Projects

Efficient Supply Chains

Background

The paper and pulp industry is becoming increasingly global in its structure and operations. Some of the recent trends in the industry include expansion of global firms with cross-border investments, mergers and acquisitions, the globalization of production and marketing activities, and the growing importance of the Asia-Pacific and Latin America regions. The US is the largest producer and consumer of paper and paperboard in the world. Europe is also a major producer and consumer of forest products, accounting for nearly 24% of the world pulp production, and 30% of the world paper and paperboard production while Asia accounts for nearly 21% of the world pulp production, 29% of the world paper and paperboard production, 26% of the world pulp consumption, and 32% of the world paper and paperboard consumption. Many developing countries are also expanding capacity in several sectors. For example, paper and pulp companies in Brazil are estimated to double capacity over the next few years from the current level of 5.8 million tons per year 1, while Indonesia, China, Thailand, and Malaysia together are slated to expand paper capacity by 5.5 million tons a year, and pulp by 1.6 million tons, in addition to the 1.6 million tons added in 1997 2.

Given the importance of globalization as one of the drivers of change in the industry, it is important to create integrated models of global supply chains that take into considerations all the key aspects of operating in the global economy. Domestic, single-country supply chains typically have a fairly homogeneous structure. In a domestic supply chain the currency, tax rates, and transportation cost structure do not change significantly between areas of the country. In addition, trade barriers are usually absent. It should be noted that a homogeneous supply chain structure does not imply that all supply chains are similar, but it indicates that such supply chains consist of the same type of components, which can be arranged in many different configurations. The main components of a supply chain consist of the suppliers of raw and recycled materials, the transformation facilities such as manufacturing plants and distribution centers, customers, and transportation channels. Through the supply chain goods flow in transportation channels, are transformed by manufacturing plants, and stored in distribution centers and as work-in-process inventory. A global supply chain on the other hand may have a highly heterogeneous structure. For example, many manufacturing firms have relocated their production facilities from developed countries to developing countries to exploit the difference in labor rates and taxation policies. The objective of a global supply chain is the maximization of the total, worldwide after-tax profit, subject to country-specific constraints. Some of these constraints are financial and regulatory such as trade barriers, minimum profit requirements per country, and exchange rates. Other constraints are the traditional supply, consumption, and technology conditions. Finally, corporations are not only interested in the most efficient supply chain, which maximizes the expected profit or shareholder value, but also in creating flexible supply chains that can adapt to the ever changing global economic conditions. Our proposed project will draw on and integrate the two areas of literature focusing on supply chain research and on the globalization research to present a model of an integrated global supply chain. We will then attempt to identify the key global factors that impact value creation or value destruction in the key segments of the industry.

Before we proceed further, it is useful to survey both the streams of literature and understand the linkages between them. We begin with a review of the supply chain literature. There exists a large body of literature on the design and configuration of domestic supply chains. For a review of research results for deterministic supply chains we refer the reader to several comprehensive review papers starting with Aikens (1985), Vidal and Goetschalckx (1997), and Goetschalckx (2000) in Stadtler and Kilger (2000). The use of commercial software for the design of supply chain systems was surveyed by Ballou and Masters (1993, 1999). Geoffrion and Powers (1995) provide a review of the research and practice of supply chain design. Finally, Tayur (1999) created a review of quantitative models and Stadtler and Kilger (2000) reviewed advanced planning systems for corporations. The research results on configuration of global supply chains are much more limited. A recent review was compiled by Vidal and Goetschalckx (1997). Arntzen et al. (1995) describe the impact savings of applying a custom developed global supply chain model for the Digital Equipment Corporation. Cohen et al. (1989), Hodder and Dincer (1986) formulate global design models. Huchzermeier and Cohen (1999) investigate the impact of exchange rate variability. However, at this time there does not appear to exist a comprehensive design model or methodology for global supply chains. One of the objectives of the proposed research is the development of such a model and methodology, with key factors identified from the globalization literature that impact the profitability and flexibility of global supply chains.

Among the key global variables affecting a firm's supply chain are tariff and non-tariff barriers. Tariffs act as a direct tax on trade, while non-tariff barriers restrict trade and market access through other non-tax means such as quotas, quality and product standards etc. Recent studies on the effects of tariffs and non-tariff barriers (NTBs) include work by Leamer (1990b), Harrigan (1993), and Trefler (1993) report significantly large effects of trade protective measures. For example, Leamer's (1990a) finds that barriers reduced imports of the 14 industrial country importers by about 4%, and reports mixed results as to whether the estimated effects of NTBs are larger or smaller than tariff effects. Trefler (1993) treats protection as an endogenous variable and finds that for the United States elimination of NTBs would increase the average import penetration for manufacturing industries by 1.65 percentage points from 13.8 percent to 15.4 percent. Harrigan's model with monopolistic competition and exogenous treatment of NTBs concludes that in most 3-digit ISIC industries Harrigan finds that tariff barriers have a sizable impact unlike NTBs, where the impact is small. Using a framework similar to Harrigan, Haveman, Nair-Reichert and Thursby (2000) find that the effects of protection on imports are large and heterogeneous across industries. Their results are compatible with Harrigan's work that reports elasticities between -5 and -12 and suggest that the reduction and diversion coefficients in a significant number of sectors are larger in absolute value than the results reported by Harrigan. Recent work by Feenstra (1992), Romer (1994), Klenow and Rodriguez-Clare (1997) and Haveman, Nair-Reichert and Thursby (2000) also highlight an additional effects of trade barriers: when there are fixed costs of selling in a country, goods will be imported only if profits are large enough to cover these fixed costs. While tariffs, by themselves, reduce the profitability of importing, the presence of fixed costs of trading compounds the effect of tariffs, and could result in substantially reduced or virtually no imports from some countries.

There is considerable effort towards reduction of trade barriers in the paper industry. Under the Uruguay Agreement, eight economies that include the US, the European Union, South Korea, Singapore, Canada, New Zealand, Japan, and Hong Kong have agreed to eliminate tariffs on paper and reduce tariff on wood by one-third by 2004. The Accelerated Tariff Liberalization (ATL) initiative by the WTO calls for elimination of tariffs on all paper products by 2002 and wood products by 2004, but so far none of the other 126 WTO members have committed to any schedule for tariff liberalization. While US tariffs on paper and wood products have been practically eliminated, the industry faces excessively high tariffs in many foreign markets. Trends in current negotiations and agreements point to future decreases in tariffs and trade barriers. For example, the importation of less expensive Canadian timber may have significant impact on the long-term survival of domestic producers while the supply and demand imbalances are evened out. 3

To summarize, the globalization of the paper industry, increase in regional imbalances in demand and supply, and the emphasis on reducing of tariff, non-tariff and other market access restrictions all provide additional opportunities for the US paper industry. The Asian economies are growing and facing increased demand for paper and paper products; however, it is unlikely that they will be able to meet this demand from their increased capacity, and in any case, they are also constrained by their domestic timber supplies. This will lead to greater Asian imports and the recycling of waste paper. The US and Canada will be able to exploit the opportunity to supply the Asian market because of their large supply of fiber. Europe will also be a competitor in Asian markets, using imported pulp from South America and Russia, and recovered paper from North America and Asia. All this points to the need for effectively configuring the global supply chains in the paper industry to exploit new markets, products, and sources of inputs. For example, the United States has become net producer of recycled paper that is remanufactured overseas. As a consequence, the paper industry may be faced with major changes in their products, supply, production, distribution, and customers, as well as their trade and fiscal environment. These changes represent challenges, as well as opportunities, that almost surely require reconfiguration of their supply chains. In the light of the developments in the global economy that affect the paper industry, the main purpose of this research is to advance the industry's understanding and management of their entire global supply chain for the full range of their product families. Integrated global supply chains trace materials from the sources of raw and recycled materials to the ultimate consumer through various facilities and transportation channels located in different countries. The complexity of the global economy increases the financial penalties for making ad-hoc, business-as-usual decisions. The identification of the critical factors, goals and constraints in their supply chains will enable corporations in the paper and pulp industry to improve their competitive position and financial results.

The main goal of the proposed first-year research is to investigate the current state of global supply chains in the pulp and paper industry and to identify the critical areas where value is added to the products, and to identify opportunities for improving the efficiency, flexibility, and effectiveness of the supply chain. A potential extension of this proposal in the second year is that this valuable information can then be utilized in the development of a decision support methodology to assist firms in the design and configuration of efficient and flexible global supply chains incorporating international trade and production factors, such as tax and exchange rates, cross-boarder pricing, tariffs, profits repatriation, and goods and services procurement.

References

1 Kenny, Jim. "The Brazilian Expansion Just Seems to Go On and On," Pulp and Paper International, March 1997, pp. 23.

2 Bayless, Martin. "Asia Pacific Poised to Take Over," Papermaker, May 1977, pp. 29.

3 Bond, Patti. "Cutting their Losses," Atlanta Journal and Constitution, February 11, 2001, pp. P1, P5-P6