Procurement management in agricultural commodity processing

Publication Type

Book Chapter

Publication Date

2-2022

Abstract

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.

Keywords

Agriculture, Commodity processing, Multiple outputs, Spot market, Contract selection

Discipline

Agribusiness | Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Agricultural Supply Chain Management Research

Volume

12

Editor

Onur Boyabatlı, Burak Kazaz, & Christopher S. Tang

First Page

71

Last Page

85

ISBN

9783030814236

Identifier

10.1007/978-3-030-81423-6_5

Publisher

Springer

City or Country

Cham

Additional URL

https://doi.org/10.1007/978-3-030-81423-6_5

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