Track: Sustainable Operations and Supply Chain Management

Abstract

Exchange rate fluctuation increases the risk of global supply chain management. In this paper, we study a global supply chain of a nonstorable commodity, which involves transactions to be settled at a foreign currency between a manufacturer and a supplier. Both parties are risk-averse, and they negotiate a supply contract through a Nash bargaining process. To hedge against the exchange rate risk, they can purchase forward exchange rates in the financial market. In addition, the manufacturer can also procure the commodity from a local supplier.  This avoids the exchange rate risk, but incurs another risk because the quantity available from the local supplier is not very certain. We formulate the problem as a Nash bargaining game where the two players have mean-variance preferences over their profits. We derive the unique equilibrium supply contract under a random exchange rate and a random local supply,  from which we characterize the optimal forward exchange rate level and the local procurement level.