Global manufacturing strategy planning under exchange rate uncertainty

Arnd Hans Huchzermeier, University of Pennsylvania

Abstract

This dissertation presents a stochastic dynamic programming formulation for the valuation of global supply chain networks under exchange rate uncertainty. A global facility network is similar to a compound financial call option, where exercising the option means switching production from one site to another site. We focus on corporate decision making at the strategic and tactical levels, including facility design, sourcing, production, distribution, market selection, pricing, as well as financing. The key feature of our model is the joint determination of operational and financial decisions. The objective of global after-tax profits is maximized through the design of the facility network, the control of material flows, as well as financial hedging decisions. We show how a firm that operates a network of integrated facilities with flexible, multi-product manufacturing capacity can capitalize on deviations from Purchasing Power Parity by shifting production between locations. In the long term, the network design can be utilized as an operational hedge to mitigate against risks from unanticipated currency movements as well as market risks, i.e. price and demand uncertainty. In the short term, the firm can utilize pure financial hedging strategies to mitigate against currency induced price risks. The goal of this study is to analyze and define global strategies for activities along the value-added supply chain that significantly impact performance measures, like global after-tax profits and operational stability. The last criteria is defined as the ability to absorb cost fluctuations rather than passing them through to the firm's customers.

Subject Area

Business community

Recommended Citation

Huchzermeier, Arnd Hans, "Global manufacturing strategy planning under exchange rate uncertainty" (1991). Dissertations available from ProQuest. AAI9125667.
https://repository.upenn.edu/dissertations/AAI9125667

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