Global capacity investment strategies for multinational corporations

Ever changing consumer needs and fierce competition force firms to serve global markets and manufacture products around the world. Global firms are, therefore, facing increasing levels of demand and exchange rate uncertainties when making capacity investment decisions. Investing in manufacturing flexibility is an effective way of mitigating demand and exchange rate risks, but using flexible capacity to hedge against exchange rate risk is not well understood. Furthermore, the extensively studied tactics of building manufacturing flexibility, such as production postponement or using common component, assume the product is modular. The manufacturing process of a modular product can be decoupled into different stages that can be carried out at different locations and different time. However, many products must be produced to its completion by continued process and at the same location due to the technical and economical considerations in its complex customization operations. We call these products non-modular. Automobile assembly is a typical non-modular process. The objective of this thesis is to enhance our understanding of making flexible capacity investment decisions for non-modular products under joint demand and exchange rate uncertainty.We carry out the investigation in three steps. First, we study the capacity investment decision faced by a firm that has to customize its non-modular product to serve two heterogeneous markets that differ in product regulations and/or customer requirements. To do so, the firm installs two different types of capacity: base capacity for producing the common features of the product variants and customizing capacity for fulfilling the markets' specific requirements. As the first step of our study, we assume the only source of uncertainty is a two-dimensional demand process. Second, we investigate the relationship between the optimal capacity investment decision and the cost of flexible technology under joint demand and exchange rate uncertainty. More specifically, we consider a firm that serves two country-specific products from a single facility. The firm has the option to invest in product-dedicated capacities and/or in a flexible capacity that can produce either product. Third, we extend our base and customizing capacity investment model to a two-market setting under both demand and exchange rate uncertainties and perform a comprehensive numerical study. We investigate the impact of investment drivers such as price, production and transportation costs, import tariff, and corporate income tax on the firm's optimal base and customizing capacity investment decisions for various joint distributional properties of variant demands and exchange rates.Chapter 1 introduces the research motivation and outlines the thesis. We present our findings of the three-step research in the next three chapters. More specifically, in Chapter 2, we present the structure of the firm's optimal investment strategy, characterize the optimal investment portfolio, and investigate how the structure of the firm's optimal investment strategy changes under perfect demand correlation. We find that investment in maximal system flexibility may be optimal even under perfectly positively correlated demands. Additionally, we use the graphical depiction of the structure of the firm's optimal investment strategy to understand the impact of investment drivers on the transition among different investment patterns. In Chapter 3, we characterize the optimal investment portfolio and the structure of the optimal investment policy. Contrary to the intuition under demand uncertainty alone, we find that investing solely in the flexible capacity can be optimal due to the exposure of the investment decision to exchange rate uncertainty, despite the high cost of the flexible capacity. This is true even under perfectly positively correlated demands. In the Chapter 4, we find that some of the insights obtained for settings with only demand uncertainty do not necessarily extend to global settings with demand and exchange rate uncertainties. Thus, the results reported in this chapter demonstrate the importance of joint distributional properties of variant demands and exchange rates on how investment drivers affect base and customizing capacity investment decisions in global settings. In Chapter 5, we summarize our findings and highlight major managerial insights.This thesis contributes to the global supply chain management literature by studying manufacturing flexibility for non-modular products, establishing the relationship between the cost of flexible technology and optimal investment strategy under joint demand and exchange rate uncertainty, and applying the stochastic input-modeling techniques to investigate the impact of different input parameters on the optimal capacity investment decision.