Horizontal collaboration in the commodity industry

4C4CHEM HORIZONTAL COLLABORATION IN THE COMMODITY INDUSTRY An European explorative case study for styrene monomer

PROJECT FACTSHEET

Horizontal collaboration is an active cooperation between two or more firms operating on the same level of the supply chain. A new business model for horizontal supply chain collaboration in the commodity industry is presented. Based on four case studies, we propose a set-up via an independent `black-box' party called 4C4Com that optimizes transport flows over the entire pool of participants. We also developed a mathematical model able to calculate the strategic business case for such collaboration, optimizing total transport, storage and inventory holding costs.

Problem description About 10 percent of transport flows in Europe are caused by the chemical industry due to large distances, movements of relatively small volumes or inconvenient connections to preferred transport means. There is potential to increase transportation efficiency through collaboration between producers, customers, suppliers and service providers to drive out waste and cost in the chemical industry. Horizontal supply chain collaboration (HSCC) in the commodity industry might have additional potential compared to other products since commodities are considered interchangeable.

Hence, by collaborating horizontally these commodities might be combined, e.g. by allowing the pool to withdraw inventories from any (new) storage facility in the network, or bundled during transport, given certain new innovative rules.

Solution methodology An empirical research based on case studies is used. The methodology is based on a combination of two approaches: The reflective cycle and an empirical research model. The case class investigated in this project is chemical commodities, specifically the styrene monomer produced by the 4C4Chem participants. Using public and private data; and semi-structured interviews with employees from the supply, land logistics, marine, strategy and commercial departments at the 4C4Chem group, we design a business and quantitative models to calculate the business case.

Case study/Implementation Based on the results of four case studies of HSCC we designed a business model for an independent `black-box' entity named 4C4Com. 4C4Com enables HSCC between structural shippers of commodities in Europe, i.e. either producers that locally produce more than they consume or structural importers. These shippers need to ship a commodity that is not transported mainly via pipeline. The total size of the shipments should be significant, at least initially, and the supply chains of the collection of shippers should be compatible. 4C4Com allows the structural shippers to optimize logistic costs and CO2. 4C4Com collects information from all individual shippers and optimizes over the entire chain. The main principle allows 4C4Com to physically bundle volumes, swap volumes geographically and to combine by opening shared storage facilities.

Figure 1 shows the conceptual model in terms of information flows, financial flows and contracts. 4C4Com holds all transport contracts and allocates transport costs incurred to supply the original customers of the suppliers, increased with operating costs of 4C4Com, according to some fair gain sharing mechanism.

Figure 1 - Conceptual model of 4C4Com

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Two models were designed for the calculation of the total supply chain cost and CO2 savings: The first is a mathematical model (mixed integer linear programming model) implemented in software program AIMMS, and the second model is based on the output of the first model as input.

Results/Managerial insights We applied the business model and optimization model to the European styrene monomer industry.

Specific to this industry is the cluster of non-integrated Dutch styrene producers, causing the Netherlands to have a net capacity excess of about 1,800 kilotons, whereas all other European countries apart from Spain have major net capacity shortages. We focused on four Dutch industry players and we built realistic profiles for them based on different types of available data (export data, capacity data and industry knowledge). Sensitivity analysis challenged the assumptions underlying these profiles and showed that the results are robust. We observe that total supply chain costs and CO2 emissions may be reduced by 6% and 11% respectively, by implementing the 4C4Com model.

Investing in shared storage facilities for styrene is currently not profitable.

Insights on business case Savings are caused by physically bundle volumes, better utilization of vehicle capacity and geographical swaps. If investing in shared storage facilities were profitable, this would cause additional savings by increasing the possibilities for bundling (including modality switches). Savings may increase by collaborating when some of the following conditions hold: High volumes and distance, large volumes shipped per tanker, high maximum parcel sizes of customers (see Figure 2), low maximum parcel sizes of producers (i.e., the volume producers are able to load due to physical or production restrictions), high reachability and high compatibility of end markets.

Savings are robust for transport costs of vehicles other than tankers and the division of customer demand over participants, as long as each customer whose volume is shifted to 4C4Com is supplied by at least two participants. We expect these insights to be applied to all commodities in general (i.e. not to styrene only). Commodities of which supply availability is spread over Europe may lead to Figure 1 - Impact of maximum customer parcel size on total savings larger reductions in terms of HSSE exposure. Savings may increase up to a potential of â‚Ź60 million for 10 commodities, while costs for including more commodities may only increase marginally.

This fact sheet was produced at part of the Dinalog project 4C4CHEM - Cross chain collaboration in the Chemical Industry. The work reported on in this factsheet was conducted by Kelly Klawer, as part of her Master Thesis work at Eindhoven University of Technology.

Interested to receive more information? Please contact Professor Jan Fransoo, 4C4CHEM project leader at j.c.fransoo@tue.nl