Business strategies for transitioning the bioeconomy to a landscape with long-term profitability

May 11, 2016 |

AAEAAQAAAAAAAAI-AAAAJDAwZTgxN2Q3LTliM2YtNGEyMy05MWI5LTA5YWVjOGJmMWY5OQBy Mahmood Ebadian, Ph.D.
Special to The Digest

Regardless of the type of industry, the primary goal of any supply chain is to fulfill the customers’ needs efficiently and effectively over the lifetime of the business. An efficient supply chain is capable of maximizing the use of resources across the supply chain as planned while an effective supply chain is capable of maximizing the customers’ satisfaction as promised. In other words, effectiveness is outward-focused on meeting the customers’ requirements on cost, quality, quantity and delivery time while efficiency is inward-focused on producing the final products with less cost, in less time and with fewer resources.

The most efficient supply chains are not necessarily the most effective. For example, running a machinery at full capacity would result in the efficient use of the resource by minimizing the unit cost for the given operation but it can create excess inventory for which there is no demand. On the other hand, using air delivery to minimize the delivery time of products to customers would result in increased service rates but the business would incur additional costs. Balancing these two dimensions of the supply chain is where the real challenges lie. An economically sustainable supply chain requires a business strategy that creates a trade-off where the customers’ needs are fulfilled while all resources across the supply chain are utilized efficiently.

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Figure 1. A deep understanding of trade-offs in biomass supply chains is critical to develop business strategies that move these supply chains to a landscape where high efficiency and high effectiveness take place. Picture Source: Neringa Murauskiene, 2014.

The Trade-offs

Biomass supply chains have a myriad of trade-offs. The majority of these trade-offs stem from the physical properties and the chemical compositions of biomass (i.e. biomass characteristics). Physical properties of biomass impact the selection of harvest, collection, handling, transportation, pre-processing and pre-treatment equipment as well as the storage configuration. Biomass is usually available and widely distributed in rural areas where the existing infrastructure struggles to process and handle large quantities of biomass efficiently in its natural form. In addition, the natural variability in the chemical composition impacts the bio-conversion processes’ efficiency and effectiveness in producing bio-products at competitive prices and with the same functionality as the petrochemical counterparts. The examples of these bio-products are bioethanol, biodiesel and wood pellets as the replacement for gasoline, diesel and coal, respectively. The inefficiency of the existing biomass supply chains also introduce more variability to the chemical composition of collected biomass.

Figure 2 shows a simple schematic of the existing supply chains in the bioeconomy. These supply chains mainly strive to deliver the right amount of biomass to the bio-processing facilities to meet their annual feedstock demand at affordable costs. They have been developed based on the established know-how in the agricultural and forest sectors. For instance, agricultural residues such as wheat straw and corn stover have been harvested, collected and handled by farmers in small scales for animal bedding and feeding for years. In addition, collection, processing and handling of woody biomass are well-established practices developed by pulp and paper plants and sawmills.

Most of the existing biomass supply chains are vertical in which the bio-processing facilities own and control as many links in the supply chain. In addition to pre-processing and pre-treating biomass into a feedstock for their bio-conversion reactors, some of these facilities put the upstream activities such as biomass harvest, collection, storage and transportation under the corporate management. The primary benefit of the vertical integration is control. However, it is difficult for one business entity to garner the expertise needed in a multi-disciplinary supply chain and to excel in all elements of the supply chain. The bio-processing facilities should outsource those aspects of their business in which they judge themselves to be least effective.

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Figure 2. Simple schematic of existing biomass supply chains. Most of these supply chains are vertical in which the bio-processing facilities own and control as many links in the supply chain. In addition to pre-processing/pre-treating biomass into a feedstock for their bio-conversion reactors, some of these facilities put the upstream activities such as biomass harvest, collection, storage and transportation under the corporate management.

Quality management and variability

Currently, there is no player in these supply chains that specializes in feedstock engineering and managing the biomass quality. The quality management is currently passed onto the bio-processing facilities whose core competency is to convert pre-processed biomass (feedstock) to bio-products. The magnitude of variability in quality characteristics of delivered biomass has resulted in extensive research and investment by technology developers to employ pre-processing operations prior to the conversion process. These pre-processing operations aim at providing a feedstock with consistent and desirable quality for the conversion reactor to maximize the yield and quality of final products. A review of the existing demonstration and commercial bioenergy and biofuel plants reveals that the pre-processing operations are the bottleneck of the production system to reach the steady-state in a reasonable time.

The quality management prior to the delivery of biomass to the throat of the bio-conversion reactor could provide significant cost savings in investing and maintaining the pre-processing operations. It also helps to expedite and streamline the process of getting from the commissioning phase to the steady-state phase, which is one of the risks associated with scaling up a bio-processing technology.

In addition to trade-offs between cost and quality in the biomass supply chains, another trade-off pertains to the economics of scale. The existing bio-processing facilities are in close proximity of biomass sources to minimize the feedstock costs. This feature of the biomass supply chains reduces their flexibility to optimize the size and location of bio-processing facilities. In contrast, high density and uniform format of crude oil and efficient logistics networks using high-capacity transportation modes such as pipeline and railway enable oil refineries to exploit the economics of scale. In addition, these oil refineries are in close proximity of markets or transportation hubs to ship their products to international markets.

Another complex trade-off in the biomass supply chains is the balance between supply security and price stability. An economically sustainable supply chain should be able to secure sufficient quantities of biomass at low costs over the lifetime of the bio-processing facilities. Large supply areas would mitigate the risk of the supply shortage due to the competing uses and weather shocks such as drought but would increase the delivered costs. In addition, the mobilization of logistics equipment among the biomass suppliers in a large supply area can adversely impact the efficiency of the logistics operations and increase the associated costs. In contrast, small supply areas can result in lower delivered costs but would increase the risk of supply shortage.

These trade-offs are examples of challenges that the existing biomass supply chains are facing in balancing their efficiency and effectiveness over the lifetime of their business. These biomass supply chains have developed expertise and know-how in managing the flow of commercial amount of biomass from sources to the gate of the bio-processing facilities. However, the long-term profitability of the existing and future facilities requires business strategies that lead to a transition to more efficient biomass supply chains that are capable of meeting the cost, quantity and quality specifications of their customers.

Figure 3 shows the general structure of biomass supply chains that have potential to move to a landscape where high efficiency and high effectiveness take place. In such a landscape, different players of the biomass supply chains are horizontally integrated in which various activities and expertise are outsources. These players focus on their core competency and deal with each other through discrete transactions or by longer-term contracts. Horizontal biomass supply chains also lead to the achievement of economies of scale and scope by producing multiple intermediate and final products from different biomass streams. However, synchronizing the activities of a network of independent firms can also be challenging. What each firm gains in scale, scope, and focus, it may lose in ability to see and understand the larger supply chain processes.

Market diversification, specialization and risk

The market diversification in horizontal biomass supply chains minimize risk for both biomass producers, processors and users. It also overcomes chicken and egg dilemma since the supply chain is not focused on the production a single primary product with relatively higher risk of failure

As shown in Figure 3, change in the landscape of the supply chain from vertical to horizontal can foster the emergent of business entities in the supply chain that specialize in the feedstock engineering. These entities are able to produce drop-in feedstocks for downstream biorefineries at central processing depots. Drop-in feedstocks are pre-processed biomass that meet the feedstock specifications of downstream biorefineries both in terms of physical properties and chemical compositions. Drop-in feedstocks can be fed into the bio-conversion reactors with no/minimum needs for pre-processing/pre-treatment at biorefineries.

With specialization occurring in feedstock engineering, these new business entities will be well-positioned to produce multiple products including both intermediate and final bio-products. In other words, they will be multi-product firms that exploit the economics of scope to produce multiple products for downstream markets. They can meet the demands of local, regional and also international markets by producing dense and uniform format drop-in feedstocks that can be handled and shipped by high-capacity transportation modes such as pipeline, railway and waterway.

This transition would open up opportunities to enhance the efficiency and effectiveness of the biomass supply chains. The new business entities are able to exploit the economics of scope to maximize the utilization of their resources to produce multiple products at low costs. In addition, their final products meet the quality specifications of downstream biorefineries. Dense and uniform format drop-in feedstocks make the long haul of these materials efficient. This provides the flexibility for biorefineries to optimize the size and location of their facilities and thus minimizing the delivered costs of their products to the end users.

Production of multiple drop-in feedstocks can also pave the way for the bio-processing facilities to introduce themselves as biorefineries that are capable of producing multiple bio-products such as green diesel, gasoline and aviation fuel. In addition, the existing oil refineries can also capitalize on this opportunity and produce green transportation fuels. The significant advantage of this business strategy is the low capital costs required by using the existing logistical, processing and distribution infrastructure in the oil industry. This business strategy, however, requires the production of intermediate products with consistent quality that can be dropped into this infrastructure with no/minimum modification.

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Figure 3. Transition to horizontal biomass supply chains in which various activities and expertise are outsourced. Different players of the biomass supply chain focus on their core competencies and deal with each other through discrete transactions or by longer-term contracts. Horizontal biomass supply chains also lead to the achievement of economies of scale and scope by producing multiple intermediate and final products from different biomass streams.    

The existing bioeconomy has targeted biomass streams that are easily accessible and relatively consistent in quality such as sawmill residues, bagasse and corn stover. A large portion of the untapped and available biomass streams are usually stranded, remote and/or have highly undesirable characteristics such as high moisture content. The examples of these biomass streams are algae, animal manure, food waste, hog fuels and sewage sludge. The discussed business strategies in a horizontal biomass supply chain can provide logistical and technology solutions to maximize the value extracted from these biomass streams to support the sustainable growth of the bioeconomy.

Towards economies of scale and scope

Overall, the successful transition of the existing supply chains to multi-products supply chains require business strategies that are innovation-driven. The focal point of these innovations should be on the development of solutions for logistics, pre-processing and upgrading operations as well as conversion technologies that are able to handle multiple types of biomass and drop-in feedstock. These innovations enable the biomass supply chain to exploit both economies of scale and scope. In addition to innovations in technology, the bioeconomy needs to find innovative business models that attract mainstream capital and unlock transformational change. These business models should be able to create win-win environments for all the stakeholders of the supply chain in the long term. The implementation of these business strategies to solve complex trade-off problems in the biomass supply chains represents a new economic movement.

The current bioeconomy has developed sufficient knowledge and information to validate the viability of the discussed business strategies. The question is not whether these business strategies are able to move these supply chains to a position where high efficiency and high effectiveness take place. We need to go beyond this question and ask instead “under what circumstances these business strategies pave the way for transitioning the bioeconomy to a landscape with long-term profitability?”

Note: The developed discussion in this article is inspired by the knowledge established in US Department of Energy (US DOE) laboratories to transition from conventional biomass supply chains to advanced supply chains that are capable of mobilize large quantities of stranded and multiple types of biomass. In addition, I would like to acknowledge the insights from Dr. Shahab Sokhansanj and Dr. Erin Webb of OakRidge National Lab in preparation of this article.

Dr. Ebadian is a Researcher, Biomass and Bioenergy Research Group (BBRG), UBC; he is also Founder of Biomass Supply Chain Consulting Ltd. More about the company here.

 

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