Optimal Agricultural Supply Planning Under Climate Change: The Impact of Extreme Weather Conditions
INSEAD in the Department of Technology and Operations Management
Dec 6, 1:40 p.m.
This paper analyzes the optimal planting and inventory assortment decisions of a seed manufacturer confronted by increasing the probability of extreme weather conditions due to climate change in addition to long supply lead times and supply and demand uncertainty. To this end, we use a two-stage stochastic programming approach to characterize the optimal production and allocation decisions and the sample average approximation method in simulations to test the robustness of our findings to our modeling assumptions. Our simulation models are calibrated to reflect the operational set-up of our industrial partner. Our analysis shows that an increase in extreme event probability leads to an increase in the optimal seed planting quantity, yet yielding a lower expected production quantity. Consequently, this would significantly increase the seed manufacturer’s working capital requirements while constraining current supply capacity, which might not be sufficient to fulfill the optimal production plans, potentially threatening the global food supply. Furthermore, a decrease in the observed yield causes lower allocation quantities into commercial seeds, which further increases the risk of food scarcity. Second, we show that the impact of lower yield will be more significant on the allocation of lower-margin commercial seeds, which are typically sold in emerging markets. Third, we demonstrate that operational flexibility in the form of postponement increases average profits and enables a simple greedy allocation policy. However, not only does the value of postponement decreases with increasing yield variability due to increased incidence of extreme events, but low-margin seeds also become even more susceptible to yield risk. Given the limitations of operational agility initiatives such as postponement under climate change, agribusiness companies should be encouraged to increase their production dramatically unless they accelerate the development of robust seeds with desirable characteristics even under extreme operating conditions.
Utku Serhatli is a Ph.D. candidate at INSEAD in the Department of Technology and Operations Management. Before joining INSEAD, he received his Bachelor of Science degree in Industrial Engineering from Bilkent University. He also worked at Tata Consultancy Services in Hungary as a financial analyst.
Utku’s research focusses on Sustainable Operations with an anchor in Agricultural Operations. He primarily employs mathematical modeling methodologies such as optimization, dynamic programming, stochastic processes, and game theory. His research tackles the operational and social impacts of economic and environmental sustainability issues in agriculture such as the impact of climate change, welfare concerns of smallholder farmers, and scarcity of natural resources.