Supply Chain Management in Process Industries: Empirical Investigations for Commodity Markets

Process industries (PI) have thrived in recent decades, but structural changes in the markets are currently putting both growth and profitability at risk. In a period of tumbling prices, supply chain management (SCM) is increasingly viewed as an essential lever for creating a sustainable competitive advantage. In PI supply chain related costs are, as a percentage of sales, on average more than twice as high as in consumer industries. Despite the interest in improving their supply chain function, many firms in these sectors struggle to implement best practices because of industry-specific constraints. Historically, the majority of SCM frameworks has been based on consumer industries and often does not take into account the context of PI. The objective of this dissertation is to close this gap and give practitioners guidance on their supply chain transformations: . What are the predominant characteristics of PI that impact the SCM environment? . How can the particular market environment of PI be translated into an adequate supply chain strategy? . In PI, what are the operational implications of investment decisions related to strategic asset development? Chapter 2 explores how industry specific properties drive inventory which is a powerful way to improve profitability. An inventory reduction of 10% in the primary metal sector would, ceteris paribus, increase the return on assets by 78% . Our empirical results show that factors such as capital intensity and transportation costs have a particularly strong impact on the supply chains in PI. This illustrates that SCM in PI is subject to - and follows - different dynamics than other sectors. Chapter 3 demonstrates why PI need different approaches than consumer industries when it comes to strategic SCM. More specifically, we identify four market archetypes that shape the SCM strategy of companies. Based on 24 in-depth interviews with supply chain managers and a survey of 477 respondents, the chapter investigates the positive effects on performance of companies that adopt a supply chain strategy characterized by the market archetypes. This strategic alignment is still lagging behind in PI, since only 32% of the surveyed companies have a supply chain that best reflects their business environment, which is about 40% lower than in consumer industries and indicates the enormous improvement potential that SCM holds for PI. The chapter concludes with two recommendations for managers in process industries seeking to successfully transform their supply chains. Chapter 4 looks at the impact of such transformative decisions in PI. In commoditized sectors, manufacturing is a core competency, and the related fixed assets are crucially important in securing a company's market position. But the required investments are particularly high, imposing fixed costs and implying operational constraints. Our empirical models show that companies follow with their investments the market prices, trading off volume flexibility and asset development. We present evidence that when we combine these two operational implications and examine their impact on the stock market valuation, the long-term effect on asset development overshadows the short-term impact on volume flexibility. This illustrates a potential conflict of interests as managers are incentivized to over proportionally increase/reduce investments into fixed assets in times of increasing/decreasing market prices to boost the share price in the short-term.

A model for the design of effective and resilient supply chain security management systems

Ximena Gutiérrez Rueda

The current business environment has become more risky and variable. In particular, the recent terrorist attacks against western economies have revealed the vulnerability of global supply chains. These events showed that companies that move cargo internationally are subjected to a broader spectrum of risks, for which they might not be yet prepared. The perception of a higher level of security risks has motivated a wide variety of efforts from the academic, public and private sectors to increase global supply chain security. First, governments, border agencies and international organizations are designing and promoting new security initiatives and regulations to force companies to take more responsibility for the security of their supply chains. Second, academics have started to apply traditional concepts of risk and security management to the supply chain context, leading to the theory of supply chain security management (SCSM). Third, companies are following the new mandatory security regulations. However, most of them are still waiting before implementing those initiatives which are not yet mandatory. At the moment, each of these parties is approaching this problem from different a perspective. However, they all face one main common challenge: Increasing security without affecting supply chain performance or creating new trade barriers. The management of security in a supply chain environment has been usually associated with the implementation of rules and activities that are obstacles for the efficient flow of goods, non-value adding operations or cost generators. It is therefore necessary for these parties, to develop security initiatives which enhance security without affecting supply chain performance or jeopardizing trade. This study builds on the theory of SCSM which is still in its infancy. The literature review shows that some of the most relevant gaps are: i) the disconnection between the governments and border agencies' security initiatives and the theory developed by academics, ii) the non-inclusion of a systematic, holistic and process perspective in the design of SCSM initiatives, and iii) the lack of adequate management tools for companies to implement and maintain the new SCSM initiatives. Based on these literature gaps and the challenges imposed by the new supply chain security risk context, the main research question of this study is: How companies and governments can develop effective (capable of reducing the probability of disruptions occurrence) and resilient ( preparing the supply chain to recover from disruptions) SCSM systems? The main goal of the study is to develop a SCSM model which can help companies and governments to make use of the most relevant lessons from the existing academic theories and the new security initiatives, by integrating them in one practical comprehensive management tool. The research study investigates the supply chain security management by companies with large experience in managing high-risk areas and products. Initially, a survey is conducted to study how some of these companies have increased their security level by implementing a voluntary security program. The analysis of this data enables the identification of some of the factors which can positively impact the success of these programs and confirms the systemic nature of supply chain security management programs. Following these results, supply chain security systems are studied from a more holistic perspective by carrying out two in-depth case studies. The analysis and comparison of these case studies allow the identification of the most relevant challenges that these companies face to manage their supply chain security. Furthermore, they show that the traditional methods of corporate security management present several obstacles to deal with these challenges. The lessons and insights obtained through the analysis of the empirical data, together with the SCSM best practices identified in the literature, are integrated into the proposed "Supply Chain Security Management Model". This model provides a concrete framework to help practitioners adding the process dimension to the management of security. The framework also allows a better understanding and managing of the interactions between the supply chain and the security systems. To complete this research study, the model is validated by applying it to the two case study companies. The results of this initial exercise show that the proposed SCSM model constitutes an innovative management tool for the evaluation of SCSM systems, which drives the attention to critical points that were neglected in the past. This practical application exemplifies how the model can be used to collect and represent in a comprehensive way the security related information that is usually spread amongst different company functions and business partners. The main advantage of such representation is that it allows for a quick identification of the areas with potential for improvement.

EPFL2007

Compatibility modeling to support opportunity analysis in new product development

Julie Hohenegger

The general context of this Ph.D. dissertation is the new product development (NPD) which is the process for transforming an opportunity that is a business or technology gap in the current situation into a product available for sale. This Ph.D. dissertation focuses on the opportunity analysis in NPD. Therefore, a framework to support opportunity analyses is developed. The framework is structured in two parts: the information search and the modeling of compatibility. Opportunity analyses require a systematic approach to obtain all the information related to the identified opportunity, as well as an approach to determine whether or not this opportunity is compatible with respect to the different attributes/criteria representing the product development context. The state of the art review reveals that such approaches are not available in the published literature. Therefore, the objective of this research is to develop a comprehensive framework comprising an information search approach and a compatibility modeling approach to respond to these needs. The early phases of NPD are characterized by uncertainty that corresponds to the difference between the amount of information required to perform a task and the available amount of information. Uncertainty may have serious consequences on NPD, resulting in the worst case in a project failure. Therefore, information is crucial for the product development process. The information search approach developed in this Ph.D. dissertation allows the reduction of this uncertainty. This approach comprises four levels. The first level comprises the activities involved in NPD, such as market analysis and manufacturing. The second level proposes a classification of the different types of information required during the product development process: product-, process-, resource- and context-related. The third level represents the different sources where each type of information can be found. Two main classes are identified: the first one comprises the company departments such as marketing, and manufacturing, while the second class contains the sources from the external environment of the company, such as suppliers, customers, competitors, research communities, and governmental and non governmental organizations. The fourth level contains different methods of collecting information. Two main classes are distinguished: meetings- and documents-related. The links between the different levels are established on the basis of a thorough review of the related literature. Once the NPD activities associated with the identified opportunity are determined, the related information types, the sources where they can be found and the methods for their collections can be easily deduced from the information search approach. The compatibility modeling approach aims at evaluating the compatibility relationships for pairs of alternatives. Two types of compatibility can be distinguished: hard compatibility and soft compatibility. Hard compatibility corresponds to the notion of matching (i.e. the possibility that two alternatives coexist in a specific product development context) and is evaluated with respect to hard attributes/criteria related to the basic laws of nature or to the technical possibilities. Soft compatibility corresponds to the notion of non-degradation (i.e. the shift from a situation where the two alternatives are considered individually to a situation where they are considered together does not induce a degradation in a specific product development context) and is evaluated with respect to soft attributes/criteria such as development cost, and lead time. The core concept of the compatibility modeling approach is the compatibility structure. The crisp compatibility structure is a quadruplet of crisp relations M, C, I, and J, called mutual compatibility, strict incompatibility, mutual incompatibility and mutual incomparability respectively that satisfy a certain number of conditions. The relations M, C, C-1 and I correspond to four different situations: no degradation – no degradation, no degradation – degradation, degradation – no degradation, and degradation – degradation respectively. J corresponds to the situation where the alternatives cannot be compared using one of the relations M, C, C-1 or I. For each attribute/criterion, partial compatibility structures without incomparability are constructed from the impact that an alternative exerts on another and vice-versa. Then, relations characterizing the partial structures are aggregated into a global relation that takes into account all the attributes/criteria. By their nature, crisp compatibility structures cannot express degrees of mutual compatibility, strict incompatibility, mutual incompatibility or mutual incomparability, and are consequently too constraining in practice. Therefore, the crisp compatibility structures are meticulously extended to the case of fuzzy binary relations. A case study from the Swiss company Laurastar illustrates the framework that supports the opportunity analysis. This case study investigates the possibility to collaborate with new suppliers located in Bucharest and Hong-Kong. The compatibility between alternatives related to the supply chain activity is evaluated with respect to the various attributes/criteria.

EPFL2007

Interrelating operational and financial performance measurements in inventory theory

Margarita Protopappa

Financial flows are often treated in a fragmented and disconnected way from the physical product flow. Managers take decisions from an operational point of view concerning inventory, service level or capacity needs. The implementation of such decisions influences financial performance in terms of profit margin, working capital requirements and return on investment. However, the interdependency of operational and financial objectives is rarely well understood. Such practice has serious implications on the profitability of a company and its responsiveness to market needs. Therefore, companies increasingly acknowledge the importance of financial supply chain management as an effective approach to optimize working capital levels and to direct cash flows. Efficient working capital allocation and visibility of accounts payables and receivables can achieve significant cost savings, enhance cash flow predictability and boost company performance. In this dissertation, we weave together financial and operational decisions. We analyze the impact of working capital targets on the optimal ordering policy and the relationship between product flows and cash flows. We also investigate the impact of trade-credit on the operational and financial performance of a supply chain. In the first part of our dissertation, we develop and analyze a model that interrelates operational and financial aspects. We analyze how the optimal solution depends on the financial characteristics of the supply chain. We elaborate on the interrelation between operational and financial performance measurements, such as inventory level, service level, return on investment, cash flows and working capital requirements. Our results demonstrate the significance of payment delays on profit margin. We motivate a joint consideration of financial and operational objectives because a higher working capital employed in the system decreases the operational cost but increases the financial cost. In the second part of this dissertation, we extend our modeling framework to accommodate multi-product settings. We focus on the interrelation of working capital and stocking decisions for functional, innovative and heterogeneous product portfolios. We analyze the effect of demand correlation, lead time, payment delays, portfolio size and service level constraints for symmetric and asymmetric product portfolios of various sizes. Our results attest the importance of upstream and downstream payment delays on the profitability of the supply chain. Our analysis demonstrates significant risk-pooling benefits for functional and innovative portfolios under specific demand correlation scenarios. In the third part of this dissertation, we extend our modeling framework and investigate the impact of working capital allocation in a multi-echelon supply chain. We consider a joint working capital allocation, where all the members of the supply chain share a working capital pool and face working capital restrictions jointly. We compare our findings with a dedicated working capital allocation, where the members of the supply chain each have a separate working capital and face individual working capital restrictions. Our research demonstrates significant cost savings when the members of the supply chain share a joint pool of working capital. We investigate the impact of interest rate, payment delays and lead time on the profitability of the supply chain. We show that extending the payment delays to your supplier increases the cost in the supply chain. We finalize this dissertation with a conclusion and a discussion of potential avenues for future research.

EPFL2009

A model for the design of effective and resilient supply chain security management systems

Ximena Gutiérrez Rueda

EPFL2007

Compatibility modeling to support opportunity analysis in new product development

Julie Hohenegger

EPFL2007

Interrelating operational and financial performance measurements in inventory theory

Margarita Protopappa

EPFL2009