Supply chain outsourcing under exchange rate risk and competition

This paper studies the impacts of foreign exchange risk and competition intensity on supply chain companies who are involved in offshore-outsourcing activities. In particular, we develop a variational inequality model that considers firms' decision-making regarding pricing, offshore outsourcing, transportation, and in-house production under competition and foreign exchange uncertainty. We also use a series of simulation examples to answer questions regarding outsourcing and pricing strategies of supply chain firms with different risk attitudes, and explore numerically their associated profits and incurred risks.

Research Highlights►We model the impacts of foreign exchange risk and competition intensity on supply chain companies that are involved in offshore-outsourcing activities. ►When the competition intensity increases, the exchange rate risks of both risk-neutral and risk-averse firms will increase. ►When exchange rate volatility increases, the average profit of the risk-neutral firm will first increase and then become stable, while the profit of the risk-averse firm will always decrease. ►As the exchange rate variability becomes higher the risk-averse firm will reduce its outsourcing activities while the risk-neutral firm may increase its outsourcing activities.