A robustness approach to international sourcing

An important advantage of the use of international sourcing networks (i.e. selection of suppliers in various countries to support the demands of the firm’s international factory network) is the resulting hedging power against real exchange rate changes in the international environment. Due to the uncertainty of future real exchange rate changes, the international manager wants to develop a sourcing network that is relatively insensitive (i.e. robust) to the potential changes of the macroeconomic parameters over a planning horizon. In the present paper, the authors formally develop a robust approach to international sourcing. This approach develops the international supplier network in a way that adequately hedges the firm’s performance against the worst contingency in terms of realizable real exchange rate shocks over a planning horizon. The authors present an algorithm to obtain the N best robust solutions (i.e. sourcing networks) to the international sourcing problem. Some computational results on the effectiveness of the approach are provided. The authors also demonstrate how the approach can be used to evaluate various sourcing strategies.