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The Primary Aluminum Industry as a Complex Adaptive System. David L. Olson James & H.K. Stuart Chancellor’s Distinguished Chair Full Professor, University of Nebraska. Complex Adaptive Systems & Supply Chains. SYSTEM ORGANIZATION
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The Primary Aluminum Industry as a Complex Adaptive System David L. Olson James & H.K. Stuart Chancellor’s Distinguished Chair Full Professor, University of Nebraska
Complex Adaptive Systems & Supply Chains • SYSTEM ORGANIZATION • Uncertain, frequent, transaction-oriented business leads to organizations (Williamson, 1981) • MARKETS – work well with straightforward exchanges, but high levels of uncertainty (& variance) • HIERARCHIES – cope with bounded rationality, but inefficient • SUPPLY CHAIN SYSTEMS • Autopoeisis - Systems have a life of their own (Maturana & Varela, 1988) • Rockefeller’s Standard Oil a HIERARCHY • VERTICAL INTEGRATION • Supply Chain organizations evolve • MARKET – transaction cost analysis theorizes switching point • SUPPLY CHAIN
Aluminum System • Bauxite • Very common mineral, but highly variable in quality (amount of dirt needed to get ton of alumina) • Strip mines • Alumina • An aluminum oxide • Created by processing dirt in REFINERY • Lots of capital required • Since volume of dirt high, tend to locate near mines • Aluminum • Fry Alumina, get rid of slag, end up with Aluminum • SMELTERS – use prodigious quantities of electricity • Since electricity the main cost, tend to locate near cheap power
System • 19th Century • Europe mined bauxite (Pechiney), depleted • 20th Century • US mined (Alcoa), depleted all but Arkansas • Shifted to Canada (Alcan), depleted bauxite • 1960s • Alcoa, Alcan, Pechiney obtained rights to Caribbean sources (Jamaica; Surinam; Guyana) • 1970s • Inspired by OPEC, Caribbean sources instigated IBA (International Bauxite Association) • 1980s • Australia joined IBA, but lowered price, took over world market • IBA basically failed
Network Model Variables • Mines (22) http://www.mapsofworld.com/minerals/world-bauxite-producers.html http://www.indexmundi.com/en/commodities/minerals/bauxite_and_alumina/bauxite_and_alumina_table11.html • Ore quality variable • Each site capacity limited • Refineries (84) • Type of ore affects conversion output www.world-aluminium.org/statistics production/capacity • Smelters (29) http://www.mapsofworld.com/minerals/world-aluminium-producers.html • Demands (18) • Year 2000 forecasts
Key Events – 1970-2000 • The International Bauxite Association was formed in the early 1970s. • In the 1980s Australian mining interests operated in competition with rather than in cooperation with the IBA, gaining a large market share • In the late 1980s the Chinese government encouraged free market development • In 1990 communism for the most part was replaced with new freer market economies
MINES • WORLD BANK • More in Caribbean • NETWORK • Close • We got more in East Europe, China • Venezuela & Brazil compromise locations • If high risk, Australia high • Despite large cost disadvantages
Refineries • High capital costs • Cost advantage close to mines • WB – sited at mines • Jamaica, India, ASEAN • As Risk Alpha increased • Brazil, Venezuela, Korea, Australia • High Risk Alpha • Zero in LDCs
Smelters • Close to electricity • WB – forecast high growth in LDCs • ACTUAL • Canada (government subsidized hydropower) • Australia
Trade Networks • 1970s • Caribbean – US very strong • 1980s • Australia – Japan grew • Caribbean declined • 2008 • Australia, Brazil, Indonesia, Jamaica, Guinea expert • Russia, Spain, Canada, Norway production centers • US, China, Japan import final product • Current • Southern hemisphere primary resource supplier • Production, consumption Northern hemisphere
Linkage of Complex Adaptive System Elements and the Aluminum Production System
Aluminum Supply Chain CAS • Shifting alliances • 1970s bauxite dominated by Caribbean • 1980s saw Australia dominate • Unintended consequence of IBA • Emergence of China in world economy • New alumina facilities – Ireland & Spain • Guinean bauxite • Norwegian, Icelandic smelting • Mid-East smelting with flare gas
Aluminum Supply Chain CAS • Adaptive behavior • First, IBA broke central hierarchical control of oligopolies • BUT: IBA induced Australian growth • MARKET replaced VERTICAL HIERARCHY • Additional dynamics • Breakup of Communism • Yugoslavia • Russia