Optimal Agricultural Supply Planning Under Climate Change

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Abstract:

We analyze the impact of extreme weather events on  supply chains that manufacture hybrid  seeds used as input to produce staple field crops such as corn and soybean.  In particular, we examine how extreme weather events affect the optimal production decisions of seed manufacturers, the expected revenue of farmers that are part of the production process, and on the security of food supply in emerging markets. We model the seed production process as a discrete-time stochastic dynamic optimization problem where, in each period, the seed manufacturer solves an optimization problem with two stages: The planting stage, where the manufacturer chooses the quantity of hybrid seeds to produce through a network of outsourced farmers, and the allocation stage, where the manufacturer allocates the resulting yield from the planting stage to different markets with varying profit margins. We then examine how changes in the probability of a yield-decreasing extreme weather event affects the supply chain's performance. We prove that, as the extreme weather event probability increases, (a) the manufacturer's expected profits decrease while the optimal planting quantity grows; (b) the expected total yield of the planting stage decreases, reducing the profit of the farmers who work with the manufacturer; (c) the expected allocation quantity to different markets decreases, and this decrease is more significant in low-margin markets. Finally, we present a simulation model calibrated to industry data. We find that even a small increase in the likelihood of yield-reducing extreme weather events can dramatically change optimal production decisions and have significant negative effects on  the profitability of commercial seeds, on the availability of seeds in low-margin markets, on the profits obtained by farmers involved in the seed production process, and on the value of typical operational improvements such as a postponement strategy.

(Joint work with Utku Serhatli, Nova; André Calmon, Georgia Tech)

Bio:

Prof. Enver Yücesan is the Abu Dhabi Commercial Bank Chair in International Management at the Technology and Operations Management Area of INSEAD.  His research is at the interface of simulation, optimization, and statistics.  In particular, he focuses on complementing the modeling power of computer simulation with efficient analysis methodologies to study the dynamic behavior of complex systems such as supply chains and social networks to enable robust design and effective management of these ecosystems. More recently, he has been focusing on agricultural supply chains to address such key challenges as identification of robust parent seeds, demand forecasting, farmer contracting, small holder management, and production and inventory planning under increasing volatility driven by population dynamics and climate conditions.  He has also been actively serving the simulation community at large over the past three decades in various editorial and administrative positions; his contributions have been recognized through the Distinguished Service Award by the INFORMS Simulation Society. Enver has recently been elected an INFORMS Fellow.