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Optimal Operating Policies in the Presence of Exchange Rate Variability


  • Sriram Dasu

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Lode Li

    (Yale School of Management, New Haven, Connecticut 06510)


We study the structure of the optimal policies for a firm operating plants in different countries. The relative costs of production between the plants are assumed to vary over time due to economic and political factors such as exchange rates, inflation, taxes, and tariffs. Based on the costs, the firm can alter the quantity produced in each plant. We determine the structure of the optimal policies for deciding when and by how much to alter the production quantities. When the switch-over costs are linear or step functions, regardless of whether the variable production costs are concave or piece-wise linear convex, and regardless of whether the firm is supplying one or more markets, the optimal policy is always a barrier policy. The optimal barriers can be determined by using linear programming techniques, and the optimal costs can be computed by solving a system of linear equations. When the number of optimal barriers is two, the optimal expected costs and the condition that determines the optimal barriers are explicitly derived.

Suggested Citation

  • Sriram Dasu & Lode Li, 1997. "Optimal Operating Policies in the Presence of Exchange Rate Variability," Management Science, INFORMS, vol. 43(5), pages 705-722, May.
  • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:5:p:705-722

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    3. Di Corato, Luca & Moretto, Michele & Rossini, Gianpaolo, 2017. "Financing flexibility: The case of outsourcing," Journal of Economic Dynamics and Control, Elsevier, vol. 76(C), pages 35-65.
    4. Goh, Mark & Lim, Joseph Y.S. & Meng, Fanwen, 2007. "A stochastic model for risk management in global supply chain networks," European Journal of Operational Research, Elsevier, vol. 182(1), pages 164-173, October.
    5. Liu, Zugang & Nagurney, Anna, 2011. "Supply chain outsourcing under exchange rate risk and competition," Omega, Elsevier, vol. 39(5), pages 539-549, October.
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    7. Benaroch, Michel & Webster, Scott & Kazaz, Burak, 2012. "Impact of sourcing flexibility on the outsourcing of services under demand uncertainty," European Journal of Operational Research, Elsevier, vol. 219(2), pages 272-283.
    8. Bengtsson, Jens & Olhager, Jan, 2002. "The impact of the product mix on the value of flexibility," Omega, Elsevier, vol. 30(4), pages 265-273, August.
    9. Jesús F. Lampón & Santiago Lago-Peñas & Pablo Cabanelas, 2016. "Can the periphery achieve core? The case of the automobile components industry in Spain," Papers in Regional Science, Wiley Blackwell, vol. 95(3), pages 595-612, August.
    10. Li, Shanling & Wang, Letian, 2010. "Outsourcing and capacity planning in an uncertain global environment," European Journal of Operational Research, Elsevier, vol. 207(1), pages 131-141, November.
    11. Jiri Chod & Nils Rudi, 2006. "Strategic Investments, Trading, and Pricing Under Forecast Updating," Management Science, INFORMS, vol. 52(12), pages 1913-1929, December.
    12. Cvsa, Viswanath & Gilbert, Stephen M., 2002. "Strategic commitment versus postponement in a two-tier supply chain," European Journal of Operational Research, Elsevier, vol. 141(3), pages 526-543, September.
    13. Dong, Lingxiu & Kouvelis, Panos & Su, Ping, 2014. "Operational hedging strategies and competitive exposure to exchange rates," International Journal of Production Economics, Elsevier, vol. 153(C), pages 215-229.
    14. Panos Kouvelis & Kostas Axarloglou & Vikas Sinha, 2001. "Exchange Rates and the Choice of Ownership Structure of Production Facilities," Management Science, INFORMS, vol. 47(8), pages 1063-1080, August.
    15. Jesús F. Lampón & Pablo Cabanelas-Lorenzo & Santiago Lago-Peñas, 2013. "Why firms relocate their production overseas? The answer lies inside: corporate, logistic and technological determinants," Working Papers 2013/3, Institut d'Economia de Barcelona (IEB).
    16. Arcelus, F.J. & Gor, Ravi & Srinivasan, G., 2013. "Foreign exchange transaction exposure in a newsvendor setting," European Journal of Operational Research, Elsevier, vol. 227(3), pages 552-557.
    17. Chipalkatti Niranjan & Koch Bruce & Buchanan Bonnie G. & Doh Jonathan, 2013. "Enhancing Value in IT Services Offshoring: Real Options Matter," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 8(1), pages 123-147, December.
    18. M. Moretto & G. Rossini, 2015. "Vertical flexibility, outsourcing and the financial choices of the firm," Working Papers wp1009, Dipartimento Scienze Economiche, Universita' di Bologna.
    19. Lode Li & Evan L. Porteus & Hongtao Zhang, 2001. "Optimal Operating Policies for Multiplant Stochastic Manufacturing Systems in a Changing Environment," Management Science, INFORMS, vol. 47(11), pages 1539-1551, November.
    20. Chakravarty, Amiya K., 2005. "Global plant capacity and product allocation with pricing decisions," European Journal of Operational Research, Elsevier, vol. 165(1), pages 157-181, August.
    21. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    22. Vishal Gaur & Sridhar Seshadri, 2005. "Hedging Inventory Risk Through Market Instruments," Manufacturing & Service Operations Management, INFORMS, vol. 7(2), pages 103-120, April.
    23. Bardia Kamrad & Akhtar Siddique, 2004. "Supply Contracts, Profit Sharing, Switching, and Reaction Options," Management Science, INFORMS, vol. 50(1), pages 64-82, January.
    24. Fisch, Jan Hendrik & Zschoche, Miriam, 2011. "Do firms benefit from multinationality through production shifting?," Journal of International Management, Elsevier, vol. 17(2), pages 143-149, June.
    25. Burak Kazaz & Maqbool Dada & Herbert Moskowitz, 2005. "Global Production Planning Under Exchange-Rate Uncertainty," Management Science, INFORMS, vol. 51(7), pages 1101-1119, July.


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