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

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.