Planning for End-User Substitution in Agribusiness.

Saurabh Bansal and James S. Dyer study a common problem in the commercial agribusiness market, where farmers have a preference for a farm input such as a seed based on a fit with their geographical location but are also willing to accept a closely related substitute. Such consumer-driven choices may not be adequately represented by traditional models that maximize the profit of a firm that seeks to make substitutions while maximizing its profit. They use a set of recent results for evaluations of moments over polyhedra to determine the exact inventory levels a firm should keep of substitutable products. Using proprietary data from a large firm in this domain, they highlight the role of geographical and climate-related factors that affect product substitution in the agribusiness industry and identify specific regions in the United States where product substitution is a source of substantial revenue for firms. In this paper, we consider the problem in which a firm offers a portfolio of products (agricultural seeds) to multiple customer segments comprising farmers under aggressive fill-rate constraints, and some, but not all, customers will accept a substitute to their preferred choice. This business situation is not adequately represented by traditional inventory-management models, where a firm initiates a substitution based on its monetary considerations. By exploiting some recent results on polyhedral expectations, we develop a decomposition-based approach to determine optimal inventory levels for the firm's seed portfolio under aggressive fill-rate targets. The approach provides an exact solution that is implementable in managerial-friendly environments and permits a what-if analysis for real-time decision support. Subsequently we extend the technical development to establish: (i) a simple computable bound on the value of substitution, (ii) a procedure for determining implied penalty costs for substitutable products, and (iii) comparative static results for the product portfolio. We also discuss the implementation of the technical development at a Fortune 100 firm that has resulted in significant monetary savings. Finally, we provide geography- and climate-specific managerial insights for managing seed substitution by end-users. [ABSTRACT FROM AUTHOR]