Tech Report Number
1995-006
Abstract
We develop a two-period model applicable to global sourcing by considering a firm that operates in two markets: one is located in the U.S. and the second is in a country having a selling season that does not overlap with the U.S. selling season. Demand for each market depends linearly on the selling price and includes an unknown scale parameter. We assume that the firm learns from sales in the first market to assist decision making in the second. We also assume a single procurement opportunity, but allow the firm to ship leftovers from the first market to the second if doing so is profitable. Our results include the characterization of the optimal recourse policy, which represents the firm's decisions made at the beginning of the second selling season after it observes both sales in the first market and a realized value of the foreign exchange rate. Additionally, we provide a sufficient condition for reducing the optimization problem to a maximization over a single variable that we interpret as the safety stock for the first market. Further, we provide evidence that the sufficient condition is a rather mild one, likely to be satisfied in practical applications. We also establish a lower bound on the optimal value of the first-market safety stock, thereby truncating the search region of the last decision variable. This lower bound represents the optimal safety stock for the first market if that decision were made myopically, without regard to its effect on the profit associated with the second market.
Date of this Version
1-1-1995