Domestic sourcing vs. Global sourcing: Impact of the exchange rate fluctuation and unreliable domestic supply chain

Abstract

 In high technology industry, it is optional for an original equipment manufacturer (OEM) to purchase semi-finished products directly from contract manufacturer (CM) or import raw materials abroad and entrust CM with processing. Due to various factors such as natural disasters, government’s sanctions and backwardness of domestic technology, the domestic supply chain is more fragile than global, while purchasing abroad faces the risk of exchange rate fluctuation. In this paper, we establish a duopoly game model to discuss the trade-offs between the disruption risk of domestic supply chain (ϕ) and the risk of exchange rate fluctuation (µ) from the standpoint of OEM, CM and government. We conclude that firms’ win-win situations of profit maximization occur (1) when the expected exchange rate fluctuation is smaller than µ1(ϕ), both OEM and CM prefer global sourcing(GS); (2) when the expected exchange rate fluctuation is larger than µ2(ϕ), both OEM and CM prefer domestic sourcing(DS).