Authors
Arnd Huchzermeier, Morris A Cohen
Publication date
1996/2
Journal
Operations research
Volume
44
Issue
1
Pages
100-113
Publisher
INFORMS
Description
In this paper, we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs. Overall, we adopt a hierarchical approach. First, exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation. Second, the firm's global manufacturing strategy determines options for alternative product designs as well as supply chain network designs. Product options introduce international supply flexibility. Supply chain network options determine the firm's manufacturing flexibility through production capacity and supply chain network linkages. Third, switching costs determine the cost of operational hedging, i.e., the costs associated with reducing downside risks. Overall, the firm maximizes its expected, discounted, global, after-tax value through the exercise of product and supply chain network options and/or through …
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