Optimal Supply Planning for Commercial Seeds

Abstract

We analyze the optimal production and inventory decisions of a global corn seed manufacturer. Due to naturally long supply lead times and short selling seasons in agriculture, we propose a newsvendor model, which includes not only supply and demand uncertainty, but also product returns and perishability. First, we present the general model for a single variety and derive structural results. Second, we characterize the optimal production and inventory management in multi-period case model for a single end product. Third, we solve the single-product, single-period case and analyze via Monte Carlo simulations using market data. Long lead supply lead time also causes demand forecasts to be notoriously unreliable. Thus, we model and solve various special cases, including scenarios with salvaging and postponement, as well as comparing across these different settings to assess the value of operational agility. Our analysis shows that while salvaging protects the firm against yield uncertainty, postponement is an effective defense against demand uncertainty.