The Limits of Operational Excellence in the Seed Industry Under Climate Change
41 Pages Posted: 25 Jul 2018
Date Written: July 24, 2018
Problem Definition: We analyze the optimal production and inventory assortment decisions of a seed manufacturer facing an increase in yield variability due to climate change in addition to long supply lead times and supply and demand uncertainty. We investigate the role of operational flexibility in the form of postponement in mitigating the risks associated with yield uncertainty.
Academic/Practical Relevance: While our research is motivated by a collaboration with an industrial partner, our results contribute to the literature on operations with random yield. The rigorous mathematical model along with the simulation tool we developed aims to support the agribusiness industry in deploying its limited resources more effectively to ensure a secure food supply.
Methodology: We use mathematical modelling and numerical experimentation. More specifically, we utilize a two-stage stochastic programming approach in mathematical modelling and the sample average approximation method in numerical experimentation. Our numerical experiments are calibrated to reflect the operational set-up of our industrial partner.
Results: We first show that a minor increase in future yield variability leads to a large increase in the optimal seed production quantity. Consequently, the current supply capacity may not be sufficient to fulfill seed manufacturers’ optimal production plans, potentially threatening the global food supply. Second, we show that postponement increases average profits (by 3%) and enables a simple greedy allocation policy. However, not only does the value of postponement decreases with increasing yield variability, but low-margin seeds also become more susceptible to yield risk due to climate change. Managerial Implications: Given the limitations of operational agility initiatives such as postponement under increased future yield variability triggered by climate change, considering the current trajectory of climate change, agribusiness companies should be prepared to increase their production dramatically unless they maintain the development of robust seeds with desirable characteristics even under extreme operating conditions.
Keywords: Agricultural Supply Chains, Sustainable Operations, Seed Manufacturing
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