Learning from the aggregated optimum: Managing port wine inventory in the face of climate risks

Port wine stocks ameliorate during storage, facilitating product differentiation according to age. This induces a trade-off between immediate revenues and further maturation. Varying climate conditions in the limited supply region lead to stochastic purchase prices for wine grapes. Decision makers must integrate recurring purchasing, production, and issuance decisions. Because stocks from different age classes can be blended to create final products, the solution space increases exponentially in the number of age classes. We model the problem of managing port wine inventory as a Markov decision process, considering decay as an additional source of uncertainty. For small problems, we derive general management strategies from the long-run behavior of the optimal policy. Our solution approach for otherwise intractable large problems, therefore, first aggregates age classes to create a tractable problem representation. We then use machine learning to train tree-based decision rules that reproduce the optimal aggregated policy and the enclosed management strategies. The derived rules are scaled back to solve the original problem. Learning from the aggregated optimum outperforms benchmark rules by 21.4% in annual profits (while leaving a 2.8%-gap to an upper bound). For an industry case, we obtain a 17.4%-improvement over current practices. Our research provides distinct strategies for how producers can mitigate climate risks. The purchasing policy dynamically adapts to climate-dependent price fluctuations. Uncertainties are met with lower production of younger products, whereas strategic surpluses of older stocks ensure high production of older products. Moreover, a wide spread in the age classes used for blending reduces decay risk exposure.