Mechanisms for Increasing Sourcing from Capacity-Constrained Local Suppliers

The fresh produce supply chain is characterized by large (mainstream) farms that are located far from consumers, and capacity-constrained (local) farms that are located close to the consumer. In this setting, we study: (i) how leadtime and capacity asymmetry between mainstream and local farms affect a retail grocer’s order policy for fresh produce, and (ii) how various operational mechanisms can increase the amount sourced from local farms. We show that this supply chain structure is disadvantageous for local suppliers (farms) because it induces the retailer to treat the local supply as a de facto responsive supply without paying a premium for the responsiveness. This disadvantage is exacerbated when the retailer’s objective is to achieve a high service level. We study three mechanisms that can improve conditions for local farms: working with an intermediary, backhauling, and a retail order policy, purchase guarantee, that explicitly supports local farms. The intermediary and backhauling mechanisms help the local farm by making local supply more attractive to the retailer, inducing her to order more locally sourced produce. The intermediary reduces the retailer’s overstock and stockout costs whereas backhauling increases the average margin. The purchase guarantee order policy helps local farms at the expense of retail profit. However, we show that purchase guarantee and ∗We are grateful to the food industry managers and experts who have graciously spent their time and lent their expertise to help us understand the evolution and current operations of the fresh produce supply chain. We thank Jose Alvarez (food industry expert, former President and CEO of Stop & Shop/Giant-Landover), Frank Carlson (owner, Carlson Orchards), Lee Kane (EcoCzar and Regional Forager, Whole Foods), Beth Keck (for helpful discussion on Walmart’s local food program), Fred Kirschenmann (Distinguished Fellow, Leopold Center for Sustainable Agriculture and President, Stone Barns Center for Food and Agriculture), Angel Mendez (Operations Manager, Red Tomato), Ned O’Neil (Vice President, J.P. Sullivan), Russell Powell (Executive Director, New England Apple Association), Peter Plas (freight industry expert), Michael Rozyne (Executive Director, Red Tomato), Joel Salatin (owner, Polyface Farm), and Mo Tougas (owner, Tougas Family Farm). We very much appreciate the constructive suggestions of two anonymous reviewers and an associate editor. All mistakes are our own. †Corresponding author.