Managing Operations of a Hog Farm Facing Volatile Markets: Inventory and Selling Strategies

51 Pages Posted: 31 Aug 2021 Last revised: 6 Mar 2023

See all articles by Panos Kouvelis

Panos Kouvelis

Washington University in St. Louis

Ye Liu

Washington University in St. Louis - John M. Olin Business School

Yunzhe Qiu

Peking University - Department of Information Management

Danko Turcic

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Date Written: August 27, 2021

Abstract

Problem Definition: We study a dynamic finishing stage planning problem of a pork producer who, at the beginning of each week, gets to see how many market-ready hogs she has available for sale and the current market prices. Then, she must decide what hogs to sell to a meatpacker, on the open market, and what hogs to hold until the following week. The farmer is contracted to deliver a fixed quantity of hogs to the meatpacker each week, priced according to a contractually pre-determined market index. If the farmer under-delivers to the meatpacker, she pays a contractually pre-determined unit penalty also linked to a market index. Bio-security protocols prevent the farmer from buying hogs on the open market and selling them to the meatpacker. The farmer can, however, use the open market to sell hogs for prevailing market prices.

Methodology/Results: We treat the problem as a dynamic, multi-item, non-stationary inventory problem with multiple sources of uncertainty. The optimal policy is a threshold policy with multiple, price-dependent thresholds. The computational complexity required to evaluate the thresholds is the biggest impediment to using the optimal policy as a decision-support tool. So, we utilize an approximate dynamic programming approach that exploits the optimal policy structure and produces a sharp heuristic that is easy to implement.

Managerial Implications: Numerical experiments calibrated to a pork producer's data reveal that the optimal policy with the heuristically estimated thresholds substantially improves the existing practice (around 25\% on average). The success of the proposed model is attributed to recognizing the value of holding UWHs and effectively hedging supply uncertainty and future prices -- an insight missed in the planning actions of the current practice.

Suggested Citation

Kouvelis, Panos and Liu, Ye and Qiu, Yunzhe and Turcic, Danko, Managing Operations of a Hog Farm Facing Volatile Markets: Inventory and Selling Strategies (August 27, 2021). Available at SSRN: https://ssrn.com/abstract=3912801 or http://dx.doi.org/10.2139/ssrn.3912801

Panos Kouvelis

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.panoskouvelis.info

Ye Liu

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO 63130-4899
United States

Yunzhe Qiu

Peking University - Department of Information Management ( email )

Beijing, 100087
China

Danko Turcic (Contact Author)

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

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