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Supply chain coordination using optimal transfer pricing to balance co- and byproduct demand within a process industry
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, The Institute of Technology.
2014 (English)Licentiate thesis, comprehensive summary (Other academic)
Abstract [en]

Process industries has for long been important for the development of Swedish industry and society. All industries face different conditions that affect how to best run their operations. This thesis aims to describe some of the conditions that characterize process industries compared to other industries. Further one of these characteristics has been studied more closely.

One of the traits of process industries is that they are positioned at the start of the transformation process close to the raw material mixing, separating or forming it into products often used for further transformation. Process industries hence become dependent on the properties of these materials. One of the most prominent characteristics inherent from the raw material properties is the divergent bill of material. The divergent bill of material originates from the fact that a given raw material is made up of different components that will yield several products with different characteristics when processed. When splitting the raw material into the desired products the yielded products from a certain raw material usually have different value to the producer, some more desired than others. These multiple products generated poses a challenge from a planning perspective raising questions like “How should we balance the supply and demand of all the products produced?”, “What shall we do with the excess products produced?”.

The first paper in this thesis describe the production planning in four Swedish process industries with the ultimate aim to connect their planning to the supply chain characteristics they face as process industries. The study concludes that the industry specific conditions mainly affect planning at short time ranges when planning becomes more detailed. In general the use of planning or decision support systems is low, stemming from a, warranted or not, belief that general decision support systems do not fit process industries. Another finding is that the case companies mainly operate in niche markets. This study also highlighted that the planning complexity arising from characteristic of co- and by-product generation in combination with the lack of decision support systems requires further studies.

The subsequent two papers focus on supply chain planning and coordination with a divergent bill of material. They present a mathematical model over the supply chain planning in a real case company in the specialty oils industry. The second paper investigates transfer pricing as a coordination tool by comparing decentralised supply chain planning with centralized planning in an integrated model. Transfer pricing is found to have a potential positive effect on supply chain planning while simultaneously creating problems in terms of uneven  distribution of the contribution margin among supply chain partners.

Finally the third paper more closely investigates different ways to set transfer prices and comparing them to the optimal transfer prices. Setting optimal transfer prices with a divergent bill of material has proven to be less straightforward than the case with no dependencies between products. Some optimal transfer prices could even be set lower than the marginal cost for producing them due to the dependency between the products in the divergent bill of material. This indicates that there is an opportunity cost for a product that is dependent on the demand of other products.

Abstract [sv]

Processindustrier har länge varit viktiga för utvecklingen av svensk industri och det svenska samhället. Alla branscher möter olika förutsättningar som påverkar hur verksamheten bäst skall drivas. Avhandlingen syftar till att beskriva några av de villkor som kännetecknar processindustrin jämfört med andra branscher. Slutligen har en av dessa kännetecknande egenskaper studerats närmare.

En av de egenskaper som utmärker processindustrier är att de är positionerade vid början av omvandlingsprocessen nära råvaran och blandar, separerar eller formar den till produkter som ofta används för ytterligare förädling. Processindustrin blir därmed beroende av egenskaperna hos råmaterialet som används. En av de mest framträdande egenskaperna härrörande från dessa råmaterialegenskaper är det divergenta materialflödet. Det divergerande materialflödet har sitt ursprung i att ett visst råmaterial består av olika komponenter som ger flera produkter med olika egenskaper. När råmaterialet separeras i sina komponenter erhålls flera produkter som kan ha väldigt olika värde för producenten. Efterfrågan på de produkter som erhålls ur separeringen kan vara vitt skild från vad som erhålls ur produktionsprocessen. Denna obalans mellan efterfrågan och försörjning är en utmaning ur ett planeringsperspektiv och väcker frågor som " Hur ska efterfrågan och försörjning av de produkter som produceras balanseras?", "Hur skall överskottet på vissa produkter hanteras? ".

Den första artikeln i denna avhandling beskriver produktionsplaneringen i fyra svenska processindustriföretag inom områdena pappersmassa, specialkemi, specialoljor samt papper och pappersmassa. Målet med studien var att jämföra planeringen av försörjningskedjan med de förutsättningar som processindustrin ställs inför. I studien dras slutsatsen att de branschspecifika förhållandena främst påverkar den kortsiktiga planeringen med mer detaljer. I allmänhet verkar användningen av planerings- eller beslutsstödsystem vara låg, som härrör från en, befogat eller inte, tro att generella beslutsstödssystem inte passar processindustri. Fallföretagen förefaller också huvudsakligen vara verksamma på nischmarknader. Denna studie betonar också vikten av djupare studier av energiplanering samt den planeringskomplexitet som uppkommer till följd av divergerande materialflöden.

De två efterföljande artiklarna fokuserar på planering och koordinering av försörjningskedjan vid ett divergerande materialflöde. De presenterar en matematisk modell över försörjningskedjan i ett fallföretag som tillverkar specialoljor. Den andra artikeln undersöker effekter av att använda internprissättning som verktyg för koordinering av försörjningskedjor genom att jämföra decentraliserad försörjningskedjeplanering med en fullt integrerad centraliserad planering. Internprissättning visar sig ha potentiellt positiva effekter på planeringen av försörjningskedjan men skapar samtidigt problem i form av att täckningsbidraget kan fördelas väldigt ojämnt mellan partner i försörjningskedjan.

Slutligen behandlar den tredje artikeln olika sätt att bestämma internpriser och utvärderar deras koordineringseffekter på försörjningskedjan genom att jämföra med optimal satta internpriser. Att bestämma optimala internpriser med ett divergerande materialflöde har visat sig bli komplicerat i och med det beroende som finns mellan produkterna som kommer från samma råmaterial. Optimala internpriser har visat sig kunna vara både avsevärt högre och avsevärt lägre än marginalkostanden för att producera dem. Detta indikerar att alternativkostnaden för en produkt kan påverkas starkt av efterfrågan på andra produkter den har en koppling till via råmaterialet de båda produceras från.

Place, publisher, year, edition, pages
Linköping: Linköping University Electronic Press, 2014. , 39 p.
Series
Linköping Studies in Science and Technology. Thesis, ISSN 0280-7971 ; 1654
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:liu:diva-105483DOI: 10.3384/lic.diva-105483ISBN: 978-91-7519-358-8 (print)OAI: oai:DiVA.org:liu-105483DiVA: diva2:707662
Presentation
2014-04-15, ACAS, A-huset, Campus Valla, Linköpings universitet, Linköping, 13:15 (Swedish)
Opponent
Supervisors
Available from: 2014-03-25 Created: 2014-03-25 Last updated: 2015-01-29Bibliographically approved
List of papers
1. Production planning in process industries
Open this publication in new window or tab >>Production planning in process industries
2012 (English)Report (Other academic)
Abstract [en]

Purpose of this paper

The purpose is to map the production planning process in process industries and analyze how it is related to their specific planning conditions and relevant current literature. Further on the research aims at detecting similarities and differences in production planning at tactical level.

Design/methodology/approach

The research methodology has a holistic multi-case design with focus on planning processes involving several entities within the companies. Information sources are documentation and interviews.

Findings

Process industries with different structures and conditions plan production differently. For instance a difference has been found between how material dominated companies plan compared to capacity dominated ones.

Research limitations/implications

Focus in this research has been on production planning at tactical level and therefore the strategic and operational level has mainly been left out of the study.

What is original/value of paper

The research gives insights in production planning processes for process industries and presents ideas on why the different production planning processes are designed as they are according some specific conditions.

Publisher
19 p.
Series
LIU-IEI-WP, 2012:2
Keyword
Process Industries, Production Planning, Tactical Planning, Supply Chain Planning, Multiple Case Study
National Category
Engineering and Technology Business Administration Transport Systems and Logistics
Identifiers
urn:nbn:se:liu:diva-84980 (URN)
Note

An earlier version of this paper was presented at NOFOMA 2011, 9-10 June, Harstad, Norway.

Available from: 2012-10-29 Created: 2012-10-29 Last updated: 2014-03-25Bibliographically approved
2. Speciality oils supply chain optimization: From a decoupled to an integrated planning approach
Open this publication in new window or tab >>Speciality oils supply chain optimization: From a decoupled to an integrated planning approach
2013 (English)In: European Journal of Operational Research, ISSN 0377-2217, E-ISSN 1872-6860, Vol. 229, no 2, 540-551 p.Article in journal (Refereed) Published
Abstract [en]

We study a problem of tactical planning in a divergent supply chain. It involves decisions regarding production, inventory, internal transportation, sales and distribution to customers. The problem is motivated by the context of a company in the speciality oils industry. The overall objective at tactical level is to maximize contribution and, in order to achieve this, the planning has been divided into two separate problems. The first problem concerns sales where the final sales and distribution planning is decentralized to individual sellers. The second problem concerns production, transportation and inventory planning through refineries, hubs and depots and is managed centrally with the aim of minimizing costs. Due to this decoupling, the solution of the two problems needs to be coordinated in order to achieve the overall objective. In the company, this is pursued through an internal price system aiming at giving the sellers the incentives needed to align their decisions with the overall objective. We propose and discuss linear programming models for the decoupled and integrated planning problems. We present numerical examples to illustrate potential effects of integration and coordination and discuss the advantages and disadvantages of the integrated over the decoupled approach. While the total contribution is higher in the integrated approach, it has also been found that the sellers contribution can be considerably lower. Therefore, we also suggest contribution sharing rules to achieve a solution where both the company and the sellers attain a better outcome under the integrated planning.

Place, publisher, year, edition, pages
Elsevier, 2013
Keyword
Supply chain management; Integrated planning; Decoupled planning; Linear programming; Contribution sharing; OR in the oil industry
National Category
Engineering and Technology
Identifiers
urn:nbn:se:liu:diva-96167 (URN)10.1016/j.ejor.2013.03.007 (DOI)000319307600025 ()
Available from: 2013-08-14 Created: 2013-08-14 Last updated: 2017-12-06
3. Joint optimization of pricing and planning decisions in divergent supply chain
Open this publication in new window or tab >>Joint optimization of pricing and planning decisions in divergent supply chain
2013 (English)In: International Transactions in Operational Research, ISSN 0969-6016, E-ISSN 1475-3995, Vol. 20, no 6, 889-916 p.Article in journal (Refereed) Published
Abstract [en]

In divergent supply chains, such as in the oil industry, processing raw materials results in an outflow of multiple products. Final products are stored at international depots, from where they are ready to be shipped to the markets. Even if one company controls the entire chain, when production and sales organizations are decoupled, a relevant problem is to determine the internal prices of products at depots for achieving coordination. We propose an optimization model involving pricing and production decisions, and several constraints commonly used in divergent chains. In our approach, the producer incorporates the sellers behavior by expressing demand as a function of the internal price. As a result, our model serves as a coordination mechanism in trying to get an overall coordinated integrated solution in a decoupled reality. Numerical examples in single and multiple periods problems show the advantages of our approach over cost-based methods.

Place, publisher, year, edition, pages
Wiley-Blackwell, 2013
Keyword
divergent supply chain, coordination, internal pricing, OR in the oil sector
National Category
Engineering and Technology
Identifiers
urn:nbn:se:liu:diva-100303 (URN)10.1111/itor.12024 (DOI)000325494000006 ()
Available from: 2013-11-04 Created: 2013-11-04 Last updated: 2017-12-06

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