Group 1b Curreny Fluctuations

IMPACT OF CURRENCY FLUCTUATIONS ON THE SUPPLY CHAIN

By: Group1- Division “B” Chetan Shetty Nikhil Wadhwani Rijun Chokshi Shalini Sukhari Suneel Jadon

CURRENCY FLUCTUATION IN THE NEWS.. 

Currency Fluctuations' are top concern for UK SMEs trading internationally

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Microsoft – “Arcade Price Hike due to Currency Fluctuations”

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India Outsourcing: Pay Is Down, Competition Is Up

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For China, moving away from the dollar makes sense

EXCHANGE RISK IN A SUPPLY CHAIN - A DETAILED ANALYSIS

An Example...

Factory based in England

Buys cocoa from Switzerland Pays in CHF

Customer based in Australia Pays in AUD

RISKS IN THE SUPPLY CHAIN

RISKS IN THE SUPPLY CHAIN

EXCHANGE RISK IN A SUPPLY CHAIN - A DETAILED ANALYSIS

IMPACT ON THE SUPPLY CHAIN

SUPPLY SIDE RISKS 

INPUT COSTS 

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SHIPPING COSTS 

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The price of raw materials etc sourced from foreign destinations may increase due to exchange rate fluctuations

Cost of shipping is usually in US Dollars which is the preferred currency for trade worldwide

SUPPLIER RISK 

Suppliers may run the risk of closure due to a squeeze on their operating margins due to the exchange rate risk. (Similar to Indian IT companies outsourcing their services to clients in the US)

OPERATIONAL RISKS 

LABOR 

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OPERATING MARGINS 

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Hike in Labor charges of people employed in foreign destinations

Operating margins increase or decrease depending on the strength of the currency in the country of operation

INTERNAL RISKS 

Funds earmarked for important initiatives like R&D may be adversely affected due to currency fluctuations

DEMAND SIDE RISKS 

PRICING 

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ENTRY INTO NEW MARKETS 

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Fluctuations in the exchange rate may force companies to hike their product price which in turn affects their competitiveness in the marketplace

Companies may look to set up shop in emerging markets with greater spending power due to favorable currency fluctuations

CUSTOMER RISK 

Companies may risk losing customers due to pricing pressures brought about by currency fluctuations

EXCHANGE RISK MANAGEMENT STRATEGIES

EXCHANGE RISK MANAGEMENT STRATEGIES

FINANCIAL HEDGING TECHNIQUES 

Modus Operandi  

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Trading in Derivatives Negotiating payments in the local currency

Shortcomings   

Protects only against short term exchange rate fluctuations Higher Premiums are charged based on the degree of risk involved in the process For futures trading, both the downside and upside are limited

OPERATIONAL HEDGING TECHNIQUES 

Modus Operandi 

By Jumping behind the tariff wall 

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Eg: Toyota’s manufacturing plants in the US

Optimizing supply chain by having multiple product sourcing options Product innovation & customization of product specifications according to customer needs in emerging markets Focus on increasing productivity in off-shore & outsourcing destinations Decreasing the period of exchange risk exposure by reducing the lead time in a supply chain

THANK YOU

REFERENCES 

Deloitte Research – Managing in the Face of Exchange-Rate Uncertainty

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Addressing currency volatility - Short-term solutions to immediate issues manufacturers face, Deloitte & Touche