CAPACITY INVESTMENT, PRICING, AND PRODUCTION ALLOCATION ACROSS INTERNATIONAL MARKETS WITH EXCHANGE RATE UNCERTAINTY

Anas Ahmed (), Murat Erkoc () and Sohyung Cho ()
Additional contact information
Anas Ahmed: Department of Industrial Engineering, King Abdulaziz University, Jeddah, Kingdom of Saudi Arabia
Murat Erkoc: Department of Industrial Engineering, University of Miami, Coral Gables, FL, USA
Sohyung Cho: Department of Industrial and Manufacturing Engineering, Southern Illinois University Edwardsville, Edwardsville, IL, USA

Asia-Pacific Journal of Operational Research (APJOR), 2012, vol. 29, issue 01, 1-34

Abstract: In this paper, we investigate joint optimal capacity investment, pricing and production decisions for a multinational manufacturer who faces exchange rate uncertainties. We consider a manufacturer who sells its product in both domestic and foreign markets over a multiperiod season. Because of long-lead times, the capacity investment must be committed before the selling season begins. The exchange rate between the two countries fluctuates across periods and the demand in both markets are price dependent. Our model considers three scenarios: (1) early commitment to price and quantity with central sourcing, (2) postponement of prices and quantities with central sourcing, and (3) local sourcing. We derive the optimal capacity and the optimal prices for each scenario, and investigate the impact of the exchange rate parameters and the length of the selling season. We observe that while the price and production decisions in the domestic market are independent of the exchange rate under early commitment and local sourcing scenarios, the exchange rate between two countries directly impacts these decisions under the postponement setting. We identify thresholds and gain insights on capacity and production costs, exchange rate movement, and selling season length for the choice of entering a foreign market under all scenarios.

Keywords: Global supply chains; capacity investment; pricing; capacity allocation; Ito processes (search for similar items in EconPapers)
Date: 2012
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0217595912400088
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:apjorx:v:29:y:2012:i:01:n:s0217595912400088

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0217595912400088

Access Statistics for this article

Asia-Pacific Journal of Operational Research (APJOR) is currently edited by Gongyun Zhao

More articles in Asia-Pacific Journal of Operational Research (APJOR) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().