Creating cost transparency to support strategic planning in complex chemical value chains

Steffen T. Klosterhalfen, Josef Kallrath, Markus M. Frey, Anna Schreieck, Robert Blackburn, Jan Buchmann and Felix Weidner

European Journal of Operational Research, 2019, vol. 279, issue 2, 605-619

Abstract: Accurate and detailed cost information is crucial for decision makers when deciding about important long-term business aspects, such as capacity investments, the product range to offer or the markets to serve. The economic assessment of these options is supported by a company’s accounting team and is based on analyses that the accountants usually run in spreadsheet models of the value chain under consideration. However, solely working with the available cell formula functionality requires model simplifications, e.g., when it comes to cyclic production relationships or by-products, two common characteristics in the chemical industry. This might lead to a distorted cost and profitability assessment. In this paper, we present a two-step approach for creating detailed cost transparency, which easily takes the production and supply chain characteristics into account. In a first step, we propose a mathematical programming model to determine the optimal procurement, production, and sales quantities. Such models can easily account for the existing operations and technical constraints. In a second step, we complement the first-stage results with another mathematical programming model that takes the predetermined quantities as inputs and allocates the variable and fixed costs to the individual products. To clarify the approach and highlight its benefits, we discuss it in the context of a real-world implementation in the chemical industry at BASF. Due to by-products, the compact formulation of the cost-allocation model is non-linear. We develop a workaround to convert it into a linear and easily solvable one.

Keywords: Strategic planning; Cost transparency; Overhead allocation; Chemical industry (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221719304643
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:279:y:2019:i:2:p:605-619

DOI: 10.1016/j.ejor.2019.05.034

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().