Dynamic Optimization of Fuel and Logistics Costs as a Tool in Pursuing Economic Sustainability of a Farm

Abstract

Improving the performance and economic sustainability of agricultural producers requires the integration of many dimensions, one of which is logistics. Establishing efficient and cost-effective transportation is a key element of establishing sustainable linkages along food supply chains between farmers, storage and transport companies, and consumers. In this regard, infrastructural constraints to sustainability in agricultural production exacerbate transportation costs and risks, and thus result in lower performance of agricultural producers. As fuel consumption is, first, the most significant cost in agricultural logistics and, second, particularly sensitive to disruptions of transport, loading, and storage infrastructure, management of fuel costs is crucial to assure profit margin of an agricultural enterprise. By transforming the standard economic order quantity (EOQ) model, the authors attempt to build an approach to the optimization of fuel costs. The analysis made in the cases of twelve large crop farms in three territories of Southern Russia allowed the consideration of: (1) fragmentation in storage infrastructure; (2) variations in fuel consumption depending on the vehicle load ratio; (3) the use of their own fleet of vehicles against the outsourcing of transport operations. The authors find that the tactics of optimization of fuel costs vary depending on the location of a farm in relation to grain storage facilities. Particularly, the farms located in areas of high concentration of storage facilities benefit from using their own fleet of vehicles, while those experiencing longer distances of transportation should outsource the performance of logistics operations to third parties. To overcome a site-specific nature, the transformed EOQ model should accommodate country-specific requirements, specifically, the level of fragmentation of transport and storage infrastructure, average distance of transportation from a farm to receival site, and average fuel consumption rates depending on the types of trucks commonly used by farmers. The key recommendation is that sustainability-aimed management of logistics costs should consider combining the operation of trucks by a farm with the outsourcing of transportation operations to address the fragmentation of transport and storage infrastructure.