Mitigating demand uncertainty across a winery's sales channels through postponement

Abstract

Wineries must allocate production across multiple sales channels before demand is known. Misallocation may result in undesirable surpluses in some channels and lost sales opportunities in others. We investigate this problem by constructing a mathematical model for postponing channel differentiation. We provide a process overview for a winery and present a two-stage stochastic linear program with fixed recourse that maximises expected profit over a distribution of demand scenarios. In the first stage, the winery allocates production to finished goods by channel and to intermediate inventory points. Once demand is known, recourse variables include transformation of intermediate inventories. Results from solving this model using a mix of data derived from interviews and literature review suggests that a considerable portion of production should be held at both the labelling and packaging level and can lead to significant improvement in product profitability. We investigate how different product configurations and restrictions may affect the degree and level of the postponement strategy. We find that postponement usage is advisable over a range of demand probabilities, costs and other considerations. Although other stochastic programming applications evaluate postponement strategies within verticals such as high technology, this research is their first application within the wine industry.