Managing Rail Logistics Risks Faced by Shippers: A Value-at-Risk Approach

In addition to the traditional market price risks, origin shippers of grains and oilseeds face risks related to the costs associated with the handling, storage, and transport of crops to their destination markets. To more closely examine the nature of these risks, a Monte Carlo optimization model was constructed using the Material Requirement Planning (MRP) methodology. The goal of the model was to minimize the mean and 5% value-at-risk (VaR) of the sum of these associated costs. The primary decision variable was the number of unit trains to purchase in the primary rail market. The model was also subjected to additional sensitivity and stress analysis to analyze the properties of the optimal results. A primary observation derived from this analysis is the importance of the primary and secondary railcar markets to the management of these risks, both from an informational and risk management perspective. Another key driver was the ability to manage the seasonality of farmer deliveries via forward contracting to capture returns to storage. Finally, another key contribution of this study is to demonstrate the utility of using subject matter expert (SME) time series modeling in Monte Carlo simulation.