In response to the challenges faced by your organization in the current highly competitive marketplace, you take the lead and start to think “outside the box”. You have spent the past several months looking for new sources of supply, and have finally put a deal together to import a key cost driver, resulting in significant bottom line savings for the organization. And now for the bad news… the US dollar has been on a steady move upward, which now makes this new vendor unaffordable, resulting in a huge waste of your time and effort.
Foreign exchange is one of the many risks that Supply Chain Professionals must mitigate in their efforts to provide value for their organization. Despite being beyond their control, the current state of currency exchange rates and the potential for significant shift requires constant attention, and Supply Chain Professionals need to take a strategic view of the potential for risk, and proactively develop strategies to mitigate these risks.
So how exactly am I supposed to do that, you ask?
Well despite being beyond your control, there are some key strategic decisions that can put you in a position for minimizing the risks associated with foreign exchange rates. As a starting point, having a good understanding of the revenue and expense structure of your organization can highlight opportunities for managing risk. How much revenue is received by the organization, and in what currencies? What about expenditures? Is it possible to achieve balance?
A few years back, I conducted such an evaluation for an organization that did significant business in both Canada and the US. The result was that the company was realizing revenues in US dollars that exceeded their US currency expenditures, but not by a significant amount. As a result, I began to look for new vendors that sold products and services in US dollars, shifting some of the Canadian dollar purchases over to them. The result was a “natural hedge” in which both revenue and expenses were impacted equally by changes in foreign exchange rates, protecting the organization from risks associated with exchange rate volatility.
That’s all well and good, you say, but that’s not possible in my organization, so what now? Well, the good news is, there are a few other options.
Having a second source of supply in order to shift purchases away from sources that are negatively impacted by unexpected shifts in rates is another way to anticipate challenges associated with foreign exchange. It provides valuable flexibility, and allows for quick adaptation to volatile markets.
Earlier than anticipated purchases, or delays in cutting PO’s until absolutely necessary, are other strategies than can be used over the short term to manage around unfavourable exchange rates, although they involve having a sound forecast for currency markets, which most of us do not take much comfort in.
Finally, the traditional approach to buying hedges with financial institutions, insuring ourselves against unfavourable and unexpected shifts in currency markets, can also provide some risk mitigation protection, and often at a reasonable cost.
All in all, there is no “one size fits all” optimal solution to eliminating foreign exchange risk. The most prudent course is to be aware that risks exist, understand your cost/revenue structure, and keep a close eye on currency trends allowing for a proactive approach to managing these risks. Having contingency plans in place ahead of time can go a long way to realizing better than average results when it comes to the potential impact of foreign exchange on your organization’s bottom line.