Optimal production planning with uncertainties inherent to biological production processes: The popcorn company case

Managers of agricultural firms that process specialty crops into consumer products operate in a unique environment that affords little control over uncertainties, making the discovery of optimal sourcing decisions especially complex. These complexities make the explicit incorporation of information valuable to operational decision-making difficult and render established decision aides inadequate. Consequently, these managers rely more on the art rather than the science of managerial economics for decision-making, increasing the potential for operational inefficiencies. This study examines a particular popcorn company whose production planning is stereotypical of many agricultural industries that depend on specialty crops for a primary input. Managers face yield, quality, price and demand uncertainty. To help manage these uncertainties, managers employ downward substitution, outsource supply, and hold sizable inventories. A simulation model, designed to explicitly consider the effects of the aforementioned uncertainties, is employed to evaluate a set of policy rules. The policy rules, once properly parameterized, are capable of assisting managers in making these complex sourcing decisions. Results indicate the managers can reduce costs by 4.84% when using properly parameterized policy rules. Sensitivities conducted on the optimized policy rule provide information on strategic inventory planning, the effects of uncertainty and the value of open-markets to managers. The analysis demonstrates that the cost-minimizing inventory level is higher than current levels, dispelling concerns by corporate executives that current inventory levels are excessive. The optimal level and mix of inventories reduce costs by 5.42%. Obtaining the proper mix is more critical than reducing total storage volume. Open-market purchasing of popcorn is proven to be valuable for reducing costs. In fact, elimination of open-market purchasing will increase costs by 4.62%. Open-market usage is not very sensitive to open-market popcorn prices. Given this information, the company will benefit from the continuation of open-market popcorn sales.