Lee Kong Chian School of Business
Singapore Management University
This paper studies the capacity investment decisions of an agri-processor that uses a commodity input to produce a commodity output and a byproduct. Using a multi-period model, we study the one-time processing and (output) storage capacity investment decisions, and the periodic processing and inventory decisions in the presence of input and output spot price uncertainties and uncertain production yield. We identify three capacity investment strategies, investing in storage-dominating, processing-dominating or mixed portfolio, and provide conditions under which each strategy is optimal. Using a calibration based on the palm industry, we provide rules of thumb for capacity management: The processor should decrease its processing capacity with an increase in price correlation; and with an increase (a decrease) in input or output price volatility when this volatility is low (high). The storage capacity should be adjusted in a similar fashion only as a response to a change in output price volatility, otherwise it should not be altered. We find that not accounting for the byproduct revenue or inventory holding possibility in capacity planning leads to sizeable profit loss. Ignoring production yield uncertainty has a significant negative impact on profitability if the capacity planning is made based on the maximum yield possible, as often done in practice; but it has an insignificant impact if the planning is made based on the average yield.
Quang (Jason) D. Nguyen, Carlson School of Management, University of Minnesota Tong Wang, National University of Singapore
Onur Boyabatli is Assistant Professor of Operations Management at the Lee Kong Chian School of Business, Singapore Management University. He holds a Ph.D. in Technology and Operations Management from INSEAD, University, Turkey.
His research interests are in the area of integrated risk management in supply chains. In particular, he studies several operational issues (such as capacity management, procurement, farm-yield management, product pricing) of supply chains agents (such as farmers, processors) in different agricultural industries (such as live-animal, oilseeds, cocoa, grains). He also studies the technology and capacity management including integration with financing and financial risk management in capital- intensive industries (such as automotive).
His research papers have been published in Management Science. He is the co-editor of “Handbook of Integrated Risk Management in Global Supply Chains.” He was awarded the Management Science Distinguished Service Award in 2012. He was nominated for the IFORM (Interface of Finance, Operations and Risk Management) SIG (Special Interest Group) Chair in 2014. He co-organized the IFORM at the MSOM conference in 2012 and 2014, the 5th Management in Operations and Global Supply Chains in 2008, and co-chaired the M&SOM-IFORM Cluster at the 2012 and 2013 INFORMS Annual Meetings.