Final answer:
Firms build over-capacity in their supply chains to shift production based on exchange rates and costs. They would typically increase production where costs are lower and reduce it where costs are higher, optimizing for economies of scale.
Step-by-step explanation:
When it comes to building capacity in the supply chain network, the goal for a firm is to enhance its flexibility and responsiveness to changes in demand, production costs, and exchange rates. By creating over-capacity and making this capacity flexible, firms can shift production to take advantage of differing costs associated with various facilities. For instance, should the exchange rates fluctuate, making production in a certain location less costly, a firm can increase production in that facility. Conversely, if exchange rates make a facility more expensive, the firm can reduce production there.
From a strategic point of view, given current exchange rates, a company would generally aim to shift production to leverage economies of scale and minimize costs. Therefore, the optimal strategy would typically be to produce more in facilities that have a lower cost based on current exchange rates (option 3) and reduce production in those facilities where the costs are higher. This approach helps the firm to maximize its profits by reducing production costs and increasing production efficiency.