A two level supply chain design under demand and exchange rate uncertainty: a real options evaluation

Yasmeen Sharan, Ryerson University

Date of Award

2009

Degree Type

Thesis

Degree Name

Master of Applied Science (MASc)

Department

Mechanical Engineering

First Advisor

M Wahab

Abstract

In this thesis, a real options approach is developed to value a two level supply chain. An integrated solution framework has been developed: where (1) a product life cycle model is formed to characterize stochastic demands in the market, (2) an exchange rate lattice is presented to account for exchange rate uncertainty, (3) a supply chain model is created to utilize stochastic demands and exchange rates to maximize the firm’s after tax profit, and (4) a recursive dynamic programming algorithm is developed to calculate the expected after tax profit. The model allows for capacity flexibility and factors in adjustment costs. Results show that the proposed solution framework allows decision makers to hedge against risks by switching between manufacturing options and or by changing capacity levels at the manufacturing facilities.