Capacity management in agricultural commodity processing
This chapter examines the capacity investment decisions of an agricultural processing firm that produces a commodity output and a byproduct using a commodity input. We model the firm’s problem as a finite-horizon stochastic dynamic program where the firm makes one-time input processing capacity and...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
| Published: |
Institutional Knowledge at Singapore Management University
2022
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/6940 |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | This chapter examines the capacity investment decisions of an agricultural processing firm that produces a commodity output and a byproduct using a commodity input. We model the firm’s problem as a finite-horizon stochastic dynamic program where the firm makes one-time input processing capacity and output storage capacity investment decisions—in addition to periodic processing and inventory decisions—when facing uncertainty in both input and output spot prices as well as output yield. We characterize the optimal capacity investment portfolio in closed form. Using a model calibration based on the palm industry, we compare the performance of the optimal investment policy against capacity investment heuristics that are commonly used in practice and/or academic literature. We find that if the yield uncertainty is ignored in capacity planning, then basing capacity investment decisions on the average yield is preferable to basing them (as often occurs in practice) on the maximum yield possible. We also find that although byproduct revenue constitutes a small portion of total revenues, ignoring it during capacity planning significantly reduces the firm’s profitability. |
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