How an effective risk management strategy can contribute to unlocking the full potential of a billion-ton bioeconomy

October 24, 2016 |

screen-shot-2016-10-24-at-8-22-09-amBy Dr. Mahmood Ebadian
Special to the Digest

The procurement of low-cost feedstock has been the focus of the pioneering bio-conversion technology developers in commercializing their first industrial-scale projects. Low-cost feedstock is critical in such projects as most of the existing bio-conversion technologies are not yet mature enough to process multiple streams of biomass and produce bioproducts at high and steady yields. In addition, these bio-products have to compete with their fossil fuel and petrochemical counterparts that already have cost-efficient supply chains from oil wells/mines to end users. Municipal solid waste (MSW), sawmill residues and bagasse are examples of low-cost biomass streams that are available either at negative costs (i.e. tipping fee for MSW) or at wood or sugarcane processing facilities and can be delivered to a nearby bio-processing facility with minimum transportation and handling costs. These types of biomass have been regarded as low-hanging fruits.

The US DOE billion ton reports (2005, 2011 and 2016) have shown that a significant portion of available biomass resources are geographically distributed in forest lands such as logging residues and unmerchantable timbers or distributed in farmland such as agricultural residues and dedicated biomass crops. Forest and agricultural residues need to be harvested, collected, stored, handled and transported to biorefineries. In addition to these logistics operations, dedicated biomass crops need extra operations including land procurement and crop establishment. All of these logistics operations take place in rural areas and appropriate infrastructure is required to run these operations in a cost-efficient manner.

Now the question is “with the additional logistics operations compared to the low-hanging fruits, will these biomass streams be regarded as low-cost feedstock for future biorefineries?” Whatever the delivered cost to biorefineries is, the profit margin should be appealing enough to attract investment in the development of biomass supply chains in rural area.

Although low-cost feedstock is critical for biorefineries to generate meaningful revenues and to recover the capital invested in their facilities, the economic health of the players involved in the biomass supply chain is also vital. These players have to invest in biomass production, harvest and collection, storage, handling, transportation and pre-processing. The biomass supply chains are developing networks with variabilities in weather conditions, harvest window, biomass yield, microbial degradation, and physical properties and chemical compositions of biomass. Expecting these supply chains to deliver biomass at low costs without rewarding them for mitigating the supply and quality risks can turn the biomass supply chain into an unappealing landscape for investment.

Changing the perspective from cost to revenue in biomass supply chains

No doubt the long-term success of the existing and future bioenergy, biofuel and biochemical plants highly depend upon the availability of commercial quantities of low-cost feedstock. However, a pure focus on cost in biomass supply chains does not address the reliability and robustness of these supply chains. A robust supply chain can be developed when the potential risks are identified, assessed and effective mitigation strategies are developed. The risk mitigation strategies can provide certainty for biorefineries in biomass supply, quality and performance in bioconversion processes.

However, the players in biomass supply chains will consider these mitigation strategies in their business models only when they are rewarded for such strategies as they require resources to develop and implement. For example, a biomass supplier may need to hold excess biomass inventory to cope with supply shocks or to establish a protective storage regime to preserve the quality of biomass. In a system where the focal point is cost, there is not much room available to develop an effective risk management strategy. To bring both risk and cost into the profit equation, the focus in biomass supply chains should be shifted from minimizing cost to maximizing revenue. Similar to a biorefinery, the players in a biomass supply chain need to recover the capitals invested in the logistics operations based on the risk profile of these operations.

Monetizing risk in biomass supply chains

It is the norm in any industry that the actions leading to cost reduction are tangible and there are incentives to develop and implement such actions. In contrast, the results of a risk management framework may not be tangible in the short term and do not provide immediate results for the bottom line. The players in biomass supply chains should be able to communicate their risk mitigation strategies and the long-term perceived benefits to biorefineries.

To this end, the potential risks should be identified and assessed and their associated risk mitigation strategies should be monetized. The perceived benefits of the risk mitigation strategies would help both upstream players and the biorefinery to evaluate the impacts of these strategies on their bottom lines in the long term. The perceived benefits can be realized in biomass supply security, consistent and on-spec quality and predictable performance of biomass at the downstream conversion processes. The perceived benefits should be significant and tangible enough so that biorefineries are willing to pay for additional costs associated with risk mitigation strategies.

Characteristics of an effective risk management framework in biomass supply chains

An effective risk management framework should have three characteristics:

1) Data-driven: With the level of complexity and the magnitude of variations in biomass supply chains, common-sense strategies, intuition and gut feeling cannot be effective in bringing risks into the profit equation. Valid data on both upstream logistics operations and the bio-processing facility should be generated to monetize the risk profile of a biomass supply chain and calculate the perceived benefits of risk mitigation strategies for downstream end users of biomass. Thus, a risk management framework should move away from gut feelings and intuition toward a data-driven approach.

 2) Dynamic: The risk management framework should be capable of updating the risk mitigation strategies based on the continuous changes happening across the supply chain.

 3) Systematic: The perceived benefits of a risk mitigation strategy should be clearly estimated for the entire supply chain not only for a portion of the chain. A sub-system/sub-optimal risk management approach can create losers in the supply chain due to the lack of appropriate risk/reward sharing approaches.

Benefits of an effective risk management framework

• A data-driven risk approach in biomass supply chains can create trust among players in the supply chain by developing a shared understanding of trade-offs, bridging disagreement and build the foundation for making more informed decisions.

• It can improve the perception of risk and turn the risk into an objective matter rather than a subjective one. An objective perception of risk can result in efficient communications of risk among the decision-makers and stakeholders. For example, it can help the policy makers to develop well-intended policies to support the growth of the bioeconomy based on the risk profile of a biomass/biorefinery project and the potential mitigation strategies.

• The visibility in the risk profile of a biomass supply chain can enhance the financeability of biomass/biorefinery projects and attract financial institutions and entrepreneurs. Both of these entities play a significant role in the success of these projects by funding them and developing innovative solutions to build robust and flexible biomass supply chains.

• It can help the players in biomass supply chains to identify the acceptable risks and the minimum return on their investment in logistics operations.

Innovation in all aspects is key to growth

For an industry with a great deal of uncertainties and risks, innovation is key to survival and growth. However, innovation is not just about the development of transformative technologies, supporting polices and incentives, and market strategies. Innovation in other aspects of the bioeconomy such as business models and risk/reward sharing methodologies should be part of the innovation package to unlock the full potential of a billion-ton bioeconomy. Low-carbon and sustainable bioproducts must earn profit for the entire supply chain and not only the downstream players.

An innovative risk management framework could lead to a better perception of supply chain risks, promote prescriptive actions and enhance the understanding of trade-offs among cost, quality and quantity in biomass supply chains. It would also provide the visibility in the risk profile of biomass/biorefinery projects and the potential risk mitigation strategies.

This visibility could build effective communications among the stakeholders and assist them in taking the right actions to succeed in these projects. The stakeholder group includes investors, policy makers, equipment manufacturers and suppliers, technology developers, biomass producers and suppliers and local communities. The full support and effective communications of these stakeholders based on real data and facts is of paramount importance to unlock the full potential of a billion-ton bioeconomy. We should stop looking at the glass as being half empty and look at the risk management as a growth enabler.

Previous articles in Biofuels Digest

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

About the author

Dr. Mahmood Ebadian is an industrial engineer with the primary focus on supply chain management and lean manufacturing. He is the co-author of two books on “Lean Manufacturing” and “Lean Supply Chain”. His passion is in adopting the best supply chain management practices from mature industries into the bioeconomy. Mahmood is currently a researcher at Biomass and Bioenergy Research Group (BBRG), the University of British Columbia. He is also the founder of Biomass Supply Chain Consulting Ltd., a consulting company specializing in the application of decision science in biomass supply chains to help clients make more informed strategic, tactical and operational decisions. 


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