is one basis for the development of the supply chain. The term supply chain was created by consultant Keith Oliver in 1982 according to Heckmann et al. (2003). Compared to the company-internal focus of Porter s value chain, the supply chain extends the scope towards intra-company material and information flows from raw materials to the end-consumer reflected in the definition of Christopher (1992) a supply chain is a network of organizations that are involved through upstream and downstream linkages in different processes and activities that product value in the form of products and services in the hand of the ultimate consumer . Core ideas of the supply chain concept are ... 

In market economies, however, companies are confronted with competition when selling to customers and they use the market competition when purchasing from suppliers. On the other hand, market constellations can change, when many customers compete for limited resources or raw materials provided by few large suppliers. In these situations, prices, values as well as ensured profitability within each company are decisive for the sustainable survival of the business. While the supply chain emphasizes the supply aspects including ensured supply and availability (Corsten 2001, p. 94), an essence of Porter s value chain underlining the value focus and the supply chain concept is required as basis for the study. 

Distribution locations are included in the company-internal value chain network, if distribution volumes and values are under the control and in the books of the company independent if the warehousing and transportation is outsourced to 3PL distribution companies or not. Therefore, a company value chain network is enclosed with a central control of all volume and value information for the respective network and clear interfaces to customers and suppliers out of the network. While the internal value chain network is focused on material flows evaluated with respective internal costs, dedicated interfaces to multiple suppliers and multiple customers are characterized by material flows, financial flows and mutual instead of one-directional exchange of information as proposed for supply chains by several authors. 

Typical management problems given volatile raw material and sales prices are driven by bottleneck steps in the network e.g. Styrene is an example in the network shown in fig. 34 for a product used in multiple subsequent products. In this case, value chain planning across multiple steps from sales to raw material is required to decide the optimal use of Styrene on the subsequent steps not only considering this relation but the entire value chain network including raw material volumes and prices required to produce Styrene. 

Finally, the value chain network can have a single value-creation step or multiple value-creation steps in production and distribution where raw materials are processed through several production and distribution steps before being sold to the market. In the work, a multi-stage value chain network is considered. 

This effect can be compared to the gas consumption of a car requiring more gas per 100 km being run at a higher average speed. Selective papers address the specifics of variable raw material consumption e.g. in the case of fuel consumption of container ships (Jetlund et al. 2004, p. 1271). Hence, the problem to balance raw material consumption and volatile raw material costs with sales quantities and prices has to be solved in value chain planning. 

The planning objective is to plan global value chain volumes and values. Initially, the value planning model with the objective function to maximize global profit is presented. The objective function also includes a relaxation concept for hard constraints leading to potential plan infeasibility. The future-oriented inventory value planning concept based on volatile raw material prices is presented at the end of the subchapter. 

Relaxation of hard constraints is critical for optimization-based planning models used in industry practice with more than even 100,000 constraints and specifically for hard integer programming problems (Fisher 2004). Hard constraints set hard minimum and maximum boundaries for decision variables that have to be fulfilled. It may occur that no solution exists fitting all constraints at the same time. Planners have difficulties to identify manually constraints leading to infeasibility. Value chain planning model infeasibility is mainly caused by volume-related constraints of material flows e.g. by bounding sales quantities, inventories, transportation quantities, production and procurement quantities. Examples in literature for relaxation methods to e.g. transportation problems is presented by Klose/Lidke (2005)... 

Future capital costs considered in the objective function rely on future capital values - in this scope future inventory values. The planning of future inventory values in all future periods and in all network locations is a complex task. As described in the requirements, future inventory value is determined by the future product values of the products on stock. These product values change, if the included material costs of the product change, which is regularly the case due to volatile raw material prices. The task now is to calculate the future inventory value throughout the value chain network and product steps considering the raw material price forecast for the planning horizon. The problem is illustrated in fig. 57. 

In a global value chain network, products are not always composed of materials from the same location. A location mapping factor defines, which share of material from a defined location is included in the subsequent product. 

Besides, products in a global multi-stage network can have a lead time caused by transportation or inventory ranges until they are used in the subsequent steps. This lead time has to be considered when calculating future inventory values of products in the value chain network a raw material product procured at a certain price can require several periods, until it is included in a final product sold in distant markets. Therefore, the inventory value change related to the procured raw material is effective certain periods after the raw material has been procured. 

In order to reflect these lead times, the concept of a timestamp is introduced. Timestamp is used in computer science documenting the system time when a certain event or transaction occurs e.g. for logging events (N.N. 2007). In the context of future inventory value planning, the time-stamp marks the period, when the first raw material has reached a certain stage in the value chain network included into a specific product. In the example illustrated in fig. 57, the raw material is processed in the same period to be converted into product 1. Therefore, all four value chain steps indexed from one to four occur in the same period and have the same time-stamp one. Conversion into product 2, however, requires additional time caused by production lead times, safety inventory and/or transportation time, that the steps indexed with five and six have a time stamp of two. The timestamp reflects that the inventory value of product 2 is not based on the raw material costs from the same period but based on the raw material costs from the previous period in order to reflect the lead time. Consequently, value chain indices and timestamps are defined for all steps and can cover multiple periods reflecting that raw materials in a global complex multi-stage value chain network can take several months, until they are sold as part of a finished product to the market. 

Procurement steps are initial steps in the value chain and require to link raw materials with the subsequent products. Procurement steps have no production costs. Since one raw material product is considered as pi and p2 and one procurement location as h and h, related factors are all 100%. 

Finally, the timestamp rf , / p,l e Ivcl is defined to indicate the average lead time measured in planning periods compared to the first raw material initialized with timestamp 1. Increase of the timestamp is caused by transportation e.g. between different continents, holding inventories or the further production processing in the value chain. 

Now, indexed material costs for all subsequent products and locations are calculated along the value chain within the indexed step sequence applying location mapping, recipe factors and product value rates as currency relations between starting location // and ending location l2. 

Then, indexed material costs can be used to calculate indexed product value rates for all other products and locations along the value chain within the index sequence summing up material costs and average production cost rates considering location exchange rate factor ratios. 

Final material cost rates and product value rates are determined based on the indexed material cost and product value rates. Multiple indexed material cost and product value rates occur, if cyclic material flows exist in the value chain. In order to apply index-independent cost and value rates in the model for future inventory planning, the maximum value and cost rates are determined for all products, locations and periods across all value chain steps i. 

Distribution balances need to calculate all volume balances in all value chain network locations between sales, distribution, production and procurement. Material flows have to be balanced for all product-location combinations in the index set p, l e IVC1. 

The variables distribution supply xDp u and distribution demand xpft, V p, 1 e Ivcl, t e T are used to balance incoming and outgoing material flows in a value chain network location with transportation quantities as illustrated in fig. 65. 

Input product quantities like raw material consumption rates can be variable depending on utilization of the resource. Input product quantities are determined by linear recipe function with the recipe factors ap and bP pt on a tons per hour basis V r,s,/> e IPU. This is a key issue of the production and the entire supply model including procurement is to decide on the variable raw material consumption rates in production. Both production and procurement planning are highly interrelated, i.e. high production rates determine the amount of raw material that has to be supplied. In the overall context of value chain optimization, production rates have to comply with decisions reflected by the sales model e.g. on spot sales quantities and prices. 

Linear recipe functions are one form found in industry. Of course, other forms of recipe functions are possible depending on the consumption pattern analyzed for a specific process. Variable recipe functions have critical importance in value chain planning and for the profitability, since increased raw material consumption rates can squeeze assumed profitability thanks to high sales volumes due to higher raw material consumption costs. 

The raw material product value shown in the foreground of the chart is related to the procurement price offers. Subsequently, the following products are listed based on the raw material. The production step costs for each product are the values-added on the raw material value. In addition, an assumed timestamp is considered reflecting lead times of products through the value chain therefore, price changes of the raw material would impact the value of e.g. product E with some periods of delay. 

Results are no surprise increasing sales prices lead to larger profits but not to higher volumes, since the value chain is already utilized. Lower sales prices impose a reduction of volumes, since increasingly fewer sales opportunities and prices compensate for the supply costs. In addition, it is called into mind that linear recipe functions in production lead to lower volumes with lower raw material consumption rates and consequently lower supply costs. 

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