A two level supply chain design under demand and exchange rate uncertainty

Valuing operational flexibility under uncertainty has become an area of interest for many companies utilizing a globalization strategy for their operations. In this paper, a valuation framework for a global supply chain network is presented aiming to maximize discounted, expected, after-tax profits. A product life cycle lattice has been developed to account for the stochastic nature of the product life cycle of the product demand. Similarly, an exchange rate lattice is used to model all the different exchange rate scenarios involved in the future. With the outcomes of these two models, different capacity levels of the plants are incorporated in the supply chain network model, which has been developed to determine the plant locations, market locations, and the optimal production quantity. Subsequently, the expected, discounted, after-tax profit is maximized by using a recursive dynamic programming algorithm which also includes capacity adjustment costs.