This dissertation investigates the use of operational flexibilities in production planning in order to mitigate the negative effects of supply and quality uncertainty. Uncertainties in supply and quality are commonly experienced among agro-businesses, and in particular, in the wine industry. The goal of the dissertation is to provide prescriptive solutions in mitigating such risks from the lives of agricultural businesses.
The first essay of the dissertation examines the impact of supply and quality uncertainty on the investment decisions made by winemakers who lease vineyard space to grow their own fruit. At the end of the growing season, the winemaker receives an uncertain amount of high- and low-quality grapes, due to varying growing conditions such as adverse weather conditions, diseases and natural disasters. High-quality grapes are used in the making of a high-end (reserve) wine, and low-quality grapes are used for the production of a low-end wine. In this study, we investigate the benefits of the downward substitution flexibility, where the winemaker uses its excess high-quality grapes for the production of its low-end wine. In addition, we examine the influence of, and the interrelationships between, three forms of operational flexibilities: downward substitution, price-setting, and fruit trading flexibilities.
The second essay of the dissertation investigates the use of advance selling to mitigate quality risk in wine production. This essay examines the influence of quality uncertainty on winemakers\u27 decisions regarding the allocation of its wine for retail operations. Specifically, we study what proportion of the wine should be sold through regular distribution channels versus what proportion should be sold as wine futures in advance of bottling. Due to the intricacies of the production method, the quality of wine may vary from the moment aging begins in the barrel to the time it is bottled and sold to the general public. This study examines the use of wine futures, whereby a winemaker sells its wine while it is still in the barrel in order to reduce the quality rating risk at the time of distribution. Overall, wine futures not only allow the winemaker to pass on the quality rating risk established through expert tastings to consumers but also let them bring in cash for immediate reinvestment into the next vintage
