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A comparative study of international automobile sourcing strategies based on stochastic process analysis

Author

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  • Li Zhu
  • Lothar Schulze
  • Lindu Zhao

Abstract

In global supply chains, increasing global sourcing costs have urged multinational automotive manufacturing firms to develop competitive international sourcing strategies. Faced with different international sourcing strategies between Original Equipment Manufacturers (OEMs) and suppliers in the automotive industry, this paper focuses on the comparative study of two popular ones (Risk Sharing or RS and Early Commitment or EC) and then tries to find out which of these is a better strategy in different situations. Using the real-options approach, the valuation models of the RS and EC sourcing strategies are established. By means of the binomial lattice technique depicting the uncertain exchange rate factor, we present the numerical simulation and sensitivity analysis of two Stochastic Dynamic Programming (SDP) problems. The results of our comparison analysis suggest that the EC sourcing strategy is better than its RS counterpart, especially when the foreign exchange rate is highly volatile in the global automobile supply chain.

Suggested Citation

  • Li Zhu & Lothar Schulze & Lindu Zhao, 2009. "A comparative study of international automobile sourcing strategies based on stochastic process analysis," International Journal of Services and Operations Management, Inderscience Enterprises Ltd, vol. 5(6), pages 817-831.
    • Handle: RePEc:ids:ijsoma:v:5:y:2009:i:6:p:817-831
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