Procurement management in agricultural commodity processing

• Main Authors: BOYABATLI, Onur, LI, Bin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Agriculture; Commodity processing; Multiple outputs; Spot market; Contract selection; Agribusiness; Operations and Supply Chain Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6939; https://doi.org/10.1007/978-3-030-81423-6_5
• Institution: Singapore Management University

This chapter provides insights on the optimal procurement decisions of a commodity processing firm that sources a primary input from a quantity flexibility contract (which is characterized by a unit reservation price and a unit exercise price), to produce two outputs in fixed proportions. The firm faces uncertainties in input spot price and output demands. Our objective is twofold. First, in a single-contract setting, we investigate the role of demand correlation in the presence of fixed proportions technology and show that the firm benefits from a higher demand correlation. Second, we investigate the firm’s optimal contract selection strategy between the two available quantity flexibility contracts. Focusing on deterministic output demands, we characterize a contract index in closed form that determines the optimal contract choice. We find that a higher expected spot price always increases the reliance on the contract with the lower exercise price. However, a higher spot price variability does the same only when the expected spot price is low and the difference between the exercise prices of two contracts is sufficiently high. Otherwise, a higher spot price variability increases the reliance on the contract with the lower reservation price.