Impact of ownership structure along the value chain in the manufacturing business

Abstract

In the chemical and petrochemical industry it is quite common that the manufacturing of a final product is the result of several consecutive steps which can be owned and operate by one or many participants. Although not always practical, equal ownership among all partners along the value chain is often recommended as a way to simplify business structure, ensuring all partners share equally in the ups and downs of an uncertain market. In contrast to this approach, there are instances where more benefit can be derived from having different owners and operators along the value chain. Examples which are common practise in the industry are the supply of utilities (e.g. electricity), feedstock and services. In these cases the non-integrated approach offers value as: It provides the operator of the upstream or utility plants the opportunity to specialize, for example, by operating very similar plants around the world. Such specialization enables the use of regional operating centres, minimum onsite cash costs, optimized operating conditions, minimized energy consumption and the optimal use of other variable cost parameters. This paper shows that if outsourcing results in a cash cost saving by an upstream operator, the benefit to the downstream owner will (in financial reward) be 1 proportional to the cash cost saving achieved. In absolute terms, the magnitude of the benefit is moderated by the size of the downstream capital investment. (The bigger the downstream investment relative to the upstream investment, the smaller the impact of the saving on the economics of the downstream company.) As a "utility provider" an upstream operator benefits from lower risk in terms of offtake and market price uncertainties. Such owners benefit from a lower cost of capital, and as such also have lower return expectations than players further along in the value chain (who are exposed to all the uncertainties in volatile markets). This paper shows that the positive impact of such benefits to the return of the downstream partner is directly proportional the difference in return expectations between the upstream and downstream company. Once again, the absolute magnitude of the saving becomes more substantial as the ratio of upstream capital investment increases relative to the downstream capital investment. Economy of learning may also enable a specialized upstream company to obtain an asset at a lower capital than a less specialized downstream operator. This paper shows that the positive impact of such a benefit is very similar to that of a lower return expectation by the upstream company.

Pouring cement down one of your oil wells: Relationship between the supply chain disruption orientation and performance

“…Finally, the sample firms and suppliers are from various industry types and with different ownership status, which may be associated with firm's performance. Firms with different ownership status (joint‐stock company, limited joint‐stock company, limited liability company, or others) may have a different organizational structure and capital contribution, which may influence collaboration with supply chain members, and ultimately firm's performance (Scholtz, 2016). Similarly, firms from various industries in a supply chain have industry specificities (i.e., industry standards, norms, requirements) that may hamper focal firm and supplier cooperation and are ultimately related to focal firm's performance (Asamoah et al., 2021; Belhadi et al., 2021).…”

Optimal design of batch‐storage network considering ownership

“…The question that then arises is whether the ownership structure influences the optimal design and operation of a supply chain. A recent study investigated the influence of ownership on supply chains and partially addressed this question. That study examined two‐step supply chain networks, consisting of up‐stream and down‐stream processes, and concluded that ownership has a complex influence on such systems.…”

“…A recent study investigated the influence of ownership on supply chains and partially addressed this question. That study examined two‐step supply chain networks, consisting of up‐stream and down‐stream processes, and concluded that ownership has a complex influence on such systems. In that study, ownership takes the form of either out‐sourcing agreements or joint ventures which are employed for some processes of the supply chain network.…”

“…Under this two‐unit system representation, the mathematical analysis of financial flow is possible. One of the interesting analysis results is that if outsourcing results in a cost saving by an up‐stream operator, the financial benefit to the down‐stream owner will be proportional to the cost saving achieved . A recent paper has also studied a two‐unit system composed of supplier and retailer .…”

“…In the process system engineering community, supply chain models which include financial flows are widely reported . However, the above cited paper about ownership is only the one with a systems perspective. The present work treats the supply chain as a multistage, cyclic network and includes consideration of financial flows as well as material flows and by virtue of using the PSW construct is able to provide insightful analytic solutions.…”