1 > 2? Less is more under volatile exchange rates in global supply chains

To meet consumer needs, global firms typically manufacture based on their aggregate production plan after receiving demand projections from all markets. One of the consequences of matching demand with manufacturing is that these plans generally ignore the impact of exchange rate fluctuations. Consol...

Full description

Saved in:
Bibliographic Details
Published in:Business horizons 2014-07, Vol.57 (4), p.521-531
Main Author: Kazaz, Burak
Format: Article
Language:English
Subjects:
Exchange rate
Financial hedging
Foreign exchange rates
Global markets
Hedging
International business
Manufacturing
Operations research
Product demand
Production hedging
Production planning
Profit margins
Studies
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:To meet consumer needs, global firms typically manufacture based on their aggregate production plan after receiving demand projections from all markets. One of the consequences of matching demand with manufacturing is that these plans generally ignore the impact of exchange rate fluctuations. Consolidated profits for global firms are significantly influenced by fluctuations in exchange rates, and opportunity exists to incorporate exchange rate uncertainty into global production planning. This article presents an operational hedging mechanism (‘production hedging’) based on manufacturing less than the total global demand. Due to uncertainty in exchange rates, the firm takes conservative action and deliberately manufactures a smaller quantity than its total global demand. The article shows how manufacturing less can create a higher profit. It provides prescriptions for marketing executives to quantify the economic value of market share. In addition, it demonstrates why operational hedging, in the form of production hedging, is more valuable than financial hedging.
ISSN:0007-6813
1873-6068
DOI:10.1016/j.bushor.2014.03.007