Optimisation of a buyer’s sourcing strategy in the mixed auction/direct supply of New Zealand wool

Abstract

The New Zealand Wool Industry (NZWI) contributes over a billion dollars a year to NZ gross output. However, this industry is at a crossroads and the incumbent practitioners are looking for ways to increase the value of the New Zealand wool clip. The value of the industry to the economy is directly related to the price which buyers are prepared to pay for wool, primarily as a result of the marketing approaches used, physical parameters of wool as well as intra and inter-fibre competition. The inflation adjusted price has steadily decreased over recent years and understanding of its dynamics is a fundamental problem for the stakeholders. Among the stakeholders, buyers / exporters, heavily involved in the process of price formation currently face a real time problem of sourcing strong wool from two parallel but different marketing systems operated simultaneously – auction and direct supply. The underlying mathematics which governs the decision making of buyers on the price dynamics in these sourcing options is poorly understood.

This study developed system models for price formation in both auction and direct supply sourcing and an associated optimization model for the buyer / exporter of the New Zealand wool clip. All three of these models were original and none appear to have been described previously. It is hoped that these three models will be of quite general utility and also be useful therefore for other agricultural commodities that are traded simultaneously via auction and direct supply. The average price for a given wool type, which is the output from this new modelling exercise is precisely what is required as input data for solving the minimization problem in wool blending models.