Accepted Manuscript

A global bioenergy supply network redesign through integrating transfer pricing under
uncertain condition

Sobhan Razm, Stefan Nickel, Mohammad Saidi-mehrabad, Hadi Sahebi

PII: S0959-6526(18)33084-1
DOI: 10.1016/j.jclepro.2018.10.070
Reference: JCLP 14472

To appear in: Journal of Cleaner Production

Received Date: 17 March 2018

Revised Date: 16 September 2018
Accepted Date: 8 October 2018

Please cite this article as: Razm S, Nickel S, Saidi-mehrabad M, Sahebi H, A global bioenergy supply
network redesign through integrating transfer pricing under uncertain condition, Journal of Cleaner
Production (2018), doi: https://doi.org/10.1016/j.jclepro.2018.10.070.

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 ACCEPTED MANUSCRIPT

A Global Bioenergy Supply Network Redesign through Integrating

Transfer Pricing under Uncertain Condition

Sobhan Razm

M.Sc. in industrial engineering at Iran University of Science and Technology

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Stefan Nickel

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Full Professor
Chair in Discrete Optimization and Logistics, Karlsruhe Institute of Technology (KIT),
Director at Forschungszentrum Informatik (FZI), KIT,

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Director at Karlsruhe Service Institute (KSRI), KIT.

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Mohammad Saidi-mehrabad
Full Professor of industrial engineering at Iran University of Science and Technology
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*Corresponding author:

• Email: mehrabad@iust.ac.ir
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• Tel: +98 21 7322-5025

• School of Industrial Engineering, Iran University of Science & Technology, Narmak,
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Tehran, IR 16846 13114

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Hadi Sahebi
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Assistant professor of industrial engineering at Iran University of Science and Technology

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Graphical Abstract: the structure of the global bioenergy supply network redesign (BE-SNR)
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A Global Bioenergy Supply Network Redesign through Integrating

Transfer Pricing under Uncertain Condition
Authors: Sobhan Razm, Stefan Nickel, Mohammad Saidi-mehrabad, Hadi Sahebi

Abstract

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Biomass, as a renewable material and a clean alternative fuel in generating electricity and heat,
is of particular importance in the transportation industry for the production of biofuel instead

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of fossil fuels. So far, many models have been proposed for the Bioenergy Supply network
design, all of which are local and focus on designing new configurations that conform to a

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specific country's economic policies. But since globalization of the economy and industry is
unavoidable today, effort has been made in this paper to propose a global Bioenergy Supply
network management model. Contrary to the present literature on the Bioenergy Supply

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network, the proposed model addresses the redesign of an existing biomass supply network
through logistic decisions, financial problems, and related merits. The model objectives can
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help managers to make decisions using the best transfer prices to maximize the global after tax
profit of the biomass company even under uncertain conditions. To validate the model, use has
been made of the data of a case study in Iran and Armenia. At last, it is concluded when
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transfer price is considered at the model, the global after tax profit can increase more than 8%
compared with the case of without transfer price.
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Keywords: Biomass-to-bioenergy supply network, Global Supply Chain Redesign, Transfer

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Pricing, Stochastic Programming.

1 Introduction
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The rapid consumption of oil reserves, limited supply, environmental pollution of fossil fuels,
and the ever-increasing demand for energy caused concerns and changed the lifestyle and
standards especially in industrial countries. The bioenergy and biofuel production systems
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attracted considerable attention as a solution in recent years because: i) they can be suitable
substitutes for limited, non-renewable fossil fuel systems (Sathre, 2014), ii) due to the
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absorption of carbon dioxide during growth, they reduce CO2 entry into the atmosphere when
it is emitted in the transportation cycle (Sharma et al., 2011), and iii) biofuels can replace fossil
fuels in the transport fleet without changes (You et al., 2012). According to the EU definition in
the (Union, 2009) : “biomass is the biodegradable fraction of products, waste, and residues from biological
origin from agriculture (including vegetal and animal substances), forestry, and related industries including fisheries
and aquaculture, as well as the biodegradable fraction of the industrial and municipal waste” which used as the
raw material for the production of biofuels and generation of heat and electricity in energy
production systems.

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The use of forest/agricultural residues for the generation of bioenergy and biofuel has attracted
much attention in recent years because it not only brings additional income for the local, and
generally poor, residents and diversifies the energy sources, but it also reduces the emission of
greenhouse gases in these areas. Forest residues include those generated during forest
operations (non-merchantable stems, branches, tree tops, leaves) and sawmill wastes (chips,
hog fuel, sawdust, shavings) (Röser et al., 2008), and agricultural residues include non-food crops,

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agricultural waste, etc.(Guo et al., 2016). These residues can be converted into bioenergy (heat
and electricity), be processed for the production of biofuel (ethanol, biodiesel, biogas oil) or

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turned into other bio-based products (plastics, chemicals, etc.) (Demirbas et al., 2009). Iran and
Armenia have widespread forest areas and agricultural lands that can produce abundant
residues; they also have areas with climates suitable to cultivate switchgrass.

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BE-SN redesign that requires such specific decisions as the closure of bio-refinery, capacity
transfer, and transfer of activities, has not been addressed in forest/agricultural biomass supply

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network(BSN) researches (Akgul et al., 2012; An et al., 2011; Costa et al., 2017; Ekşioğlu et al.,
2009; Freppaz et al., 2004; Frombo et al., 2009; Leduc et al., 2010; Leduc et al., 2008; Marvin et
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al., 2012; Natarajan et al., 2014; Papapostolou et al., 2011; Parker et al., 2010) and the biomass
global SC has not been paid much attention, but considering: 1) high costs of logistics, and 2)
high importance of improving productivity, especially in poor economic conditions, efficient and
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effective logistics management of the global biomass supply(BSC) seems quite essential.
Another point is that the merits of the World Trade issues, transfer pricing and common
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commercial incoterms have not been utilized in the BE-SN; this, as a prolonged research gap,
has been considered in the present paper.
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Unlike the BE-SN design, it is assumed, in its redesign, that the BE-SN already exists and focus is
on such configuration decisions as transferring production activities from the existing to new
bio-refineries or closing/opening them. In redesigning projects, the mother company breaks the
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existing BE-SN into different main activities and transfers each of them to a place where it is
more profitable. Encouraged by the opportunities and benefits of globalization (legal
production costs and tax benefits offered by some countries and corporations), companies are
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willing to consider locations with new potentials for their production sites in different countries
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and create new potentials for suppliers(Melo et al., 2009). It is common ground, through
globalization, that middle and final products are traded among subsidiaries of a global
company. If these affiliated companies are in different countries, transfer pricing will act as a
powerful tool to transfer revenue to affiliated companies in lower-tax countries and thereby
increasing after-tax profit of the SC (Shunko & Gavirneni, 2007). Some examples of how global
companies can use transfer pricing to shift revenue from high-tax to low-tax countries and
maximize the global after tax profit have been provided in(Lakhal et al., 2005; Shunko et al.,
2014; Shunko & Gavirneni, 2007).

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In this paper, a profit maximizing optimization model has been developed that redesigns the
global biomass supply network to bioenergy and biofuel by considering such features as the
bio-refinery closure, its initial production capacity, activity transfer, and the biofuel/bioenergy
traded among countries. In addition, the model considers transfer pricing and uses incoterms
that are prepared and compiled by the World Chamber of Commerce (WCC) and are common
in the world trade.

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Accordingly, the main contributions of this paper are: i) developing an optimization model that
redesigns the BE-SN to a global bioenergy supply network and stud complex factors (decisions,

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costs, etc.) ignored by models that are based on the BE-SN design literature, ii) integrating
transfer pricing into the model as a variable for biofuel/bioenergy produced in each bio-

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refinery, iii) considering world trade-specific parameters/incoterms in products transferred
among countries, iv) presenting a non-deterministic model and its solution using stochastic
programming, and v) Iran-o-Armenia case study with a focus on their exact commercial

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boundaries, rail/sea transport routes, tax rates, circulating currencies, and their
biomass/biofuel/bioenergy sales prices.
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This paper has been so organized as to study the BE-SN literature, related characteristics, and
relationships with the global SC redesign in Section 2, explain the problem precisely and
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formulate the problem modeling both deterministically and non-deterministically in Section 3,

describe the case study in detail in Section 4, solve the problem and analyze the results in
Section 5, and, finally, conclude and make suggestions for future researches in Section 6.
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2 Literature review (BE-SN design models)

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Various factors affect the overall profit of SCs that convert biomass to bioenergy and biofuel. If
biomass of the forest/agricultural residues are studied, these factors are: a) sources and various
residues (harvesting residues, sawmill wastes, non-food crops, agricultural waste), b) locations
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of bio-refineries, c) various capacities of technologies, d) various types of products, e) places

(markets) where they are to be sold, f) amount of collected biomass, g) amount of transported
biomass, h) amount of converted biomass, i) amount of produced biofuel, j) amount of biofuel
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transported within the SC in each period (material flow), k) time of changes in the supplying
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feedstock, l) market conditions, m) time of opening new bio-refineries, etc.

According to these factors at SCs, there are various contribution in this paper; for example for :
b) not limiting of the location of plants in a country, c) relocation of capacity technology among
of plants, d) considering different intermediate productions in SC (Richardson et al., 2013;
Rossing, 2013), l) considering foreign customer by international trade policies (de Matta &
Miller, 2015), k) not limiting suppliers and use of foreign suppliers (Lakhal, 2006; Pendse, 2012;
Perron et al., 2010), etc.

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Harvesting residues include non-merchantable logs that not suitable for either lumber or pulp
production, branches, small diameter logs, and sawmill wastes include chips, hog fuel, sawdust,
shavings; these materials can be converted into power, heat and such biofuels as bio-oil and
ethanol (McKendry, 2002a). Basic processes for converting biomass to bioenergy and biofuel
are thermochemical, chemical, and biochemical (McKendry, 2002b). The thermochemical
process (e.g. combustion, gasification and pyrolysis) and biochemical process (e.g. producing

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ethanol through fermentation and hydrolysis) are the most suitable methods of converting
forest and agricultural biomass to bioenergy and biofuel. Many studies have been done on BE-

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SN problems each of which has its own specific features. These studies (Balaman & Selim, 2014;
Ekşioğlu et al., 2009; Ghaderi et al., 2018; Shabani & Sowlati, 2016) have worked only on SC
design and have not used the SC redesign that can prevent such costs as those of constructing

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new bio-refineries.

These researches (Azadeh & Arani, 2016; Babazadeh et al., 2017; Costa et al., 2017) have been

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conducted only locally in one country and have not enjoyed the benefits of the global SC
considering their own countries’ geographic locations and better tax policies of their
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neighboring countries for biofuel production activities or capacity transfer between bio-
refineries. In these models (Čuček et al., 2012; Gautam et al., 2017; Zamboni et al., 2009), BE-
SN design has been used only locally without capacity transfer or closure of bio-refineries the
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operations of which are not economically justified whereas in redesign cases there are fewer
restrictions for the production of biofuel and bioenergy. For instance, if the required technology
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does not exist in a bio-refinery, use will be made of the technology capacity of other bio-
refineries.
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Considering the above mentioned issues, the following items as the some contributions of this
work increase the total SC profit and eliminate many limitations of the biomass supply and
conversion technology, can be enumerated as the gaps in earlier researches:
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• Biomass global SC: global SC is a series of events that occur regarding the demand of a
product/service and add to its value; this chain seeks to connect suppliers/producers/
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manufacturers to transnational distributors/customers(Branch, 2009). Caniato et al. (2013)

have proposed a combination of three key processes as a global SC in their paper (Caniato et
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al., 2013): i) global source-finding (management and communication with international

suppliers), ii) global production (production activities distributed throughout the world), and iii)
global distribution (management of sales and international distribution channels). It is worth
mentioning that a very important objective of the logistics management at the international
level is maximum profit versus minimum costs.

• BE-SN redesign: described in the “Introduction Section”.

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• Intermediate products: in BE-SN redesign issues, intermediate products play a key role to
integrate transfer pricing to make revenue variations possible; in their model, Thanh et al.
(2008) have used intermediate products transferred among SC production plants(Thanh et al.,
2008).

• Capacity transfer decisions: a main decision in BE-SN redesign issues is capacity of activities

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(whole or part) transfer among bio-refineries (Melo et al., 2012).

• Closing bio-refineries: In redesign projects that close some sites, the closing may cause

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considerable costs that may affect redesigning decisions; therefore, closing decisions (and the
related costs) would rather be considered in the model. Melo et al. (2006) have considered
capacity transfer decisions and facility closing costs in a complex SC structure in their model

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(Melo et al., 2006), but have ignored international factors; this is not much suitable for SC
redesign.

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• Foreign biomass suppliers: it is possible to consider strategic decisions of selecting foreign
biomass suppliers in SC redesign projects. Meixell & Gargeya (2005) have concluded (from their
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study) that SC design models should include both the domestic as well as foreign
suppliers(Meixell & Gargeya, 2005; Vidal & Goetschalckx, 2001).
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• Tax and transfer pricing: merits of using lower-tax countries are explained in “Introduction”.
Transfer pricing means setting prices for products transferred between two units owned or
controlled by one company. An example is when a bio-refinery under a holding (parent
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organization) sells a product to another bio-refinery under the same holding. Intelligent transfer
pricing can prevent payment of additional tax which means more profit. In most studies,
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transfer pricing is considered as a parameter whereas it can be considered as an effective

variable. OECD guideline has presented methods and constraints for determining the transfer
price; common methods are based on: 1) market price, 2) cost price, and 3) negotiation and
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agreement. Role of transfer pricing in a global SC has been studied in the papers (Lakhal et al.,
2005; Matsui, 2012; Shunko & Gavirneni, 2007).
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• Currency conversion rates: when the issue of SC redesign is considered globally, use has to be
made of currency conversion rates to convert different-currency revenues and costs into one
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single reference currency; an example has been provided in the paper (Vila et al., 2006) by Vila
et al. (2006).

• INCOTERMS: INCOTERMS or “International Commercial Terms”, produced and compiled by

the “International Chamber of Commerce”, are widely used to separate costs and
responsibilities between sellers and buyers. Such international trade terms as FCA or CIF are so
common in international sales contracts that today there is seldom any purchase-sale contract
that may lack referrals to these terms. In FCA, the vendor carries the product to the ship deck

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and accepts the export clearance costs; FCA is not necessarily used for shipping. According to
this rule, the buyer is to coordinate the international transport from the agreed delivery point
to the final destination and pay the costs; it is worth mentioning that the provisions of this rule
do not oblige the buyer to insure the goods. In CIF, costs of transportation (to the destination)
and insurance are on the vendor.

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According to global SC problem, results of literature review in summary explained in table 1.

Table 1: Classification of supply chain design models

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Currency exchange
in object function

Foreign suppliers

Capacity transfer
Transfer pricing
Facility Closing

Taxation rates
Intermediate

parameters
Max profit

Uncertain
SC
products

Article
Matta & Miller (2015)
Rossing (2013)
Richardson et al. (2013)
Shabani & Sowlati (2016)
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X X X X
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X X
X X
X X
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Pendse (2012) X X X
Matsui (2012) X X
Perron et al. (2010) X X X X X X
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Ghaderi et al.(2018) X X
Lakhal (2006) X X X X
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Costa et al.(2017) X
Melo et al.(2006) X X X X
Lakhal et al. (2005) X X
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Vidal & Goetschalckx (2001) X X X X X

Melo et al.(2012) X X
Proposed model X X X X X X X X X
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A review of the related literature shows that the effective development of a comprehensive
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optimization model for optimizing the global SC redesign that converts biomass to bioenergy
and biofuel with the integration of transfer pricing is a serious research gap. Accordingly, the
present paper has addressed the modeling of uncertain parameters in the redesign of a global
SC network. Next, the results of the model solution under real conditions of a case study have
been analyzed.

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3 Problem Statement
In this paper, an existing (origin) BSC network of a company with different origin biomass
suppliers and bio-refineries is considered for the problem and then new alternative biomass
suppliers and bio-refineries located worldwide are considered and it is redesigned at the global
level (See Fig. 1). All suppliers (origin and alternative) are represented by index A, origin bio-
refineries by index  , and new alternative bio-refineries by index  . A new

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alternative bio-refinery can either be opened or discarded and an origin bio-refinery can either
be kept or closed. An origin biomass supplier may remain in the SC or may be refrained from

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continuing to work with and a new alternative supplier may be selected or ignored.

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Fig. 1: structure of redesigning the global biomass supply network to bioenergy and biofuel
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Products considered in this problem (shown by index O) are: i) biomass received from biomass
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suppliers, ii) intermediate products sellable among bio-refineries (e.g. pellet), and iii) final
product sold to final customer (e.g. ethanol). The set of customers is shown with index C and a
multi-period programming horizon with index T is considered as the set of time periods.
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To redesign the BE-SN, the company’s existing(initial) process is first divided into different
works each of which is considered independently meaning that the work done in bio-refinery 1
is independent of that done in bio-refinery 2; in other words, each work has its output in the
form of one of the product types mentioned above. Total work done to produce product O is
shown with index W. Next, the process is redesigned by selecting the required work and its
location. Determining a work should not depend on its location meaning that the same work

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can be done simultaneously in other bio-refineries. Now, the general model variables are
explained as follows:

• Location and work transfer: the model selects the work and its new location; this will
lead to the determination of original bio-refineries that should be closed or the new
ones that should be opened.

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• Capacity planning: the model determines the capacity of each work in each SC part;
this capacity is obtained through: i) foreign sources and ii) transfer from one bio-refinery

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to another.

• Transfer pricing: the proposed model determines the transfer price of each

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intermediate product sold among bio-refineries belonging to the company.

• Selecting foreign biomass suppliers: selection of different foreign biomass suppliers is

considered in the model.

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All these decisions are based on economic criteria (cost factors), financial criteria (income tax
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and exchange rate), and common commercial incoterms, that lead to maximizing the global
after tax profit of the biomass company.
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3.1 Bioenergy Supply Network Redesign (BE-SNR) model

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The problem is formulated as a mixed-integer optimization model using Table 2.

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Table 2: Model decision variables, indices, sets, and parameters

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Sets
A Biomass suppliers; index  ∈ 

Bio-refineries; index  ∈  =  ∪ 

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Customers; index  ∈ 
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W Works; index  ∈

O Products; index  ∈ 

 Output products of work w

T Periods; index  ∈ 

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 Scenarios; index  ∈ 

Parameters
 !"#$ Sales unit price of product O by bio-refinery b to customer c in period t

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'()*+"$
,-./011 Purchase unit price of product O by bio-refinery b from supplier a in period t
(includes transport costs too)

Transportation costs of unit product O from bio-refinery b to bio-refinery b' (b' ∈ B)

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'()*"
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4 "$

in period t; this is assumed to be paid by the destination site

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SC
'()!" Costs of amortization (buying capacity from foreign sources) and doing unit work
capacity w in bio-refinery b; amortization costs of the invested capacity are generally
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considerably high. Therefore, the fixed cost7 in each period (from the

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capacity purchase to the end of the planning horizon) is imposed on bio-refinery b

'()!"
6D Relocation cost of a unit work capacity w from bio-refinery b' (b' ∈ B) to bio-refinery
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4"

b; in relocation period, this cost is imposed on the destination

'()!"$
.E Operating cost of a unit work capacity w in bio-refinery b in period t
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Cost of bio-refinery b being open. It is assumed that when a bio-refinery is

'()".EF opened, it can no longer be closed until the end of the programmed horizon.
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In addition, since the cost of bio-refinery b being open is significantly high, this
cost is imposed on it in each period with an interval (starting from when the
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bio-refinery is opened to the end of the programmed horizon)

'()"GD. Fixed cost of closing bio-refinery b imposed on it in its last operating period

)H"$
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Income tax in the country of bio-refinery b in Period t; it is assumed that the

tax rate will be zero if the company incurs a loss
IJ"$ Currency conversion rate for costs and prices in the country of bio-refinery b
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which are turned into their values in the standard currency in period t
K!* Maximum product O that can be produced by a unit work capacity w over a
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period (if work w produces only product O)

KO!* Input product r L ∈ M required by a unit work capacity w to produce
maximum possible output from product O output (e.g. N)
P A sufficiently large number

Q*#$ Demand for product O by customer c in period t

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+*$ Capacity of supplier a for product O in period t

'R !" Initial available capacity of work w in bio-refinery b

ST Occurring probability of scenario θ

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IJ"$T Exchange rate of bio-refinery b to standard currency in period t in scenario θ

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QU
*#$T Demand for product O by customer c in period t in scenario θ

X*""Y$
V′ in period t
Lower limit of sales price of unit product O from bio-refinery b to bio-refinery

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Z*""Y$
V′ in period t
Upper limit of sales price of unit product O from bio-refinery b to bio-refinery

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Binary variables
\ Equals 1 if in period t bio-refinery b (V ∈ [  ) is open and 0 otherwise. Note that it
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does not refer to the period in which bio-refinery b is opened for the first time; it
refers to the status of b in period t

] Equals 1 if bio-refinery b (V ∈ [ ] ) is closed at the end of period t and 0

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otherwise. Note that it is 1 if and only if bio-refinery b is open in period t, but closed in
period t + 1
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Integer variables
'R !"$ Capacity of work w in bio-refinery b in period t

JX!""Y$ Capacity of work w transferred from bio-refinery b to bio-refinery b' (b' ∈ B) in

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period t

R^!"$ Capacity of work w obtained by bio-refinery b from foreign sources in period t

C
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Continuous variables

_
`
(respectivly, _
f
) The before tax profit( respectively, loss) of bio-refinery b in period t
expressed in local currency b

g
`
(respectivly, g
f
) The before tax profit( respectively, loss) of bio-refinery b in period t
expressed in standard currency

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*!"$ Amount of product O produced by work w in bio-refinery b in period t

h*!"!4 "4$
transmitted to work w' (w' ∈ W) in bio-refinery b' (b' ∈ B) (i.e. O is output
Amount of product O produced by work w in bio-refinery b in period t and

product of w and input product of w' (w' ∈ w))

h*!"#$ Amount of product O produced by work w in bio-refinery b and carried to customer c
in period t

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h*+!"$ Amount of product O purchased by bio-refinery b from supplier a and used in period t
by work w
H*""4 $ Amount of product O transferred from bio-refinery b to bio-refinery b' (b' ∈ B) in

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period t (i4  = ∑∈ ∑Y∈ k4 4  )

H*"#$ Amount of product O delivered to customer c by bio-refinery b in period t (i =

SC
∑∈ k )

H*+"$ Product purchased by bio-refinery b from supplier a in period t

(i = ∑∈ k )

) U
Transfer price paid by bio-refinery b' (b' ∈ B) to bio-refinery b in period t to buy
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*"" 4 $
product O (e.g. for an amount Xmnn4 o ). It is noteworthy that TPmnn4 o is
expressed in standard currency.
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Pre-tax profit/loss in bio-refinery b in period t is expressed in local currency and shown by

(_` − _ ) which is the difference between revenues and expenses of bio-refinery b in period
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f
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t. Revenues are obtained from product sale to foreign customers and other company sites while
costs (expressed in the local currency) include all those attributed to bio-refinery b. Pre-tax
profit/loss (_`
 − _ ) in bio-refinery b in period t, which is expressed in the local currency of
f
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bio-refinery b, depends on the newness or originality (existence) of bio-refinery b; if bio-

refinery is new, relation (1) and if it is an existing one, relation (2) will be used. Object function
gets from (incomes - costs), that maybe it's positive (_` f `
 ), or negative (_ ), if it's positive (_ ),
then (income - costs) is multiplied by tax, but if it's negative (_f
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 ), then tax is not considered

for (income - costs).The tax is considered just for profit, so Lr − i M is just multiplied by _ `
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.The point worth noting is that for the given bio-refinery b in period t, both _ `
and _f cannot
be nonzero in an optimal solution (for proof see (Vidal & Goetschalckx, 2001)).

The BE-SNR model is as follows:

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st uv v  wLr − i M_ − _ yz

+ −

∈ ∈

 − _ = {v v 7\ i + v v|\′  − \′ } / 

_` f

∈  ∈ ’∈

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− ‚v v 7s77 i + v v 78
 8ƒ

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∈  ƒ,ƒ„ ∈

SC
+ v v 7]
4  ]4  + v 7 \
\

4 ∈  ∈

+v v 7
4  i4  + 7\ U
\ 
∀ ∈  ,  (1)
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∈ 4 ∈
M

_`
 − _ = {v v 7\ i + v v|\′  − \′ } / 
f
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∈  ∈ ’∈

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− ‚v v 7s77 i + v v 7 8ƒ

8

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∈  ƒ,ƒ„ ∈

+ v v 7]
4  ]4  + v 7 \
\
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4 ∈  ∈
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∀ ∈ ] , 
+v v 7
4  i4  + 7]
 ] 
(2)

∈ 4 ∈

St:

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]Y i4  ≤ \4  ≤ ‡Y i4  ∀, ,  (3)

\4  ≤ ˆ i4  ∀, , Y ,  (4)

∀, , 
v i = ‰
(5)

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∈

∀, , 
v i ≤ 7

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(6)
∈

SC
∀, , , 
v k + v v k4 4  = \
(7)
∈ Y∈ Y∈

v k + v v k4 4  = v

U N \
N
∀,  ∈ , ,  (8)
AN
∈ Y∈ Y∈ ∈ 

∀, , Y , 
i4  = v v k4 4 
M

(9)
∈ Y∈

∀, , , 
D

i = v k
(10)
∈
TE

∀, , , 
i = v k
(11)
EP

∈

\ ≤ \(fr) + 8 + ]4 (fr) − ]4  ∀, ,  ∈ \‹Œ (12)

C

\Œ ≤ \ + 8Œ − ]4 Œ ∀, 

AC

(13)

∀, ,  ∈ \‹Œ
v ]4  ≤ \(fr)
(14)
Y∈

∀, 
v ]4 Œ ≤ \
(15)
Y∈

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\ \ ∀, , 

v ≤ \ ≤ v +r
(16)
N N
∈ ∈

∀, 
\ ≤ v v \ ≤ ˆ \ ,
(17)
∈ ∈

PT
\ ≤ \(`r) ∀ ∈  ,  (18)

RI
] ≥ \ − \(`r) ∀ ∈ ,  (19)

SC
∀ ∈  , , ƒ > 
v v \ƒ ≤ ˆ ( r − ] )
(20)
∈ ∈

U
AN
For a new alternative bio-refinery b (b ∈ BNEW), the total value (_`
 − _ ) is expressed in (1). In
f

fact, revenues in period t are obtained through selling final products (e.g. ethanol) to customers
(∑∈ ∑ 7\ i ) and sellable intermediate products (e.g. pellet) to other bio-refineries
M

\ 4
(∑∈ ∑4 ∈   ). In this formula, \4  has been divided by to express it in

D

\ 4
the common currency of bio-refinery b. In period t, costs are grouped into: 1) costs of buying
products from other bio-refineries (∑∈ ∑4 ∈   ), 2) costs of buying biomass from
TE



suppliers (∑∈ ∑ 7s77

 i ), 3) costs of acquiring work w (in period t or before
it) (e.g. ∀ƒ such as ƒ ≤ t) is paid by bio-refinery b with (∑ƒ,ƒ„ ∑∈ 78
 8ƒ ) (φ
EP

equals the current period and is in fact the beginning of the period of buying capacity), 4) costs
of work transfer (∑4 ∈ ∑ 7] 4  ]4  ), 5) operational costs of the works
C

 \ ), 6) costs of transportation (∑∈ ∑4 ∈ 74  i4  ), and 7)

(∑∈ 7\ 

costs of bio-refineries being open (7\ \ ).

AC

If bio-refinery b is an existing one (b ∈ BORIGIN), calculations are done by Eq. (2) and its after tax
profit/loss in period t in standard currency is expressed by  w(r − i )_ − _ y.
+ −

The model objective is to maximize the global after tax profit of biomass company (all bio-

byst ’∑∈ ∑∈  w(r − i )_ − _ y“.

refineries) throughout the planning horizon (all periods) which is shown
+ −

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To obtain the transfer price in relations (1) and (2), it is first assumed that product O may have
comparable products in foreign markets; hence, a lower and upper limit is considered for each
product which is shown by constraint (3). This constraint allows TP decision variables to be
obtained within the BE-SN without creating complexities for the problem. Constraint (4) is to
prevent the acceptance of unacceptable situation. In fact, TP is paid when product flow exits
between two bio-refineries which means if i4  = Œ, then\4 = Œ. Customers’ demands

PT
are to be met, so constraint (5) is added to the model. Constraint (6) shows the capacity of the
biomass; a supplier’s output product should not exceed its capacity. The next two constraints

RI
address the product flow balance in the BE-SN. Constraint (7) means that all products produced
in and sent from bio-refinery b to customer c by work w plus products sent to other bio-
refineries should equal the total production of bio-refinery b in period t. On the one hand, work

SC
w requirements in bio-refinery b in period t related to the input product r are calculated based
on the output products produced by work w. The point worth noting is that different output
products may be produced by work w; therefore, the requirements related to input product r

U
N \
are represented by∑∈
N
. On the other hand, requirements of work w in bio-
AN
refinery b in period t for input product r should be obtained from biomass suppliers and other
works; this is expressed by constraint (8). It is obvious that the flow balance conditions are to
be satisfied automatically; therefore, constraints (9), (10), and (11) are added to the model. The
M

proposed model specifies the capacity to be installed in each bio-refinery in each period for
each work w and explains how it is obtained. Capacity constraints are grouped into two: when t
D

> 0 and when t = 0. First, the available capacity for work “w” in bio-refinery b is considered in
different periods except 0 (t > 0); therefore, considering constraint (12), the capacity of work w
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in bio-refinery b in period t should not be greater than the capacity of work w in bio-refinery b
in period (t-1) plus the capacity bought from foreign sources and other bio-refineries for this
bio-refinery minus the capacity given to other bio-refineries. And considering constraint (13),
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capacity in t = 0 should not be greater than the initial existing capacity plus the capacity
purchased minus the capacity given to other bio-refineries; the reason why it is considered
smaller is that a capacity may not be used due to old technology or other reasons and ignored
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without being transferred to another bio-refinery. Usually, when an original bio-refinery is

closed, its products are transferred to a new bio-refinery and a different or novel technology is
AC

considered for this product in the new bio-refinery. Since technology/facility transfer is time
consuming, it is assumed that the desired facility is freed in the prior period and gets ready to
begin work at the beginning of the next period. Constraints (14) and (15) ensure that the total
capacity of the works transferred from bio-refinery b should not exceed its total capacity in
period t-1 and period 0 (initial available capacity). Constraint (16) states that, on the one hand,
the capacity of work “w” in bio-refinery b in period t should be sufficiently greater than that
required to produce the output products, and on the other hand, it does not need to be more

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than the required amount like when \ should adopt an integer. Next constraints are
used for the opening or closing of bio-refineries. Constraint (17) states that bio-refinery b is
considered open (\ = r) if, and only if, it produces output products in period t
(∑∈ ∑∈ \ > Œ). According to constraint (18), a new alternative bio-refinery cannot
be closed after it is opened. Constraint (19) ensures that an original bio-refinery b is closed at
the end of period t (] = r) if, and only if, it is open in period t (\ = r), but it closes

PT
in period (t + 1) (\L`rM = Œ). According to the constraint (20), if a bio-refinery is closed in
period t, it will not produce in it thereafter.

RI
Since this problem is defined in a fixed network, the BE-SNR model size depends on the size of
the index and parameter sets. Therefore, the number of constraints is calculated as follows:

SC
|||•| |+–|] | + |||| + •||||—′ — + |||| + |||| + •| |||||
+ |||||| + |||||| + –| ||| + ||} + •| |||

U
AN
The number of variable is determined as follows:

||L˜|| + •| ||| + | |||Y | + ||| ||| + ||| ||||Y ||Y | + ||| |||||
+ ||||| ||| + •|||||Y | + |||||| + ||||||M
M
D

The number of parameters is calculated as follows:

||L| ||||| + |||||| + –|||||Y | + •| ||| + | ||||Y | + •|| + ||||

TE

+ ||||M + •|| + | ||| + | ||| + ||| ||| + r .

EP

In the real world, since currency conversion rates and product demand vary differently over the
planning horizon, they are considered uncertain in this paper and the BE-SNR model is solved
C

using stochastic programming (scenario-based). In fact, the problem is remodeled and solved
AC

considering several scenarios and through: i) the 2-stage approach and ii) the mean approach.
The information (Historical data) about uncertain parameters and their changes can be
estimated by using information of relevant sites (i.e. stochastic or real data), relevant reports
and using experts' opinions. So they can be defined in different situations or scenarios. It is
worth mentioning that, in low-cost countries, especially in Asian countries, exchange rates
depend on the value of the dollar, but these currency fluctuations are approximately
predictable by experts (with their past behavior) in certain times of the year. As a result, the
best approach to take the uncertainty into account is the stochastic programming.

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3.2 Bioenergy Supply Network Redesign: Stochastic model (BE-SNR_Stoch),

In the (BE-SNR) model on based on the principle of certainty, the value of the parameters of
the exchange rate and demand, deterministic was considered, but in real applications, it is
rarely possible to determine the value of these parameters precisely. Hence, the optimal value

PT
of the variables in the implementation is accompanied by error. This uncertainty has a lot of
impact on the problem and may cause the problem to be infeasible. To deal with this problem,
an approach is to produce a huge amount of bioenergy products so that if demand is raised, the

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BE-SN is still responsive. These solutions increase the cost of the optimal mode. Therefore, the
model should balance classic goals such as minimizing total costs and maximizing total income.

SC
In this paper for solving this problem, scenario-based stochastic programing method is used.

A scenario is a description of a future status and the course of events that enables something
to progress from the original state to the future. A scenario should be relevant, consistent,

U
reliable, transparent and responsive to all desirable criteria (Godet, 2000; Nguyen et al., 2007).
AN
The purpose of the scenario is to discover the most probable or possible situations for the
parameters of the exchange rate and demand, and aggregate them in the form of more likely or
possible imaginations (scenarios). In fact, the probable values are extracted for each of the
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parameters according to the historical behavior or estimation of the experts. Then, decisions
are made according to these scenarios. It is worth noting that the created scenarios are a
maximum list of possible scenarios.
D

In generally, the two stage stochastic programing is included two bunch of variable, first stage
TE

variables include configuration variable (š) and second variables correspond to flow rate
between facilities (›), that defined based on the configuration of system and realization of
random data.
EP

To clarify the subject, general notation of proposed model is considered in the following
sections. In this general form, the scenarios are shown by (Θ). Notice that each scenario has its
C

own random vector, in order to distinguish of random vector from its particular realization,
random vectors shown by the tilde sign.
AC

œ› ' 5 . š + v Sž . ( Ÿ5 . ›T )
k-1
T
st:
 ›T + ¡¢T š = £̃T ∀ž k-2
(›T ≥ ¥¦T ∀ž
∀ž
k-3
¨T
§›T ≤ § k-4

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¨T š ∀ž
J›T ≤ œ k-5
Rš = © k-6
Qš ≤ I k-7

Vector of š defines as first stage variables, and £̃T , ¥¦T are random data. Vector › is for second
stage decisions that are determined based on š and realized variation of £̃T , ¥¦T . Meanwhile

PT
ª̃ = L£̃T , ¥¦T , §
¨T , œ
¨T , ¡¢T M is shown for random vectors, while ª = L£T , ¥T , §T , œT , ¡T M shows its

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specific realization. To solve model (k-1) to (k-7), it should be maximized the equivalent crisp
version which shown as follows:

max ' 5 . š + ®¯^ (ª̃ , š)°

SC
m-1
­
st:
Rš = ©
m-2

Qš ≤ I
U
m-3
AN
Where ^ (ª, š) is represent of the optimal value for specific value of y in following problem :

max v Sž . ( Ÿ5 . ›T )
M

g-1
±²
T
st:
 ›T + ¡T š = £T ∀ž
D

g-2

(›T ≥ ¥T ∀ž
g-3
∀ž
TE

§›T ≤ §T
g-4
∀ž
J›T ≤ œT š
g-5
EP

It should be recalled that the optimal value of the two-stage problem (g-1) to (g-5) is, a function

model (m-1) to (m-3) is estimated with respect to the probability distribution of ª̃ which is
of the first stage variables and realization of random data. Notice that, the object function of
C
AC

assumed to be known.

Therefore, different scenarios are considered for demand and exchange rates and each of
which is shown withΘ; the probability that each scenario may occur is´ . The objective of The
Bioenergy Supply Network Redesign stochastic model (BE-SNR_Stoch ), similar to the BE-SNR
model, is to maximize the global after tax profit of company (all bio-refineries) throughout the
planning horizon (all periods) considering different scenarios which is shown with
stµ∑∈ ∑∈¶(r − i )g − g ·¸. With knowing that, the costs of opening and closing bio-
+ −

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refineries in a country are independent of the currency conversion rate and are paid with the
currency of the same country, and each bio-refinery in each country pays its taxes with the
current currency of the same country, \ and ] are considered as the variables of the
first stage and the problem is Modified for two-stage approach.

The BE-SNR_Stoch model is as follows:

PT
RI
st uv v wLr − i Mg − g yz
+ −

∈ ∈

SC
g` f U U
 − g = v πž ¹ º v v 7\ i¹ + v v |\′ ¹ − \′ ¹ }⁄¹
ž∈Θ ∈  ∈ ’∈

− v v 7s77
 i¹ − v v 7]
U
4  ]4 ¹
AN
∈  4 ∈ 

− v 7\
 \¹ − v v 74  i4  ¹ ¼
M



∈ ∈ 4 ∈
D

− 7\
 \ ∀ ∈  ,  (21)
TE

g U U
 = v πT ¹ º v v 7\ i¹ + v v (\4 ¹ − \4¹ )⁄¹
− gf
EP

T∈½ ∈  ∈ ’∈

C

− v v 7s77
 i¹ − v v 7]
4  ]4 ¹
AC

∈  4 ∈ 

− v 7\
 \¹ − v v 74  i4  ¹ ¼


∈ ∈ 4 ∈

−7]
 ] ∀ ∈  ,  (22)

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St:

]Y i4 ¹ ≤ \4  ≤ ‡4  i4 ¹ ∀, , , ¹

PT
(23)

\4 ¹ ≤ ˆ i4 ¹ ∀, , ′ , , ¹ (24)

RI
U ∀, , , ¹
v i¹ = ‰ ¹
(25)

SC
∈

∀, , , ¹
v i¹ ≤ 7
(26)
∈

U
AN
∀, , , , ¹
v k¹ + v v k4 4 ¹ = \¹
(27)
∈ Y∈ Y∈
M

N \¹ ∀,  ∈ , , , ¹

v k¹ + v v k = v
(28)
N
′
′  ¹
∈ Y∈ Y∈ ∈ 
D

∀, , ′ , , ¹
TE

i4 ¹ = v v k4 4 ¹
(29)
∈ Y∈

∀, , , , ¹
EP

i¹ = v k¹
(30)
∈
C

∀, , , , ¹
i¹ = v k¹
(31)
AC

∈

\¹ ≤ \(fr)¹ + 8¹ + ]4 (fr)¹ − ]4 ¹ ∀, ,  ∈ \‹Œ, ¹ (32)

\Œ¹ ≤ \ + 8Œ¹ − ]4 Œ¹ ∀, , ¹ (33)

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∀, ,  ∈ \‹Œ, ¹
v ]4 ¹ ≤ \(fr)¹
(34)
Y∈

∀, , ¹
v ]4 Œ¹ ≤ \
(35)
Y∈

PT
\ ¹ \¹ ∀, , , ¹
v ≤ \¹ ≤ v +r
(36)
N N

RI
∈ ∈

∀, , ¹
\ ≤ v v \¹ ≤ ˆ \

SC
(37)
∈ ∈

\ ≤ \(`r) ∀ ∈  , 

U
(38)
AN
] ≥ \ − \(`r) ∀ ∈ ,  (39)

∀ ∈  , , ƒ > , ¹
v v \ƒ¹ ≤ ˆ ( r − ] )
M

(40)
∈ ∈
D
TE

4 Case study
EP

To illustrate the model application, a study has been conducted on Iran and Armenia which
have completely different climates in their different regions. In Iran, for instance, Mazandaran
province is wet and covered with forests while Fars province is tropical and full of farmlands.
C

The two countries are good sources for the production of agricultural and forest residues and
switchgrass. The biomasses of these areas used to be converted to bioenergy and biofuel are
AC

mainly: i) forest residues (leaves, non-merchantable stems, and branches), woodwork factory
residues (chips, hog fuel, sawdust, and shavings), and agricultural residues that do not have any
other applications in these areas, and ii) switchgrass. According to the 20-year data collected by
the “Agriculture and Natural Resources Engineering Organization” of the two countries, it is
expected that the biomass collected in these areas will annually vary differently in the next 20
years. Fig. 2 shows an estimate of the mean biomass collected every year in each period in
Fioletovo, Yerevan, and Mazandaran provinces. Five-year periods have been considered in this
study.

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600,000

PT
500,000
400,000
300,000
200,000 Armenia-Fioletovo

RI
100,000 Armenia-Yerevan
Iran-Mazandaran
0
years1-5 years 6-10 years11- years16-

SC
15 20

Iran-Mazandaran Armenia-Yerevan Armenia-Fioletovo

U
FIig. 2: Average biomass ton per year
AN
According to studies, the purchase price per ton of agricultural/forest biomass and switchgrass
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in Iran are averagely 1,800,000 and 2,200,000 rials, respectively, and in Armenia they are
24,000 and 27,000 dram, respectively. Iran-Mazandaran and Armenia-Yerevan suppliers are the
existing (origin) biomass suppliers and Armenia-Fioletovo is the new alternative supplier. Iran-
D

Mazandaran and Armenia-Yerevan bio-refineries (owned by the Biomass Company of

“Organization of New Energies of Iran” (SANA)) are the existing (origin) bio-refineries and Iran-
TE

Fars and Armenian-Fioletovo bio-refineries are new alternatives. It is worth noting that Armenia
is an inexpensive, low-cost country and each of these bio-refineries has three technologies of
generating electricity, producing pellet, and producing biofuel with different capacities as
EP

shown in Table 3.

Table 3: Capacity of each technology

C

Location
AC

Technology Iran- Iran- Armenia- Armenia-

Mazandaran Fars Yerevan Fioletovo
Biomass boiler+steam
turbine(electricity only )(MW) 5 2 3 2
Pyrolysis(t/day) 600 200 400 200
Pellets(t/year) 45,000 15,000 30,000 15,000

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If it is assumed that all the input biomass is allocated to only one technology for doing one job,
these bio-refineries can averagely produce 21% electricity, 91% pellet, and 66% biofuel (these
percentages may vary with the change in the biomass quality). Table 4 shows the operational
cost per ton of biomass converted to electricity, pellet, and biofuel considering the capacity of
each technology.

PT
Table 4: Operational costs

operation cost of technology

RI
biomass boiler+ steam turbine(electricity only)
(MW) – (operation cost: $ ton of biomass) 2 - 45 3 - 35 5 - 25
Pyrolysis

SC
(t/day) – (operation cost: $ ton of biomass) 200 - 45 400 - 38 600 – 37
Pellets
(t/year) – (operation cost: $ton of biomass) 15,000 - 40 30,000 - 50 45,000 - 45

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Iran and Armenia are countries whose global trade are heavily dependent on the exchange
AN
rate, and over the years, these countries are seeing variations in the exchange rates. Also, due
to different political reasons, the demand for bioenergy products from the customers of these
countries is accompanied by changes. Therefore, the demand and the exchange rate are
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considered as uncertain parameters.

In this paper, the scenario-based stochastic model by two approach (two-stage and average
D

approach) is used that, based on historical data and expert's opinions, three scenarios are
determined for the uncertainty parameters. The two-stage method is based on the BE-
TE

SNR_Stoch model, and following steps are followed for the average approach:

Step 1) Obtaining an average value for uncertain parameters

EP

Step 2) Obtaining variables of the first stage found from the solution of The BE-
SNR_Stoch model where the mean value is considered for uncertain parameters
C

Step 3) Solving The BE-SNR_Stoch model under conditions where the values of the first
AC

stage variables are put equal to the values obtained in step 2 (solving each BE-SNR
models assuming that values of the variables of the first stage are equal with those
obtained in step 2)

Step 4) Obtaining the expected value of the obtained solutions.

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Effort has been made in this paper to give the reader a better understanding about railroads,
land/sea borders, and locations of biomass suppliers/bio-refineries through the geographic map
of the two countries (See Fig. 3 and 4). A special merit of Iran and Armenia is their inexpensive,
satisfactory railroads available almost throughout both countries causing great saving in
transportation costs in the entire BE-SN. According to the following geographic maps, all SC
transportations (biomass, products, and facilities) are done through special trucks to railroad

PT
stations and then displaced by trains. According to each country’s Railway Company enactment,
the rail and truck transport costs per ton per km are respectively 160 and 260 rial in Iran and

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2.3 and 3.6 dram in Armenia. The upper and lower limits of transfer prices for biofuel and bio-
energy, which also include each country’s transport costs and CIF/FCA policy costs, are
determined based on their foreign market prices. It is worth noting that Iran usually uses CIF

SC
and FCA policies for respectively exportation and importation in maritime/land transactions to
create jobs for its people.

U
AN
M
D
TE
C EP
AC

Fig. 3: the geographic map of abroad transportation network of case study

Customers of the final product (biofuel) are from India, China, and Japan. Products considered
in this study include: 1) forest/agricultural residues, 2) switchgrass (both obtained from biomass

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suppliers), 3) pellet (intermediate product sold among bio-refineries), 4) electricity (sold to each
country’s main network), and 5) biofuel (sold to customers in India, China and Japan). Main
works considered in this case study are: 1) planting/collecting biomass, 2) burning to generate
power, 3) producing biofuel (pyrolysis), and 4) producing pellet, and it is based on four 5-year
periods. Through studying the economic situation and the government supports, different tax
values have been determined for each country in each period. Common currencies of Iran and

PT
Armenia are rial and dram, respectively and the two countries do their transactions through
their own currencies which are finally turned into a standard currency (dollar). According to

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their maps, all transactions are done via Jolfa and Bandar Abbas, and all transportations
between the two countries (from Fioletovo to Bandar Abbas) are done by railway. The final
product (biofuel) is sent by ship (under CIF policy) from Bandar Abbas to ports in Tokyo (Japan),

SC
Hong Kong (China), and Mumbai (India); the rest of the products are traded under FCA policy.

U
AN
M
D
TE
C EP
AC

Fig. 4: the geographic map of national BE-SN

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5 Results and Discussion

The MILP model is solved by GAMS 24.1.2 Software with an Intel 2.13-GHz processor and its
objectives are: 1) finding profits from the 2-stage and mean approaches and studying and
comparing the obtained results using the related indices, 2) helping a better understanding of
why a transfer price is introduced, 3) analyzing the impacts of international factors (tax

PT
policies), and 5) assessing the effects caused by changes in such parameters as operational and
transportation costs and biofuel sales price. These results provide insights useful to managers
of biofuel/bioenergy producing companies.

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5.1 Solution through 2-stage and average approaches

SC
Three scenarios have been considered for the product demand and exchange rate, and The BE-
SNR model is solved by considering the Iran-Armenia case. An optimal solution is obtained in

U
each scenario (shown in Table 5a), but it is not really possible to find out which scenario is going
to happen in the future; therefore, two approaches that create near-optimal solutions will be
AN
used to solve this problem and the results will be compared.

First is the two-stage approach that is used by the BE-SNR_Stoch model considering the
M

variables of the first stage and finds the biomass company’s global after tax profit. Then, EVPI
(Expected Value Perfect Information) index is computed (See Table 5a); the advantage of this
index is that it determines how much the full information knowledge can be profitable; in other
D

words, how much profit is obtained when accurate and complete information is available on
uncertain variables, and how much profit is lost when information is none. The smaller is the
TE

index the better is the situation because the values of uncertain parameters have been
predicted closer to real values.
EP

Second is the mean approach that finds the biomass company’s global after tax profit. Then,
VSS (Value Stochastic Solution) index is computed using the difference between profits found
from the two-stage and average approaches (shown in Table 5b). A greater value of this index is
C

an indication that the 2-stage approach is better. In fact, with this index, it is possible to find
out how valuable is the answer found from the 2-stage approach.
AC

Table 5a: the resulted values

θ=1 θ=2 θ=3 two stage EVPI

TP 566,422,565 677,232,423 799,632,575 675,623,652 5,472,202
without TP 525,565,241 626,725,653 737,655,362 624,125,623 5,856,462

Table 5b: the resulted values

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two stage Average method VSS

TP 675,623,652 674568456 1,055,196
without TP 624,125,623 623114685 1,010,938

PT
As shown (in Table 5a and 5b), when transfer price is considered, the EVPI index equals
5,472,202; therefore, if the exchange rate and demand can be predicted accurately with new
tools and technologies, more profit can be obtained. The VSS index, when transfer price is

RI
considered, equals 1,055,196 meaning that the 2-stage approach is better than the average
approach. As shown (in Table 5a and 5b), the model shows similar behavior when transfer price
is not considered and, again, the 2-stage approach excels the average approach. It is worth

SC
noting, of course, that there is no relationship between the EVPI and VSS indices.

The model solution shows that Iran-Mazandaran, Armenia-Yerevan, and Armenia-Fioletovo

U
biomass suppliers become active during the planning horizon and Iran-Mazandaran and
Armenia-Yerevan bio-refineries are active in planning horizon, and the final product (biofuel) is
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sent to all customers in China, India, and Japan.

5.2 Effects of the transfer price

M

Considering Iran-Armenia case study, the model is investigated in the following two cases to
evaluate the effects of the transfer price on the BE-SN:
D

Case 1- Transfer price is considered as a decision variable and estimated by adding upper and
lower limits on it. Values of these limits are considered by the sales price of the products in the
TE

market and their operational costs.

Case 2- The model does not include the transfer price.

EP

The after-tax profit comparison in the two above-mentioned cases would result in a higher
average profit in Case 1. In fact, when transfer prices are considered as decision variables, the
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model manipulates them for paying less tax and increasing profits. It means that the model has
the necessary freedom to manipulate transfer prices between the imposed limits and the ability
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to find their numerical values and maximize profits. On the other hand, the after-tax profit in
Case 2 (with no transfer price) is smaller than that in Case 1 in the BE-SN Network because the
model cannot use the benefits of the other low-tax country (Armenia). This emphasizes the fact
that selecting transfer price without considering a model is difficult; therefore, it is important
that the transfer price be considered in the model as a decision variable.

Results show (See Fig. 5) that the average profit obtained in Case 2 (without transfer price) is
8% less than that in Case 1 (with transfer price). This reveals the importance of the transfer

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price as a decision variable in the model and shows that if it is used, it can act as a powerful tool
for transferring profit and maximizing the biomass company’s global after tax profit.

800,000

PT
700,000
After tax profit (*10^3)

600,000

RI
500,000

400,000

SC
300,000

200,000

U
100,000
AN
0
TP Without TP

Fig. 5: impact of transfer price

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5.3 Effects of tax rate

To assess the effects of the tax rate on the profits of the biomass company, Armenia (low-cost
D

country) tax policy is studied. It is expected, with a gradual increase in tax from 0 to 50%, that
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we should witness a steady decrease in the company profits, especially steeper in taxes near
50%. But, contrarily, tax rate variations do not always have similar effects on the company’s
global profit. With the changes made in the two cases (with and without transfer price) and
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comparison of the company’s global after-tax profit in the Fig. 6, it is possible to see how these
changes are a function of the tax rate in Armenia (low cost country).

• For Case 1 (with transfer price), when the tax rate rises from 0 to 25%, the company’s after-
C

tax profit decreases steeply. This shows that transfer price has acted effectively as a means of
AC

transferring profit to the low-cost country. If the tax rate reaches 25%, Armenia is no longer an
inexpensive country and the model can manipulate the transfer prices for transferring profits
from Armenia (low-cost) bio-refinery to Iran (high-cost) bio-refinery to maximize the biomass
company’s global after tax profit and minimize bioenergy/biofuels sale in Armenia. This explains
why the global after tax profit of the biomass company declines less steeply after the 25% tax
rate in (low-cost) Armenia.

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• For Case 2 (without transfer price), when the tax rate increases, the biomass company’s after-
tax profit decreases less steeply. Under such conditions, (low-cost) Armenia is not considered as
an excellent foreign market for the sale biofuel and bioenergy, but just a country with low
production costs; hence, it is a more ideal place for production or bio-refineries. Therefore, in
tax rate variations in this country do not have much impact on the biomass company’s global
after tax profit because after tax profit in Armenia is very low.

PT
800,000

RI
750,000
After tax profit(×10^3)

700,000

SC
650,000

600,000

550,000
U
AN
0 5 10 15 20 25 30 35 40 45 50
Tax in Armenia (low-cost country)%
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TP Without TP

Fig. 6: After tax profit vs tax rate

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5.4 Effects of costs and prices

To assess the effects of the production operational costs (See Fig. 7), they are gradually reduced
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to 0 from their initial values. It is believed that lower operation costs are more important than
lower transport costs; in fact, when production operation costs are reduced, production in
(high-cost) country (Iran) rises because Iran is near the global market causing its transport costs
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to be less.
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The same is also the case with a decrease in transport costs meaning that when one cost
becomes irrelevant, another one becomes more important for the design of the product flow.
Here (See Fig. 8), in this particular case study (Iran-Armenia), although an increase in transport
costs causes a production increase in the (high-cost) country (Iran), this can be attributed to the
fact that the (low-cost) country (Armenia) is far from India, China, and Japan markets, and even
if taxes and production costs are low, other factors become irrelevant when transportation
costs are very high.The Fig. 8 also shows that in both cases (with and without transfer price),
bio-refineries behave similarly in the model.

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If both operation and transport costs are reduced simultaneously, the model will decide only
based on tax rates. Therefore, when such costs become irrelevant simultaneously, the bio-
refinery in Armenia (low-tax) will work with full capacity and the one in Iran (high-tax) with
minimum possible capacity.

PT
90,000,000
Average production of biofuel in
high-cost country (Litre/Period)

80,000,000

RI
70,000,000
60,000,000

SC
50,000,000
40,000,000
30,000,000

U
20,000,000
10,000,000
AN
0
Base OC 1/2 OC OC=0

TP Without TP
M

Fig. 7: Decrease of operation cost

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90,000,000
Average production of biofuel in high-

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80,000,000
cost country (Litre/Period)

70,000,000
60,000,000
EP

50,000,000
40,000,000
30,000,000
C

20,000,000
AC

10,000,000
0
TP Without TP

Reduced Base Increased

Fig. 8: Changes in transportation cost

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Finally, biofuel price variations with an increase in its sales price in various foreign markets in
each period and in each scenario are issues worth studying. This process shows that the sales
price will affect the design of the global BE-SN network because when there is a considerable
increase in the biofuel sales price in a foreign market, the model changes the design of the
biomass global network (flow of products) to conquer this foreign market.

PT
5.5 CIF and FCA policies VS After tax profit

RI
According to Fig. 9, in the base state (base transfer costs used to in this study) CIF policy runs
for Iran exportations. Since by this policy, various costs, such as: loading, initial carriage,
customs clearance, insurance, delivery, and final transportation, are the responsibility of Iran,

SC
and among these costs, the final transportation cost is all the more significant, so benefit of
project is 675,623 thousand $. If FCA policy is to be replaced, the benefit of the project is
increased by 2,900 thousand $, but due to this special case that policy of Iran is based on the

U
creating jobs in the export section, this cost is paying by Iran till created more jobs for Iran.
AN
Another point that can be seen in the Fig. 9 is, more sensitivity of the used to CIF policy in
comparable with use of FCA, that's mean, in this special case, when CIF policy is been
considered, with a gradual increase in transportation costs from base TC to 2TC , the after tax
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profit of the project is decreased with a steeper slope, that in this situation, , senior executives
can make new decisions about supply chain design, considering the job creation and the costs
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imposed by the type of policy that governs Iran's export laws.

TE

680,000
678,000
After tax profit (*10^3)

676,000
674,000
EP

672,000
670,000
668,000
C

666,000
664,000
AC

662,000
660,000
base TC 1.25 TC 1.5 TC 1.75 TC 2 TC
Increase of transportation cost

CIF FCA

Fig. 9: CIF and FCA policies VS After tax profit

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6 Conclusions
This paper presented a model for the redesign of a global network of biomass SC to convert
biomass to biofuel and bioenergy considering the transfer price as a decision variable. In The
BE-SNR model, demand and exchange rate were investigated in three different scenarios and
The BE-SNR_Stoch model was presented. Using the two-stage and average approaches of the

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stochastic programming, the model was solved by Gams software and the solutions were
investigated and compared with specific indices.

Therefore, the model objectives can help managers to make such decisions of the global BE-SN

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as bioenergy/biofuel production activities using the best transfer prices to maximize the global
after tax profit of the biomass company even under uncertain conditions. By imposing

SC
acceptable limits, the model was able to determine the transfer price of biofuel and bioenergy
transacted in the global SC. The limits had been set based on the prices of the foreign markets
for products and included transport costs and costs within each country's global trade policies

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(such as CIF or FCA).
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Next, a basic scenario was considered and then two versions of the model: 1) with transfer
pricing and 2) without transfer pricing were compared by selecting interesting alternatives.
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This work can be expanded from different aspects. It is possible, in future researches, to study
the initial capacity of bio-refineries to start the work, or use new technologies in some bio-
refineries to increase the efficiency of the process of converting biomass to bioenergy and
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biofuel. It is also an interesting issue to apply the model to consider fixed costs for the
insurance and salaries of permanent employees of bio-refineries. In the end, an interesting
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issue in this research is that it studies different methods to determine transfer pricing.
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Highlights

• developing an optimization model that redesigns a global bioenergy supply network (BE-SN)
• integrating transfer pricing into the model as a variable

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• considering world trade-specific parameters/incoterms
• presenting a non-deterministic model and its solution using stochastic programming

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• Applied the model to a case study in Iran and Armenia.

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