Enhancing Corporate Value in the Optimal

Design of Chemical Supply Chains

Jose´ Miguel Laı´nez,Gonzalo Guille´n-Gosa´lbez, Mariana Badell,
Antonio Espun˜ a, & Luis Puigjaner

Publication year : 2007

Hamidreza Rezaei
IMT Atlantique – Nantes
Oct.16 2018
Intr
odu
ctio
n • Application : Chemical Process Industry
• Scope : Supply Chain Design
I. Facility Location
II. Financial Consideration

• Objective Function : Maximizing the Corporate Value (CV) of the firm

• Programming Technique : Mixed Integer Linear Programming
 Design-Planning
Formulation
• Constraints :
I. Mass Balance Constraints.
II. Manufacturing Sites
III. Distribution Centers
IV. Marketplaces
V. Capacity and Facilities
Location Constraints
Financial
Formulation
• Budgeting Model :
• The budgeting variables and constraints
of the model should be determined
according to the specific applicable rules
(depreciation), legislation (taxes), etc.
This may lead to different formulations
depending on the case being analyzed.
A set of general equations that
intend to reflect a general
case
 Financial Formulation  The cash at each period t is a function of
I. The available cash at period t - 1 ;
o Budgeting model II. The exogenous cash from the sales of
products or, in general, from any other inflow
• The cash balance for each planning period of cash;
III. The amount borrowed or repaid to the short-
• Pledging Cost term credit line;
IV. The raw materials, production, and transport
• The exogenous cash payments on accounts payable incurred in
• A short-term financing source any previous or actual period t;
V. The payments of the fixed cost;
• The accounts payable VI. The sales and purchases of marketable
• Marketable Securities securities;
VII. The amount invested on facilities ;
• The long-term debt VIII.The capital supported by the shareholders of
the company;
IX. The amount borrowed or repaid to the long-
term credit line;
X. Other expected outflows or inflows of cash.
 Financial Formulation
o Budgeting model  A certain proportion of the accounts receivable
may be pledged at the beginning of a period.
• The cash balance for each planning period Pledging is the transfer of a receivable from
the previous creditor (assignor) to a new
• Pledging Cost creditor (assignee). Therefore, when a firm
• The exogenous cash pledges its future receivables, it receives in the
same period only a part, normally 80%, of
• A short-term financing source their face value. Thus, it can be assumed that a
certain proportion of the receivables
• The accounts payable outstanding at the beginning of a period is
• Marketable Securities received during that period through pledge.

• The long-term debt

 Pledging represents a very expensive way of
getting cash that will only be used when no
more credit can be obtained from the bank.
 Financial Formulation
o Budgeting model
• The cash balance for each planning period
• Pledging Cost  The difference between the amount of
accounts receivable maturing in period t and
• The exogenous cash incurred in previous periods t¢ minus the
amount of receivables pledged in previous
• A short-term financing source periods on accounts receivable maturing in
• The accounts payable period t plus the amount pledged in the actual
period on accounts receivable maturing in
• Marketable Securities future periods.
• The long-term debt
 Financial Formulation
o Budgeting model
• The cash balance for each planning period
• Pledging Cost
• It is represented by an open line of credit with
• The exogenous cash a maximum limit imposed by the bank. Under
an agreement with the bank, credits can be
• A short-term financing source obtained at the beginning of any period and
• The accounts payable are due after 1 year at a given interest rate that
depends on the specific agreement reached
• Marketable Securities with the bank.
• The long-term debt
 Financial Formulation
o Budgeting model
• The cash balance for each planning period
• Pledging Cost
• The exogenous cash
• They are due to the consumption of raw
• A short-term financing source materials, production, and transport services

• The accounts payable

• Marketable Securities
• The long-term debt
 Financial Formulation 
o Budgeting model
• The cash balance for each planning period
• Pledging Cost
• The exogenous cash
• A short-term financing source
• The accounts payable
• Marketable Securities
• The long-term debt
Marketable securities are liquid financial
instruments that can be quickly converted
into cash at a reasonable price. The
liquidity of marketable securities comes
from the fact that the maturities tend to be
less than one year, and that the rates at
which they can be bought or sold have
little effect on prices.
• https://www.investopedia.com/terms/m/ma
rketablesecurities.asp
 The portfolio of marketable securities held
by the firm at the beginning of the first
period includes several sets of securities
with known face values maturing within
the time horizon. All marketable securities
can be sold prior to maturity at a discount
or loss for the firm.
 Financial Formulation
o Budgeting model
• The cash balance for each planning period
• Pledging Cost  these constraints are similar to those
associated with the short-term credit line,
• The exogenous cash
as, in practice, both types of debts can be
• A short-term financing source treated in a similar way. Nevertheless, in
the case of the long-term debt, the amount
• The accounts payable repaid in each period of time remains
• Marketable Securities usually constant in every time period.

• The long-term debt

 Objective Function
• Maximization of the shareholder’s value (SHV) of the firm
• It is mainly motivated by the fact that it reflects in a rather accurate way the capacity that
the company has to create value. The SHV of the firm can indeed be improved by
maximizing its corporate value (CV).
• The market value of a company is a function of four factors:
i. Investment,
ii. Cash flows,
iii. Economic life,
iv. Capital cost,
• The approach to compute the Corporate Value :
• Discounted-Free-Cash-Flow (DCFC)
o The DFCF method values a project or an entire company by determining the present
value of its future cash flows and discounting them, taking into account the appropriate
capital cost during the time horizon for which it is defined (economic life).
 Discounted Free Cash Flow

• According to financial theory, the enterprise market value of a firm is given by the difference
between the discounted stream of future cash flows during the planning horizon and the
net total debt at the end of its life time (NetDebt ).
T

CV = DFCF – NetDebt T

• The final total debt includes both the short and long-term debt and also the cash.
CLinet : short-term debt in period t
LDebtt : long-term debt in period t
NetDebt = CLine + LDebt – Cash
T T T T Casht : cash in period t

• In the calculation of the DFCF, one must discount the free cash flows of each period t and the
salvage value (SV) at a rate equivalent to the capital cost.
The salvage value could be calculated as a percentage of the total investment or by any other
applicable method. FCF : free cash flows in period
t

WACCt : weighted average

cost of capital in period t