ZLC Seminar Series: Alejandro Serrano, Supply Chain Professor of ZLC

"Global sourcing decisions under demand and exchange rate uncertainty"

Abstract

The value of postponing the purchase to gain a more accurate demand forecast has been well studied. The corresponding value for an improved purchase price forecast needs further investigation, though. This is so as supply chains sourcing in low-cost countries have not only increased their lead-times but also the purchase price uncertainty as the price is quoted in a foreign currency. The purchase price will also fluctuate if it is linked to the price of a commodity. The price and demand uncertainty are typically correlated which must be considered when comparing the premium paid for shorter lead-time against the value of better information. We investigated the value for a risk-averse decision maker to choose a supplier with a shorter lead-time but a higher list price in a single-period problem under demand and price uncertainty. Exact expressions for the optimal order quantity are derived under various resale price strategies. The value of postponing is evaluated analytically and/or numerically under various price and demand scenarios. Interestingly, for a risk-averse decision maker, the correlation between the demand and purchase price might create a “natural” hedge that can outperform a perfect hedge of the price uncertainty through forward contracts.