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.

Seifert, Ralf
Lausanne, EPFL
Other identifiers:
urn: urn:nbn:ch:bel-epfl-thesis7190-4

 Record created 2016-10-11, last modified 2018-01-28

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