1 > 2? Less is more under volatile exchange rates in global supply chains

To meet consumer needs, global firms typically manufacture based on their aggregate production plan after receiving demand projections from all markets. One of the consequences of matching demand with manufacturing is that these plans generally ignore the impact of exchange rate fluctuations. Consolidated profits for global firms are significantly influenced by fluctuations in exchange rates, and opportunity exists to incorporate exchange rate uncertainty into global production planning. This article presents an operational hedging mechanism (‘production hedging’) based on manufacturing less than the total global demand. Due to uncertainty in exchange rates, the firm takes conservative action and deliberately manufactures a smaller quantity than its total global demand. The article shows how manufacturing less can create a higher profit. It provides prescriptions for marketing executives to quantify the economic value of market share. In addition, it demonstrates why operational hedging, in the form of production hedging, is more valuable than financial hedging.