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Buyer-supplier currency exchange rate flexibility contracts in global supply chains
Journal article   Open access   Peer reviewed

Buyer-supplier currency exchange rate flexibility contracts in global supply chains

Gbemileke A. Ogunranti, Oben Ceryan and Avijit Banerjee
European journal of operational research, v 288(2), pp 420-435
16 Jan 2021
DOI: https://doi.org/10.1016/j.ejor.2020.05.053
Featured in Collection :   UN Sustainable Development Goals @ Drexel
url
https://openaccess.city.ac.uk/id/eprint/24328/1/EJOR-D-18-01077_R3.pdfView
Accepted (AM)Open Access (License Unspecified),  Open

Abstract

Contracts Currency exchange rate Newsvendor model Risk sharing Supply chain management
•Two types of exchange rate flexibility contracts are proposed.•These contracts are studied under uncertain demand and currency exchange rate.•Due to exchange rate volatility, the effective wholesale price become uncertain.•The impacts of the contracts parameters on the expected profits are investigated.•Expected profits of both parties improve if payment is made in supplier’s currency.•Numerical examples are provided to illustrate the findings of our study. This paper analyzes a decentralized global supply chain under a newsvendor setting, where a supplier delivers a certain quantity of a single product to a buyer in accordance with the terms of a mutually agreed upon contract. This contract is signed prior to the delivery of the product and subsequent payment, thus, exposing the supply chain to the risk of currency exchange rate fluctuations. We propose two types of currency exchange rate flexibility contracts to explore the characteristics of exchange rate risk mitigation policies for the buyer and the supplier. Furthermore, we investigate the effects of the contract structures on the optimal order quantity, as well as the expected profits of both supply chain members. Our results show that the optimal order quantity of the buyer decreases when the wholesale price is uncertain due to exchange rate volatility. Also, both our proposed contracts tend to improve the expected profits of both the buyer and the supplier, when the payment is made in the supplier’s currency, indicating the desirability of adopting such contractual agreements from the perspective of both parties. On the other hand, when the payment is made in the buyer’s currency, our suggested contracts do not yield such win-win scenarios. Finally, we examine the effectiveness of availing the services of a local vendor, which is capable of satisfying any demand in excess of the quantity ordered from the foreign source with short notice, in order to mitigate the risks associated with an overseas order.

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UN Sustainable Development Goals (SDGs)

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#12 Responsible Consumption & Production

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Domestic collaboration
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Web of Science research areas
Management
Operations Research & Management Science
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