Chain model predicts profit links in biobased economy

In a biobased economy or green economy, companies use one another’s residual flows (biomass flows).

Because producers deal with new consumers, this leads to different agreements and new distribution issues in the chain. Researchers developed a biobased chain model, with which different scenarios and biobased chain configurations can be examined and the impact of those on companies’ profits can be investigated.

LEI,  Wageningen University and Wageningen UR Food & Biobased Research have scoped out the biobased economy and are researching the economic chain distribution issues. A biobased economy changes the normal distribution channels. Agricultural suppliers deliver their products to new parties, such as bio-ethanol producers, electricity companies and the pharmaceutical industry. Other links in the chain, such as the processing industry, also have to deal with new chain partners. This results in modified distribution issues and other relationships in the chain. For example, contracts have to be concluded which contain agreements about risks and deliveries.

Supply chain

The researchers developed a biobased chain model, which enables an understanding to be gained of, amongst other things, the impact of fluctuations in supply and sales prices in the supply chain in a biobased economy. The model is based on the principle of profit maximisation. The profit maximisation can be examined for one party, but the profits of the separate links can also be linked and a maximum chain profit can be aimed for.

Uncertainties and risks

The researchers took uncertainties and risks into account. Those can relate to technology, prices, availability and demand:

  • In the production of raw materials that enter the chain, there are uncertain factors regarding weather conditions (for the success of harvests), government policy (subsidies, taxes and environmental policy), the reactions and actions of competitors, technological developments, developments of land, capital and labour markets.
  • In the production of substances that leave the chain, there is uncertainty about, for example, sales market prices, government policy, the reactions and actions of competitors and consumer behaviour.

Micro-economic models

The researchers have developed micro-economic models that can be used in practice. The models are case dependent. Examples of cases: what impact does a co-fermentation installation have on the profit if other co-fermentation products have to be used and the price of electricity fluctuates? How many hours do installations have to run in a bio-ethanol factory before becoming profitable?
The disadvantage of using this in individual cases is that a lot of specific information has to be collated. The advantage is that a lot of experience is gained in cooperation with various companies.