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A Framework of Hedging Decisions for Supply Chain Partnersts

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Listed:
  • Kouvelis, Panos
  • Wu, Xiaole
  • Xiao, Yixuan

Abstract

We study cash flow risk hedging in a bilateral supply chain of a supplier and a manufacturer that use internal cash to invest in production efficiency improvements. The associated production efficiency function is convex in capital investment. We offer a conceptual framework for understanding supply chain cash hedging strategies by decomposing the difference of a firm’s expected profit of hedging versus not hedging into a sum of two terms: the cost reduction effect and the flexibility effect of hedging. We find that the correlation of cash flow risks of supply chain partners significantly affects the hedging decisions of firms via impacts on production efficiencies. When the cash flows of firms are independent, the cost reduction effect favors hedging, whereas the flexibility effect favors not hedging. A firm is more likely to hedge when the supply chain is more profitable or its supply chain partner hedges. When the cash flows of firms are correlated, the cost reduction and flexibility effect of hedging may complement each other and support the same hedging choice. The impact of market size on firms’ hedging decisions is contingent on the cash flow correlation.

Suggested Citation

  • Kouvelis, Panos & Wu, Xiaole & Xiao, Yixuan, 2019. "A Framework of Hedging Decisions for Supply Chain Partnersts," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 12(2-3), pages 189-200, March.
    • Handle: RePEc:now:fnttom:0200000082
    DOI: 10.1561/0200000082
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    References listed on IDEAS

    as
    1. Mahesh Nagarajan & Yehuda Bassok, 2008. "A Bargaining Framework in Supply Chains: The Assembly Problem," Management Science, INFORMS, vol. 54(8), pages 1482-1496, August.
    2. Gérard P. Cachon & Martin A. Lariviere, 2001. "Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain," Management Science, INFORMS, vol. 47(5), pages 629-646, May.
    3. Helper, Susan, 1991. "Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry," Business History Review, Cambridge University Press, vol. 65(4), pages 781-824, January.
    4. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    5. Terry A. Taylor & Erica L. Plambeck, 2007. "Simple Relational Contracts to Motivate Capacity Investment: Price Only vs. Price and Quantity," Manufacturing & Service Operations Management, INFORMS, vol. 9(1), pages 94-113, January.
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    Cited by:

    1. Jiao Wang & Lima Zhao & Arnd Huchzermeier, 2021. "Operations‐Finance Interface in Risk Management: Research Evolution and Opportunities," Production and Operations Management, Production and Operations Management Society, vol. 30(2), pages 355-389, February.
    2. Karani Anthony Muriithi & Odari Sammy & Noor Shalle, 2021. "Moderating Effect of Environmental Uncertainties on the Relationship between Risk Hedging Supply Chain Strategy and Performance of Manufacturing Firms in Kenya," International Journal of Management Science and Business Administration, Inovatus Services Ltd., vol. 8(1), pages 45-49, November.

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    More about this item

    Keywords

    Risk management; Hedging; Operational risk; Supply chain finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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