The inbound logistics of Biovalue

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The inbound logistics of Biovalue

A policy supporting research study about the inbound logistics of the Biovalue biodiesel factories

Jildert Bokma

University of Groningen

Faculty of Management and Organisation Specialisation Operations and Supply Chains July 2005

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The inbound logistics of Biovalue

A policy supporting research study about the inbound logistics of the Biovalue biodiesel factories

Author Jildert Bokma

Student number 1423746

University University of Groningen (Rijksuniversiteit Groningen, RUG) Faculty Management and Organisation

Program Master of Business Administration (MScBA) Specialisation Operations and Supply Chains

First supervisor Dr. Leonieke Zomerdijk Second supervisor Dr. Martin Land Company Biovalue

Location Stadskanaal, the Netherlands Company supervisors Klaus den Houting

Ir. Michiel Kousemaker

Date July 2005

Place Stadskanaal, the Netherlands

Version Final

The author is responsible for the contents of the report.

The copyrights of the report are with the author.

(De auteur is verantwoordelijk voor de inhoud van het rapport.

Het auteursrecht van het afstudeerverslag ligt bij de auteur.)

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Summary

The biodiesel market has grown strongly in the past and will continue to grow strong in the future. Biodiesel is a fuel product made from rapeseed that is an alternative for the fossil diesel. Biovalue, with its patent to turn the rest product glycerine into diesel/additive, can have a prosperous future in this market. At least when it can secure the supply of rapeseed to the factory. This research aims at supporting Biovalue in securing the supply. The objective of this research is stated below:

The objective of this research is to provide recommendations to the management of Biovalue Holding BV about the inbound logistics of rapeseed for the Biovalue biodiesel factories in order to support future policy making.

First the possibilities in the inbound logistics of rapeseed have been determined. This is followed by the estimation of the logistical and financial performance of the different possibilities. The research was made using literature, internet, Biovalue self as well as from other comparable companies. Visits to a milling company, a transport company and a sugar processor were part of the data collection.

In the figure below the inbound logistics of rapeseed is depicted. The inbound logistics is the area between the yearly harvest of rapeseed and the year-round production of biodiesel. In the inbound logistics different governance options, procurement strategies and transport options are possible. These different possibilities are called configurations.

The extent of governance determines how much of the inbound logistics is the responsibility of the supplier and how much is the responsibility of Biovalue. The extent of governance can range from no governance at all (only production), via procurement (CIF), shipping from warehouses (FOB), warehousing, to complete governance from farm to the factory with or without a warehouse in between. Governance options including the warehousing of rapeseed have not been further considered in this research as these are unrealistic in the inbound logistics of rapeseed.

Two basic procurement strategies have been considered in this research. The first is to accept daily changing prices and cope with it. Rapeseed can be procured continuously, during harvest or only when prices are low. Continuous procurement only requires low storage capacity while the during harvest and low prices options require large storage capacity.

The second strategy is to ensure fixated prices. This can be achieved by forward contracts, futures or hedging. Futures will not be considered as this requires a lot of hassle while alternatives in the form of forward contracts and hedging are available. A special form of procuring is tolling. No rapeseed is procured and no biodiesel sold when applying tolling.

Only a tolling fee is paid by the tolling partner to process the rapeseed.

Storage can take place at the factory or in a warehouse. Storage in a warehouse, however, is not realistic as the warehouses are generally governed by the suppliers. Storage capacity at the factory can range from minimal 10.000 ton to the complete yearly requirement of 183.315 ton. Storage is required as the harvest takes place two months a year while biodiesel production takes place all year round.

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Transport can be done by ship or truck. Other modalities are not useful for transporting rapeseed. Transport by train is too expensive.

Out of these configurations of governance, procurement, storage and transport four scenarios can be distinguished for organising the inbound logistics:

Producing company (only produce and receive tolling fee for this)

Procurement company (procure products on a CIF basis and use procurement strategies to deal with price differences)

Shipping company (procure on a FOB basis and thus also do the transport from warehouse to factory)

Trucking company (or alternatively do the transport from farm to factory, skipping the warehouse)

The performance of the scenarios with their underlying procurement strategies and transport modalities has been estimated based on the performance objectives of dependability and costs. Dependability is important as out-of-stock costs are approximately 45.000 euro per day. Costs performance is important for obvious reasons. The resulting evaluation is summarised in the table below.

Scenarios Procurement Transport Dependability Costs

Producing company ++ -

Procurement company Continuous/

During harvest

+ +

Shipping company Low prices Truck <150 km Ship > 200 km

-- ++

Trucking company During harvest Truck ++ +

As can be seen the different procurement options fit different scenarios. Transport is only to be organised by Biovalue in the Shipping and Trucking scenarios. Above the 200 kilometre ships should be used while below the 150 kilometre trucks should be used. In the range of 150-200 kilometre in between both modalities might be useful depending on circumstances.

The highest yielding scenarios are that of a Procurement company and Trucking company.

The Producing company only yields a high dependability performance while the shipping company yields a high costs performance, it does, however, have a very low dependability.

The conclusion is that the Procurement and the Trucking company are most appropriate for the inbound logistics of rapeseed. Only when the supplier of rapeseed is not able to achieve a dependable supply the Shipping option might become an option. In this case Biovalue will be better able to ensure a dependable supply and at the same time benefit from price differences.

The main recommendation of this research therefore is that Biovalue should use the Procurement and Trucking scenarios to organise the inbound logistics. This can be done in a combination of the scenarios partially procuring products at the quay of the factory (CIF) and partially procuring from the farms.

Using the Procurement company scenario does only require research in more operational issues. The Trucking company requires more research. More knowledge is required to further understand the possibilities of this scenario. We therefore advise to do a small scale pilot in the Eemshaven factory with this scenario. This way Biovalue can learn more of this part of the inbound logistics.

When Biovalue’s policy makers decide to use the Procurement company and to an as large as possible extent Trucking company as the basis of the future policy for the inbound logistics of rapeseed, Biovalue can enjoy a prosperous future with a dependable supply of rapeseed in the booming biodiesel market.

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Preface

In front of you lies the report that forms the final phase of my study Master of Business Administration at the University of Groningen. This report was written for Biovalue, a company which is still in its founding phase. During this research financing of the factory still had to be completed. Working for a company that has not even started operating is a challenge. Even more if this company is going to operate in the developing market of biodiesel.

This research could not have been possible without the cooperation of a number of persons.

First of all I want to thank the people of HKM in Stadskanaal, Henk de Haan, Klaus den Houting and Michiel Kousemaker for their hospitality and their trust.

Secondly I would like to thank Leonieke Zomerdijk of the University of Groningen for the time she took to help me with this research. I wish her good luck with her new job at the London Business School. I would also like to thank the second supervisor of the university, Martin Land, for his assistance.

Furthermore I would like to thank the other companies that have contributed to this research.

These are listed below:

Theo van Doorn, Fortis Global Energy Markets, Amsterdam, the Netherlands

Mr. Van der Hoek (quality department) and Mr. Huisman (procurement department) of Koopmans Meel, Leeuwarden, the Netherlands

Dirk Pol (deputy commercial director) and Kees Wanrooij (director Forwarding) Wijnne

& Barends, Delfzijl, the Netherlands

Derk Reiffers (plant manager Eemshaven) Holland Malt, Eemshaven, the Netherlands

Mr. Westerhof (technical department) and mr. Weegenaar (Manager Agricultural service) Suikerunie, Groningen, the Netherlands

The last person that made this research possible, though indirectly, is currently in Vienna via a student exchange program. I would like to thank Rosemarijn Kriek for giving me the opportunity to stay in her room in “Huize Woestgezellig” in Groningen during the six month period of this research. Without this excellent accommodation in the centre of Groningen it would have been difficult to do an internship at Biovalue. I would have also missed a wonderful time with the other seven occupants of the house.

More in general I would like to thank my parents and brothers for their support during my study.

Jildert Bokma

Stadskanaal, the Netherlands, July 2005

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List of tables

Table 1.1 Growing winter rapeseed ... 13

Table 1.2 Facts and figures of a Biovalue biodiesel factory (estimated 4/4/2005) ... 14

Table 1.3 Data collection ... 18

Table 2.1 Example of hedging rapeseed ... 30

Table 2.2 Cost of running out of rapeseed... 31

Table 2.3 Ship sizes ... 34

Table 2.4 Ship transport costs according to Wijnne & Barends... 34

Table 2.5 Rail transport costs according to Stinnes... 35

Table 2.6 Costs of truck transport according to Suikerunie ... 36

Table 2.7 Configurations ... 37

Table 3.1 Scenarios with procurement strategies and transport modalities ... 39

Table 3.2 Criteria for dependability ... 40

Table 3.3 Criteria for costs ... 41

Table 3.4 Performance of procurement options with daily changing prices... 43

Table 3.5 Performance of different procurement options... 45

Table 3.6 Prices and costs between rapeseed supplier and consumer... 49

Table 3.7 Performance of scenarios ... 50

Table V.I Standard rapeseed content from three sources.. Error! Bookmark not defined. Table V.II Deviations from standard rapeseed content ... Error! Bookmark not defined.

List of figures

Figure 1.1 Biodiesel production in the European Union since 1992 (1.000 tons) ... 11

Figure 1.2 Simplified biodiesel production process ... 11

Figure 1.3 Rapeseed plant and seed ... 12

Figure 1.4 3D view of a Biovalue factory... 14

Figure 1.5 Biodiesel supply chain... 16

Figure 2.1 Inbound logistics of rapeseed ... 20

Figure 2.2 Rapeseed producing regions, storing locations and Biovalue locations... 20

Figure 2.3 Options for the extent of governance ... 22

Figure 2.4 Inventory level with continuous procurement ... 26

Figure 2.5 Inventory level with procurement during harvest ... 26

Figure 2.6 Inventory level with procurement when prices are low ... 27

Figure 2.7 Photo Euro-Silo NV, Gent, Belgium ... 33

Figure 3.1 Graph of break-even point ship vs. truck ... 46

Figure 3.2 Geographical break-even point ship vs. truck ... 47

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1 Introduction

When Dr. Rudolf Diesel invented the diesel engine in 1895 he used peanut oil to power it. Not long after this discovery vast amounts of mineral oil were found in the United States. The high supply of oil resulted in lower prices which made the transport and factories change their energy source from the more expensive vegetable oil and coal to the abundantly available mineral oil. In the 1960s enormous amounts of oil were found in the Middle East. Since then the world got used to having vast amounts of mineral oil available. Since the first wells were drilled in the United States the worldwide production of mineral oil has shown an almost continuous increase. Only the oil crisis in the 1970s has disrupted this.

According to Campbell (2004) this continuous increase will in the near future turn into a decline of the production (see appendix I). Campbell, the former vice president of Total and a geologist, even argues this could happen as soon as 2008.

Others think the world should not be concerned about the future of mineral oil. Sheik Zaki Yamani’s favourite statement is: “The Stone Age did not end for lack of stone”. Yamani was Suadi Arabia’s oil minister from 1962 till 1986.

Even without the oil decrease in the near future the world will have several other reasons for searching alternatives. Reducing CO2 to counter the effect of global warming is only one of them.

There are some alternatives for mineral oil available. In the media hydrogen gets most of the attention. Hydrogen is made from mineral gas or by the electrification of water. Electrification splits the hydrogen and the oxygen atoms. The process of making hydrogen currently needs more energy input than the produced hydrogen can deliver as output.

Some European countries have chosen a different solution in the past few years for use in diesel engines. They convert products like rapeseed, sunflower seed, soybeans etc. into natural oil. This oil is either sold directly which requires an adaptation to the diesel engine. Or the oil is chemically changed to make it comparable with normal diesel. This chemically changed natural oil is called biodiesel.

Biovalue is one of the companies entering this market using rapeseed as its main resource.

Biovalue is constructing a biodiesel factory in the Eemshaven, the Netherlands and in Greifswald, Germany. This report describes the results of a study about how the inbound logistics of the rapeseed can be organized.

This first chapter aims at introducing biodiesel, rapeseed and Biovalue to the reader. At the end of this chapter the research design of this report will be presented. In the next section biodiesel will be further explained. In the second section the role of Biovalue in this will be explained. In the third section the research design will be given.

1.1 Biodiesel

Biodiesel or Rapeseed Methyl Ester (RME) is comparable with mineral diesel. Most car manufacturers approve biodiesel in their vehicles. This means vehicles using biodiesel do not lose their warranty. Adaptation of the car is not necessary.

Biodiesel is made by chemically adapting the natural oil it uses as a source. A large variety of oils can be used including both vegetable and animal oils. These natural oils can already be used in adapted automobiles. In the Netherlands there is currently a small company in Delfzijl concentrating on this market.

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The most used vegetable oil used to make biodiesel is rapeseed oil. The rapeseed is mostly grown in France, Germany and Eastern Europe. Purchasing the rapeseed is an important factor for the profitability of the factories.

Unfortunately biodiesel can only replace a small part of the mineral diesel. There is not enough fertile ground to grow enough oilseeds to replace the current diesel demand. It can be, however, a partial solution replacing just a small part of the mineral diesel with biodiesel.

Animal oils can also be used for producing biodiesel. Since the BSE crisis in Europe these animal oils are modestly used. In the United Kingdom a company recently started producing this type of biodiesel.

In the next subsection the environmental and political impact regarding biodiesel will be described. As Germany already has some years of experience with biodiesel the second subsection will pay attention to this. In the third subsection the production process of biodiesel is explained. In the fourth section the main raw material, rapeseed, is described.

1.1.1 Environmental and political impact

Choosing rapeseed in the production of biodiesel includes environmental advantages. These are listed below (ADM-Oelmühle Hamburg AG):

Biodiesel is sulphur free (<0,001%)

Soot (smoke) emission is lowered to about 50%

Burning of biodiesel creates the same amount of CO² as the rapeseed plant has put into it (closed CO² circle). Biodiesel is CO² neutral.

Biodiesel does not contain the highly flammable and toxic benzene

Biodiesel has got a high capacity for lubrication resulting in a cleaner engine

In case biodiesel is spilled into nature the short term effect will be the same as with mineral diesel. After a half year, however, the biodiesel will be naturally dissolved contrary to mineral diesel. Biodiesel is biologically degradable (Business Plan Biovalue, 2004).

Biodiesel has a high flash point of about 120ºC compared to 60ºC of diesel (Wikipedia)

Emissions of nitrogen oxides are either slightly reduced or slightly increased depending on the duty cycle of the engine and testing methods used (Biodiesel.org).

There are, however, also negative aspects to the use of biodiesel. Firstly biodiesel is a little less efficient than normal diesel (about 0-5%). Secondly acid and flammable chemicals are needed for the conversion of the natural oil into biodiesel.

The EU has issued a directive that compels all member states to increase their use of bio energy as from 2005 from 2% to 5,75% in 2010. The proposed rule to mix the bio fuels with normal (mineral) fuel has not been compulsory, allowing the choice to either mix the biodiesel with other fuel or sell it separately at the petrol stations. Member states have been given a two year period to comply with the new directive of 2%. Each state is also left free to decide whether to levy tax on the bio fuel. From 2005 on the member states will each year decide what measures should be taken in order to achieve the 2010 goal.

1.1.2 European experience

In France and Germany the Biodiesel is produced for some time. In France biodiesel is mixed with common diesel while until recently Biodiesel was sold pure in Germany. Both countries have tax measures to make sure Biodiesel is sold at a lower or equal price than fossil diesel.

In Germany biodiesel is already available at over 1.500 petrol stations (2002). It is sold tax free (only VAT) which makes it about ten eurocent pro litre cheaper than normal diesel (price level 2/2005).

In figure 1.1 an overview is given of the development of the biodiesel production in the European Union. Germany is now producing more than 1 million tons of biodiesel. France and Italy have produced 348.000 and 320.000 tons of biodiesel respectively.

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Figure 1.1 Biodiesel production in the European Union since 1992 (1.000 tons)

55 80 150 280 435 475 390 470 680 1065 1434 1933

780

0 500 1000 1500 2000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Production (1.000 tons)

EurObserv’ER, June 2005

As can be seen sales of biodiesel has risen dramatically in the past years. Because of this increasing demand selling the biodiesel will be relatively easy while getting the resources will be more difficult.

The German rapeseed production is 5 billion tons per year (2004). Germany produces about one third of the rapeseed in Europe. See appendix III for more information about oilseeds production in Europe.

1.1.3 Production process

The production process of biodiesel is a typical continuous process that is constantly transforming inputs into outputs. The input for producing biodiesel is natural oil. This oil can be produced from rapeseed, sunflower seed, soybeans etc. Current large scale biodiesel producers only use rapeseed as an input. Using animal oil would also be an option.

Figure 1.2 Simplified biodiesel production process

Potassium hydroxide Solphuric acid

K2SO4

(M)ethanol

Glycerine

Biodiesel Oil

Seed

Meal Press

Esterification

Based on data from Business Plan Biovalue (2004)

The production process is depicted in figure 1.2. The oilseeds are the inputs for the press where the output consists of two products. 60% is meal which can be sold as animal food.

The other 40% is the vegetable oil. The pressing process is also called crushing.

The meal still has 9% oil in it which can be extracted in an environmentally unfriendly way.

Though this extra extraction increases the profitability Biovalue has chosen not to use the extra extraction due to environmental reasons. The meal forms a large part of the logistical

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activities that take place at the factory. Measured in tons the factory is more a meal producer than a biodiesel producer.

Not all biodiesel factories have a press. Some outsource the pressing or crushing of the seeds and procure the oil instead of the seeds. The crushers are the companies pressing the rapeseed.

After producing the oil, the oil is chemically changed into biodiesel and glycerine by adding methanol or ethanol in a process called esterification. Before this process takes place the vegetable oil needs to be cleaned in order to get the 97% triglyceride. Methanol is a product made from mineral sources while ethanol is made from natural sources like corn. Current biodiesel producers use methanol.

The process of making biodiesel out of triglyceride (the esterification) is triggered by adding small amounts of chemicals. The glycerine in the triglyceride and the methanol molecules exchange position and the end products are biodiesel, glycerine and a small amount of K2SO4 which can be sold as fertilizer. See appendix II for the chemical process that takes place.

Glycerine currently has a low price in the market due to the high number of biodiesel factories being built in Germany in the past few years. Biovalue has found a solution for this which will be further described in subsection 1.2.1. The next section will describe the main resource for producing the biodiesel: rapeseed.

1.1.4 Rapeseed plant and seed

In this subsection an introduction is given about what rapeseed is. Rapeseed (Brassica Napus oleifeira) is the main commodity used in the European biodiesel factories. The cultivation of rapeseed is nothing new; already in the 17^th century rapeseed was being pressed in wind mills in the Netherlands. In figure 1.3 the rapeseed plant (left) and the rapeseeds (right) are depicted.

Figure 1.3 Rapeseed plant and seed

Source: Wikipedia

The plant has undergone two development stages in recent past. The first step was the reduction of oil acids resulting in 0-Rapeseed in 1974. The second step was the reduction of glucose in 1985 resulting in 00-Rapeseed. Oil made from 00-Rapeseed is comparable with for example olive oil (de.wikipedia.org). When rapeseed is mentioned in this research it refers to 00-Rapeseed as depicted in figure 1.1.3 on the right side.

Rapeseed is not only used for biodiesel. Before biodiesel became popular and still today rapeseed was grown to improve the quality of the ground and to make vegetable oil out of it.

The current biodiesel demand just adds demand for rapeseed to the market.

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Rapeseed can be sowed in the winter or in the summer. Winter rapeseed is sowed in august and harvested in July. The summer rapeseed is sowed in spring and harvested in autumn.

The oil content of this summer rapeseed, however, is lower than the winter rapeseed.

Summer rapeseed is only used on a large scale in the Ukraine. In most other countries winter rapeseed is used. Rapeseed can only be grown once every 4 or 5 years. In table 1.1 the growing season of winter rapeseed is summarized.

Table 1.1 Growing winter rapeseed

Period Activity

August Sowing after harvesting previous grown crop. Tiny plant grows.

November-February Hibernation.

February-March With the help of some fertilizer the plant grows.

April-May Protecting the rape plant.

Flower grows.

Flower falls off and the seeds begin to grow.

July Harvesting.

Source: UFOP 12/2004

As can be seen the harvest becomes available in July. From this moment on storage capacity should be available either at the farm, at warehouses and/or at the crushers/biodiesel factories.

In Europe about 15 million ton of rapeseed is produced annually. Production of rapeseed mostly takes place in Germany, France, the United Kingdom and Poland. In the Netherlands rapeseed production is almost non-existing. In section 2.1 the locations where rapeseed is produced and traded will be further described.

In France an overlap exists between the production of rapeseed and the more to the south produced sunflower seeds. North Italy, small parts of France and the Ukraine are the only places where soybeans are produced on a large scale in Europe. Most soybeans used in the EU come from the USA or South America. As this research focuses on rapeseed, sunflower seeds and soybeans will not be further mentioned or only when relevant for understanding the logistics of rapeseed.

1.2 Biovalue

Currently no biodiesel factory exists in the Netherlands. This will soon change as Biovalue is building a biodiesel factory in the Eemshaven this year. Besides the factory in the Eemshaven construction will also start this year on a biodiesel factory in Greifswald Germany.

The Biovalue project started with the company Entexo BV. This small company has been doing research in the subject of biodiesel for the past five years. The goal has always been to build a biodiesel factory.

During 2003 a contract was signed with Fortum from Finland to build a factory in Greifswald Germany. Fortum chose Entexo out of a number of companies as it was the company that was able to make the most cost efficient factory even though the patent had not yet been developed (see next subsection for more). Eventually this initiative did not result in the construction of a factory because the European Union at that time had not yet decided to put in place the 2% criteria by 2005 (see subsection 1.1.1 for more).

Later Entexo went on to invent a patent that could make biodiesel out of the cheap by product glycerine. The next subsection will elaborate on this. The shareholders of Entexo founded a new company called Innovatec. Five other participants joined Innovatec to form Biovalue Holding. This company is now building biodiesel factories in the Eemshaven and Greifswald.

Biovalue Holding BV owns Biovalue Nederland BV (the Netherlands) and Biovalue GmbH (Germany). Figure 1.4 gives an impression of what the factory will look like.

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Figure 1.4 3D view of a Biovalue factory

1.2.1 Glycerine patent

Biovalue does not only distinguish itself from competitors by having low production costs but also by being able to put the low value glycerine into the high value biodiesel. As has been mentioned in section 1.1 the glycerine is currently low priced. Prices will only become lower when more biodiesel factories start operating in the near future. A solution chosen by some of the currently operating factories is to upgrade the glycerine to the pharmacy quality of 99,7%

pure. This can, however, only be a temporary solution as an over-supply of this type of glycerine will eventually arise and prices of this type of glycerine will also decrease.

After two years of research a patent has been settled by Innovatec for another solution to this problem. Glycerine is transformed into a fuel/additive which can be added to biodiesel and/or mineral diesel. This fuel/additive enhances the combustion properties and is environmental friendly. The fuel/additive can be sold for about the same price as biodiesel which is considerable higher than the price of glycerine. Therefore the profitability of the factory is greatly enhanced by this patent.

The patent will be slowly introduced into the production process. At the start of the project all glycerine will be sold. After five years all glycerine should be added to the biodiesel.

1.2.2 Factory facts and figures

The characteristics of a Biovalue biodiesel factory are listed in table 1.2. The inputs, outputs and some other figures are listed.

Table 1.2 Facts and figures of a Biovalue biodiesel factory (estimated 4/4/2005)

Rapeseed requirement 183.315 tons/year

Chemicals 8.720 tons/year

Total inputs 192.035 tons/year

Meal production 111.350 tons/year

Fertiliser and waste 5.920 tons/year

Glycerine production 8.248 tons/year

Biodiesel (RME) production 66.517

74.737.000

tons/year litres/year

Total outputs 192.035 tons/year

Rapeseed storage capacity 22.000 tons

Number of employees 30-40 FTE

Operating hours 18-24 hours/day

Investment 40.000.000 euro

Based on the calculations excluding the patent.

The pressing (or crushing) of rapeseed takes place by two production teams working 18 hours a day. The esterification takes place 24 hours a day requiring three production teams.

The processing capacity of the factory can be modified by increasing the number of days per year on which the factory is operating. As for now the probable number of working days will be 300 days/year.

Press Office Esterification Oil/biodiesel

Meal Laboratory Rapeseed Tank station Chemicals/methanol

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1.2.3 Strategy

The strategy of Biovalue is based on the cost benefits from the patented technology, the building of more factories, being flexible and being able to secure supplies of oilseed.

In the Strategic Document (2004) of Biovalue the development of factories has priority over the licensing of the patented technology though this is an option. Research and development is part of the strategy. Cooperation with the University of Groningen’s department of chemical sciences is being set up. Research will also be done in the field of process technology and the diversification of resources.

After the realisation of the Eemshaven and Greifswald factories Biovalue is planning to build other factories within as well as outside the EU. Biovalue has calculated that about 35 Biovalue size factories are needed in 2006 to produce 2% of the EU diesel market (Business Plan Biovalue 2004 based on 60.000 ton esterification capacity).

Biovalue has chosen to have its own press which is capable of pressing different kinds of oilseeds. Instead of producing the oil the alternative was to purchase the natural oil. This brings more flexibility but also increases the risks as the factory becomes dependent on third party crushers (press factories). This has caused three factories in Germany to go bankrupt as they were unable to get natural oil supplies as the suppliers had limited press capacity.

The products Biovalue will sell are meal, biodiesel, fertilizer and in the beginning also the glycerine. The demand for meal is sufficient since the BSE crisis that resulted into the banning of all kind of animal products as food for other animals. The glycerine can be sold at relatively low prices and after the patent is put into practice will be part of the biodiesel.

For the longer term options for the inbound logistics are still open for both the factories that are now scheduled to be built. Long term in this respect is longer then 2 years. For the shorter term the inbound logistics for the Eemshaven factory have been determined.

Products will be procured using a forward contract. Meaning products are bought on a yearly fixed price. Transport to the factory is the responsibility of the supplier. Storage capacity at the Eemshaven factory will be 22.000 ton.

1.3 Research design

In this section the research design will be described. The previous sections formed an introduction to this design. This report is about the inbound logistics of rapeseed. In other words, the research is about how to get the rapeseed to the factory. The inbound logistics forms an important factor in the competitiveness of the company. Though the short term inbound logistics strategy has been determined, for the longer term all options are considered open.

As Biovalue has a strategy of expansion and because it has its own factories it would like to have the different options for the inbound logistics researched for the longer term. These options can for example be where the resources are procured, where they are stored, how often a shipment arrives etc. Circumstances in the biodiesel market have changed rapidly in the past and will probably change rapidly in the future. Therefore the longer term can be as short as two years.

The founders of Biovalue have knowledge in all kind of fields. The founders have knowledge about design, process engineering, personnel and organisation, managing, business administration, ICT etc. Knowledge about the inbound logistics of rapeseed, however, is limited. This study is meant to give Biovalue the knowledge about the inbound logistics.

The knowledge about inbound logistics is necessary to negotiate with the suppliers and in the long term be more active in self organising the inbound logistics. The inbound logistics is an important factor for the survival of the company. It is the inbound logistics that can make a difference as the supply of the factory is most critical. Therefore this research will focus on the inbound logistics.

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In the next subsections the problem statement will be described. The problem statement consists of the objective, the research question and the restrictions of the research (De Leeuw 2001).

1.3.1 Objective

The objective is stated below:

The objective of this research is to provide recommendations to the management of Biovalue Holding BV about the inbound logistics of rapeseed for the Biovalue biodiesel factories in order to support future policy making.

Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’

requirements (CSCMP 1/2005).

The logistics can be split in inbound and outbound logistics as well as the manufacturing part.

The inbound logistics consist of all incoming goods and information entering the factory. The main focus will be on the goods and not on the information. The flow of goods in the biodiesel supply chain is depicted in figure 1.5. The rectangle figures represent activities, the triangles represent storage points and the arrows represent movements in the supply chain. The inbound logistics, the topic of this research, is marked red. In this research the storage of raw materials at the Biovalue factories is included in the inbound logistics.

Figure 1.5 Biodiesel supply chain

There are three main differences between inbound and outbound logistics. First, the market demand that creates fluctuations in demand in the outbound logistics is in the inbound logistics a relatively smaller problem as demand from the factory can be determined quite well. Secondly the inbound logistics is more likely to be in bulk. Thirdly firms generally pay less attention to the inbound logistics compared to the outbound logistics. Products are often bought inclusive transport. An analysis of inbound costs is not performed as often or in as much depth as the outbound. Thus, significant cost savings are possible (Stock and Lambert 2001: 278).

Though this research focuses on the inbound logistics, there is a link with the outbound logistics. Seed is going into the factory and meal is going out of the factory. There can be situations where a ship delivers seed and takes back meal. This combination can be beneficial for the transporting company and thus for the prices paid by the biodiesel factory.

In practice, however, this is not something the biodiesel factory needs to worry about. The transporting companies will take care of ensuring they have goods to transport on the way back from a nearby location.

The inbound logistics consists of all goods entering the factory. Issues in the inbound logistics are to what extent Biovalue has influence, where to store the product, how to transport it, what shipment quantities should be used etc. The process downstream from the storage at the factory is relatively less interesting as the production is known, engineering completed and the sales secured through the increasing demand. The rapeseed market on the other side is volatile and on first sight difficult to oversee and therefore interesting to research.

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Only the rapeseed will be researched as this product accounts for most of the inbound transport. The methanol or ethanol and the small amount of chemicals will not be part of the research.

Alternatives for rapeseed will not be part of the research or only when relevant for understanding the inbound logistics of rapeseed. Alternatives are sunflower seed and soybeans. Also the alternative of procuring natural oil instead of making it will not be considered.

As mentioned in section 1.2 Biovalue is building factories in Eemshaven Netherlands and Greifswald Germany. Both the Eemshaven factory as the Greifswald factory will be part of the research. For these two locations an overview of the logistical options and the consequences of the options will be given. Both locations are chosen as this will result in better calculations and will give a better insight in the rapeseed logistics. This in turn will improve future policy making.

The research helps to support future policy. De Leeuw (2001: 207) defines ‘policy supporting’

as: “research of which the results increase the rationality of the policy process in terms of effectiveness, efficiency, and meaning for the actors”. This future policy making is necessary as Biovalue wants to have a larger influence on the inbound logistics.

1.3.2 Research question

The objective will be met by answering the research question stated below.

What are the possible configurations for the inbound logistics of rapeseed and what is the logistical and financial performance of the different configurations in the inbound logistics for the Biovalue biodiesel factories?

The research question is split in two parts. The first is focussing on the possible configurations of transport and storage options for the inbound logistics of rapeseed while the second part focuses on the performance of the different options.

Three sub questions will be answered in order to answer the research question. The sub questions are listed below together with the purpose of the data collection methods.

I What are the possible configurations for the inbound logistics of rapeseed?

An overview will be made with the possible configurations for the inbound logistics. Topics that will be discussed are how much influence Biovalue can have on the inbound logistics, how transport can be done, where the storage can take place etc. This question will be answered by studying literature, the internet and interviews with Biovalue. This question will be answered in chapter two.

II What performance objectives should be taken into account when evaluating the logistical and financial performance of the inbound logistics configurations?

When the logistical configurations are known the performance of the different configurations can be determined. The performance effects can be evaluated in both financial as in non- financial criteria. What these criteria are will be determined by this question. Literature will be used as a reference for determining what effects should be taken into account. Through interviews with Biovalue shareholders the importance of the objectives should become clear.

This question will be answered at the beginning of chapter three.

III What is the logistical and financial performance of the configurations?

From the previous question it has become clear what effects should be taken into account.

With this question the actual estimation of the effects will be done. The financial data required for this will come from Biovalue self, internet sources and interviews with other companies trading in commodities.

The non-financial criteria will be evaluated on a more qualitative way and will deal with issues like flexibility and reliability. This data will come from Biovalue interviews and literature

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sources. Interviews with companies like Suikerunie, Holland Malt (neighbour of Biovalue Eemshaven), Koopmans Meel etc.

The result of this question will be an overview or of what the effects of decisions in the inbound logistics will be. This question will be answered in chapter three.

1.3.3 Restrictions

The research will not result in a detailed description of how the inbound logistics should be organized. This is not possible as circumstances change and detailed descriptions would change accordingly. Instead the research will provide a more general overview describing what could be done in what situation.

During the research the Biovalue biodiesel factories do not exist yet. They are under construction. Therefore all data of the Biovalue factories are based on estimates.

The research starts on January 31^st and finishes before July 22^nd 2005.

1.3.4 Data collection

In this subsection an overview is given of where what data will be collected. In this research data is collected at several sources. The sources are literature, internet and interviews. The interviews are with Biovalue, transport companies and companies operating in commodities other than rapeseed. In table 1.3 an overview is given about the data that is required from the different sources.

Table 1.3 Data collection

Sub question

Source I II III

Literature X X

Internet X X X

Biovalue X

Wijnne & Barends X X X

Holland Malt, Suikerunie, Koopmans Meel X X X

During the research more extensive information about the data collection is given.

1.3.5 Research build up

The research is divided into two parts. First the possible configurations are described.

Secondly the performance of the different configurations is described.

In chapter two a description is given of the inbound logistics of rapeseed. From this description the possible configurations will be determined. The result of this chapter is an overview of possible scenarios. This chapter will answer sub question one.

In chapter three the performance of the configurations determined in chapter two is estimated and evaluated. First the way the evaluation takes place is described. When this is done the actual evaluation takes place. In this chapter sub question two and three answered.

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2 Configurations

This research aims at supporting policy making in the inbound logistics of Biovalue. Before making policy one has to know what decisions need to made. Or in other words what the possibilities in the inbound logistics are. This chapter describes the possible options for the inbound logistics. Different options form configurations with each other. The result of this chapter will be an overview of the possible configurations thereby answering the first sub question. In the next chapter the performance of the configurations will be estimated.

The inbound logistics of rapeseed can be organised in different ways. In this research these different ways are called configurations. The configurations consist of a combination of:

the extent of governance of the supply chain of rapeseed (section 2.2);

the procurement of rapeseed (section 2.3);

the storage of rapeseed (section 2.4);

the transport of rapeseed (section 2.5).

In section 2.1 first a short introduction is provided to give some more background information about the inbound logistics of rapeseed.

The extent of governance is about the party organising and taking responsibility of the supply chain either by using market mechanisms, cooperation or vertical integration of parts of the supply chain. The supply chain can be either governed by Biovalue or by the supplier. The possible options for the extent of governance are described in section 2.2.

The timing of purchases is an important element in the inbound logistics. As harvest takes place two months a year and processing takes place all year long rapeseed is priced differently during the year. Different possibilities are available to deal with this. The option for timing the purchases are described in section 2.3.

The way rapeseed flows through the supply chain is the third part where decisions need to be made. These decisions depend on the choices made in the extent of governance and in the timing and sizes of purchases. Different options are where the storage takes place to overcome the difference in harvest and processing of rapeseed (section 2.4). Furthermore the appropriate transport modality needs to be determined (section 2.5).

In section 2.6 a summary is presented of the possible configurations for the inbound logistics resulting in an overview of possible scenarios. While this chapter describes the possible configurations, the next chapter will estimate the performance of the different configurations.

2.1 Introduction

In this section some background information is given about the inbound logistics of rapeseed.

This information is required for understanding the possible configurations described later in this research.

In figure 2.1 an abstract overview of the inbound logistics is depicted. As can be seen the inbound logistics does not include the harvest nor the pressing and esterification at the biodiesel factory. The logistical activities in between are part of the inbound logistics.

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Figure 2.1 Inbound logistics of rapeseed

Though the harvest, pressing and esterification are not part of the inbound logistics they do influence it. The harvest of rapeseed becomes available in July and August. The pressing and esterification is done in a continuous process all year long. Therefore the inbound logistics needs to absorb the difference somewhere in between.

In the inbound logistics of rapeseed no transformation processes exist. Therefore only the goods flow and the storage are relevant. Storage can take place at the farm, at a warehouse or at the factory. The harvested rapeseed is initially stored at the farm or directly transported away from the fields. From the farm the rapeseed can be transported directly to the biodiesel factory or first brought to a warehouse. Warehouses are giant complexes of silos were hundred thousands of tons can be stored. Finally the rapeseed arrives at the biodiesel factory where it is stored and processed to biodiesel.

Figure 2.2 depicts where the most important rapeseed growing areas are located, where some of the warehouses are located and where the Biovalue biodiesel factories will be located.

Figure 2.2 Rapeseed producing regions, storing locations and Biovalue locations

Dark grey area Light grey area

Rapeseed >10% of used land 5-9% of used land Green dots Biovalue factory Eemshaven, Greifswald Orange dots Major Warehouses

(Matif)

Gent (Belgium); Würzburg (Main);

Bülstringen, Magdeburg, Vahldorf (Mittellandkanal);

Belleville, Frouard and Metz (Mossele) Blue dots Major Warehouses

(WTB)

Gent, Rotterdam, Rostock, Hamburg, Elbe-Lübeck Kanal, Main, Mittellandkanal, Mossele

Comments:

Colouring of rapeseed regions is based on data from CBS 2005 for the Netherlands, Coceral 2004 for Czech Republic and USDA 1994 for the other countries. Data was available for the pink countries. Data for Matif and WTB major warehouses come from the Matif and WTB internet sites.

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Producing areas in Poland are probably larger than depicted. Coceral 2004 states a production of 1.6 million ton in Poland in 2004 which equals the U.K. production. Other countries do not show this discrepancy in rapeseed growing area between USDA 1994 and Coceral 2004.

The majority of the farms producing rapeseed are located in the grey areas of figure 2.2. As can be seen there is a ‘belt’ ranging from the U.K. and France to the Ukraine where most of the rapeseed is produced. Just below this belt, a belt of sunflower producing regions exists (not depicted) and just below this a small belt of soybeans producing regions can be found.

Some of the major warehouses are depicted in figure 2.2 by the orange and blue dots. These warehouse locations have sizes ranging from several hundred thousand tons to several million tons of storage capacity. These complexes exist of silos dedicated to all kinds of grains and/or oilseeds. The locations depicted are used by exchange markets for determining the FOB price. Exchange markets are markets where products like rapeseed are traded. FOB stands for Free On Board. When procuring rapeseed on a FOB basis the buyer is responsible for transporting the rapeseed from the warehouse to the biodiesel factory. Section 2.2.2 has more information about this. For now, it is enough to understand that these warehouses or important enough to be price references for these exchange markets.

The warehouses depicted in the figure are meant to give an overview of where the most important storage areas are. This does not give a complete overview of all available warehouses. These warehouses are used to gather enough rapeseed to allow large scale ship or train transports. Besides gathering rapeseed to ensure large scale transport the warehouses are also used for bridging the gap between the harvest of rapeseed and the processing of the rapeseed.

Besides the areas where the production takes place the locations of the Biovalue factories are depicted in figure 2.2 by the green dots. The Biovalue factories are the relevant end users of the rapeseed in this research. Of course many other seed crushing locations exist. They are however not relevant in this research as this research focuses on the Biovalue factories.

The background information provided in this section is used in the next sections to describe the possible configurations. First the options for the extent of governance are described, followed by the options for timing and sizing of the procurement and ending with the options for moving the seed through the supply chain.

2.2 Extent of governance on inbound logistics

The extent of governance is one out of four elements determining the configurations of the inbound logistics. The other elements are the timing and sizes of purchases and the way the seed moves through the supply chain. These last two elements, however, only need to be determined when certain extent of governance options are chosen. For example when the supplier is responsible for getting the rapeseed to the factory Biovalue does not have to make the choice for transport modality or warehousing locations. Instead this choice of transport modality and storage location will be made by the supplier. In other words, the transport is governed by the supplier.

Governing can be done by allowing the market to determine conditions, by conducting a partnership or by vertically integrating a part of the inbound logistics (Blomqvist et.al. 2002).

When parts of the inbound logistics are not governed by Biovalue, they will be governed by the supplier. The benefits and costs of that part of the inbound logistics will be the responsibility of either Biovalue or the supplier.

Several options exist for the extent of governance of the inbound logistics. These options are depicted in figure 2.3. The light grey area is governed by the supplier while the dark coloured area is governed by Biovalue. The options are determined by moving from no governance by Biovalue in the first option to complete governance by Biovalue on the supply chain in the fifth option. The sixth option deviates from this as here the rapeseed is transported directly to Biovalue without first being stored at a warehouse.

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Figure 2.3 Options for the extent of governance

In the next sections the 6 options for governing the inbound logistics will be further explained in subsection 2.2.1 to 2.2.6 respectively.

2.2.1 Tolling

The first option is called tolling. Tolling is an agreement to put a specified amount of raw material per period through a particular processing facility (Trading-glossary.com). The biodiesel factory is only responsible for processing the seeds into biodiesel. The factory does not own the inventory. The inventory is owned by a third party who can also buy the end product. In a 100% tolling strategy the complete turnover will be generated by the fees given for the processing of the seeds. Governing of the inbound logistics is completely outsourced to the supplier.

The biodiesel factory is only responsible for processing the seeds into biodiesel. This means Biovalue is not concerned with prices of oilseed, meal, oils, biodiesel etc.

The tolling partner is the company that is supplying rapeseed and taking back meal and biodiesel. The tolling partner is performing this role as it benefits from the price change between the rapeseed and the meal and biodiesel. The tolling partner keeps the profits made due to price changes of the different products while the only cost the tolling partner has (and the only turnover the biodiesel factory has) is the fixed tolling fee paid for processing the rapeseed into biodiesel. This cost for processing rapeseed in case of tolling is fixed. Hence, the turnover of the biodiesel factory is fixed as well.

The biodiesel/additive made out of glycerine via the patent is not included in the tolling agreement. It is sold as biodiesel at market prices. This is, however, part of the outbound logistics and will not be further researched.

As the complete inbound logistics is governed by the tolling partner, Biovalue will minimize its investments in the inbound logistics in the form of storage capacity at the factory. Biovalue

The inbound logistics of Biovalue

The inbound logistics of Biovalue

The inbound logistics of Biovalue

Summary

Preface

Contents

List of tables

List of figures

1 Introduction

1.1 Biodiesel

1.1.1 Environmental and political impact

1.1.2 European experience

1.1.3 Production process

1.1.4 Rapeseed plant and seed

1.2 Biovalue

1.2.1 Glycerine patent

1.2.2 Factory facts and figures

1.2.3 Strategy

1.3 Research design

1.3.1 Objective

1.3.2 Research question

1.3.3 Restrictions

1.3.4 Data collection

1.3.5 Research build up

2 Configurations

2.1 Introduction

2.2 Extent of governance on inbound logistics

2.2.1 Tolling