Are You Managing Your Currency Risk?
I’m vacationing in Italy and France right now with my wife, but being the dedicated guy that I am, I’m sneaking in a blog – being typed as I fly from Venice to Paris.
After feeling the personal sting of currency exchange using the once mighty dollar (and it’s interesting to note that the root cause of the collapse of the dollar is all purchasing 
related – by consumers, businesses, and government – but let’s not go there in this blog) here in Venice, I’m more sensitive to this topic.
I had my US Dollars converted to Euros at pretty bad rates for the first few days. It wasn’t until I took the time to do a quick internet search and found out that the market rate is .74 that I started to negotiate and convert in larger quantities – getting the best rates in the process.
But what I realized was I made a rookie mistake. My wife and I spent so much time researching and planning tickets, hotels, tours, etc that had good early rates with high reviews, that we totally overlooked currency exchange as a huge cost sucker.
(Note: Keep reading and you’ll understand the connection to your job in a few paragraphs – there is a purchasing parable here)
Until we figured out the system here, we were first getting .52 Euros for every dollar. By the third day, I was getting .7 Euros to the dollar. For you math geeks, the exchange companies were making 35% extra currency exchange profit off of me early on.
So while my focus was on not getting ripped off on everything from a PRICE perspective, unbeknownst to me, I was getting ripped off not on price (well, I was, but not more than anyone else), but rather on exchange ratios.
I also figured out that Europeans practice the “nibbling” strategy when selling things (e.g. try booking an inter-Europe flight and see how much the total cost comes out, as compared to the ticket price you were quoted up front), but we’ll save that for another blog.
The bottom line is this: virtually all supply chains are global now. It’s an inescapable fact. And with that, one of the costs we rarely spend time looking at are currency fluctuations, yet it’s one of the most impactful.
I challenge you to find one person who knows that China’s exchange rate has increased from ~ 8:1 to around ~6:1 over the last decade. And they are gradually making their currency stronger and stronger, through a pegging process – which means your country currency will buy less and less Chinese goods, Ceterus Paribus (“all things being equal” – an economics flashback for some of you I bet).
That also means massive inflationary pressures for supply chains that run through China. How many of those do you think you have? TONS. And the Chinese government plans to keep on bringing the exchange rate closer and closer to natural equilibrium – which means again more inflation for those buyers in other countries.
Same thing with Brazil – their currency strength relative to the USD has doubled in the last 8 years. DOUBLED. That means the price to you doubled if you are paying in USD. Not to mention world cup related inflation that’s happening now.
Even if you aren’t sourcing internationally, your suppliers probably are. And guess who that currency risk gets passed onto? You guessed it!
Well for starters, if their exchange rate becomes more favorable, your suppliers are going to quickly enjoy a fatter profit margin. They’re certainly not going to contact you and let you know that you are due a currency driven discount.
However, if currency rates change to a supplier’s detriment, you are the *first* person your supplier is going to call. So if you aren’t paying attention, what will happen is you will bear the brunt of currency risk, but will never reap any benefits when it changes in your favor.
You should also be looking at taxes and tariffs. I know of one Fortune 50 company that legally has as many of their purchases go through their Oregon based purchasing department as possible, because Oregon doesn’t have sales tax. Hey, if there’s a legal loophole that your company approves, why not take it?
So don’t just look at your own currency risk management strategy, look at your supplier’s as well. If your company is of reasonable size (say, Fortune 1000), then you should have a treasury department of sorts with at least one person who has professional training, experience, and current job scope related to management of currency risk.
Talk to this person! Make them earn their money! Find out who is paying attention to currency risk for your materials and services purchases. Is anyone? It’s not enough for your price in USD not to change, you total cost has to not change. And for that matter, if exchange rates change to your benefit, then your costs should improve.
So now here I sit with Euros in hand, purchased at a favorable rate for current economic conditions. It doesn’t mean I’m going to get a good deal though.
Chances are, Parisian vendors of food, local transportation, and various trinkets all have ensured that my work is cut out for me. While I’d like to tell you that I’m going to issue an RFQ for lattes, croissants, museums, and taxis…..it’s just not so.
I’m afraid this is one market for which multiple sources are available for everything, but due to unique market conditions, all suppliers act like sole source vendors – they have you over a barrel and they know it.
It’s all good. My only objectives are to have a good time and not gain weight. I already know a blanket PO is the only thing that works on these kind of trips. For once, I’m not going to negotiate. Not too hard, anyways.
I’ll be back with you again next week, from someplace in Italy. Until then, be your best! Ciao!!
Omid G
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