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Wilfrid Laurier University Leaf
December 10, 2016
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Lazaridis School of Business & Economics

SCM Speaker Series

Capacity Management for Oilseeds Processors
Jun 27/14

Date: Jun 27/14
Time: 11:00 - 13:00
Location: E & Y Board Room
Cost: Free

Dr.Onur Boyabatli
Assistant Professor of Operations Management
Lee Kong Chian School of Business Singapore Management University


This paper studies the capacity investment decisions of a processor (an oilseed pressing plant) that uses a commodity input (oilseed) to produce a commodity output(crude vegetable oil) and a byproduct in proportions. The oilseed and the crude vegetable oil are traded in the spot markets. We model the processor's decisions in a multi-period framework. At the beginning of the planning horizon, the processing capacity for the input and the storage capacity for the output are chosen. In each period, given these capacity levels, the processing volume for the input and the storage volume for the output are chosen with respect to the input and the output spot price uncertainties as well as the production yield uncertainty. We demonstrate that, in general, the optimal capacity investment portfolio is not balanced, i.e. the proportional input-output relationship does not hold for this optimal portfolio, and we explain why. Focusing on the palm industry, our analysis provides some rules of thumb for the capacity management: The processor should decrease its capacity investment portfolio with an increase in spot price correlation; and with an increase (decrease) in the input or the output spot price variability when this variability is sufficiently lower (higher) than the other variability. To investigate the impact of using heuristic capacity investment policies (such as ignoring the production yield uncertainty or by-product) on profitability, we conduct computational experiments using a calibration based on a palm oil mill.These experiments use data from Malaysian Palm Oil Board, complemented by the industry supply and demand studies based on Southeast Asia. These experiments demonstrate that these heuristic capacity investment policies lead to significant losses in profit.

Contact: Karen Cleaver
Phone: 519-884-0710 ext.2059

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