Optimal allocation of capacity across international retailers

Murat Erkoc, Eduardo Ron

Research output: Chapter in Book/Report/Conference proceedingConference contribution


As globalization in economics and trade grows to become a widespread phenomenon, supply chain operations are increasingly influenced not only by transportation costs but also by the variability in exchange rates between currencies in different countries, and their taxation policies. In this study, we analyze the problem of optimal allocation of a supplier's existing capacity across its multiple retail outlets positioned in international locations within the global market. The proposed modeling approach optimizes the capacity allocation, and end item local market pricing decisions in a globally integrated firm by taking exchange rates, transportation and production costs, and duties and taxes into consideration. We consider a single period setting where the production needs to be completed before the demand season, and the realization of the adjustments in exchange rates in local markets. Based on realized exchange rates and transportation costs, the firm allocates the products across local markets, and sets the local market prices. Our study is conducted in three phases. In the first phase we consider a stochastic programming model that maximizes the expected net gains before taxes for the integrated channel under uncertain future exchange rates. Due to long lead times production in the home country must be completed, and products need to be shipped to the international markets prior to the realization of exchange rates in those markets. Our main modeling assumption is that the demand in each international market is a decreasing function of the selling price in local currency. In this setting the first stage decision is to determine the optimal allocation of the manufacturing capacity across international retailers. We consider the pricing both as the first stage and second stage decisions in end customer markets. In the former case the price of the product is determined prior to the realization of the exchange rates while the latter case considers pricing after exchange rate realization. We investigate the implications of two approaches on firm profits and market demands. We further our analysis by including the multi-product case where more than one type of product, which use the same manufacturing capacity, are sold abroad through the same retail subsidiaries. Issue of duties and taxation is introduced in the second phase where we analyze the impact of taxation policies experienced in different markets on the production planning and allocation, pricing, market demands, and overall company revenues. In addition to allocation, and pricing decisions this phase also include the decisions on transfer prices between the exporting subsidiary and importing subsidiaries. Although transfer prices are but reallocation of cash within the company, they are crucial in determining the taxes to be paid and thus, they affect the firm's net gains after taxes. In the last part we introduce a game theoretic framework where we add the impact of the global competition to our investigation. In this setting, we analyze the equilibrium decisions between two competing global companies whose subsidiaries compete in the same international markets. We investigate how competition is affected by exchange rate distributions, and varying taxation policies that are in effect in both exporting and importing countries. We present our computational results, and managerial insights for each studied case.

Original languageEnglish
Title of host publicationIIE Annual Conference and Exhibition 2004
StatePublished - Dec 1 2004
EventIIE Annual Conference and Exhibition 2004 - Houston, TX, United States
Duration: May 15 2004May 19 2004


OtherIIE Annual Conference and Exhibition 2004
Country/TerritoryUnited States
CityHouston, TX


  • Capacity allocation
  • Exchange rate uncertainty
  • Global markets
  • Retail pricing
  • Stochastic programming

ASJC Scopus subject areas

  • Engineering(all)


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