Optimal design of batch‐storage network considering exchange rates and taxes

Abstract This article presents an integrated analysis of the supply chain and financing decisions of multinational corporations. We construct a model in which multiple currency storage units are installed to manage the currency flows associated with multinational supply chain activities such as raw material procurement, processing, inventory control, transportation, and finished product sales. Temporary financial investments, bank loans, and currency transfer between multiple nations are allowed to increase the marginal profit. The core contribution of this study is its quantitative investigation of the influence of macroscopic economic factors such as exchange rates and taxes on operational decisions. The supply chain is modeled as a batch‐storage network with recycling streams. The objective function of the optimization involves minimizing the opportunity costs of annualized capital investments and currency/material inventories minus the benefit to stockholders in the numeraire currency. The major constraints of the optimization are that the material and currency storage units must not be depleted. A production and inventory analysis formulation (the periodic square wave model) provides useful expressions for the upper and lower bounds and average levels of the currency and material inventory holdings. The expressions for the Kuhn‐Tucker conditions of the optimization problem are reduced to a subproblem and analytical lot‐sizing equations. The lot sizes of procurement, production, transportation, and financial transaction can be determined by analytical expressions once the average flow rates are known. We show that the optimal production lot and storage sizes are typically 20% smaller when corporate income tax is taken into consideration than when it is not considered. An illustrative example is presented to demonstrate the potential of this approach. © 2007 American Institute of Chemical Engineers AIChE J, 2007