5 strategies for retailers to reduce FX risk in their supply chain

Money makes the world go around, and money goes around the world more today than it ever has. For global retailers, controlling that flow of money around the world, through either their supply chain or from customer payments, can be the difference between a good year and a great year, or even between surviving and thriving.

When it comes to the bottom-line, business leaders will spend a lot of their time trying to increase production efficiencies, lower costs, drum up new business and increase profit margins, but the cost of doing that business is often factored in as just that – the cost of doing business.

Currency management can be seen as outside of their control more than any of the other factors, so therefore their time is best used elsewhere. It’s only when a crisis happens (such as a currency they are holding has a sharp drop in value) that the point is driven home – managing currency and mitigating against currency risk on an ongoing basis can be a real competitive advantage.

Strategies for retailers managing FX risk

1. Identify where your risks lie

This is easier said than done. Retail supply chains are complex, convoluted beasts with many hidden parts. You may be buying electric saws from a manufacturer in Japan, who sources iron from China to make them. If they are hit by harmful currency fluctuations (or even political actions like tariffs) they may have to move their supply chain to source the iron from Australia, raising the prices of those goods you are buying.

This may all happen even though you have no direct relationships with either China or Australia. Identifying those risks therefore needs a deep analysis of the supply chain. Again, easier said than done.

CFOs, Treasury and Finance will need to collaboratively work to analyse and map out potential risks and suggest alternatives if risk or cost levels get too high. In a constantly moving economic landscape, this will be very much a dynamic and moving picture.

You can also put in contractual safeguards to supplier agreements, such as agreed refunds if a major swing takes place, or agreements to shorten the payment period.   

2. Identify typical variances

There are consistent macro-economic cycles that will impact currency markets. While it’s impossible to know the exact outcome of these in each case, knowing about them and factoring them into your decision making is a way for a retailer to ride those macro-economic waves more successfully.

Let’s focus on one that’s big in the news right now - inflation.

Inflation is an economic pillar that has big impacts on the currency markets. Countries with low-inflation levels will generally have stronger currency values relative to others, as their purchasing power increases over time. Countries with high inflation will see that purchasing power eroded, and therefore their currency will weaken.

What does this mean for retailers?

If you’re sourcing goods in a country with high inflation levels (a common occurrence right now) those goods might go down in price relative to your own currency. Of course, all currency calculations depend on the relationship of at least two currencies, so the economic landscape of where you’re buying from is equally as important.

Nevertheless, when you are analysing currency risks and potential places you can take advantage of fluctuations, inflation is a key consideration.

3. Currency Hedging

A core strategy for many retailers when it came to FX risk is to hedge currency. Hedging allows you define risk for a certain period of time. It is when you enter into a binding agreement with a supplier to buy or sell at an agreed FX rate.

For example, a UK retailer may agree to buy ten thousand computers from a United States manufacturer over the next 2 years with the price set at 1.20 USD to 1 British Sterling. This means you can plan with certainty around the cost.

“1,200 European and North American companies surveyed in 2018 quantified $15.61 billion in negative currency impacts in a single quarter.”

Guide to Foreign Exchange Risk Management — And Why it Matters Right Now

You can also be more sophisticated and agree sliding scales or a share in the risk, but the principle is the same; you’re trying to not get caught out, and even potentially gain an advantage.

4. Be agile where you supply from

We all know that many things are done today because that is the way they were done yesterday. People follow templates, and their predecessors, in every area of a business, and supply chains are no exception.

This happens at all levels and at all business sizes.

Most global retailers will conduct regular audits of their supply chains to look for inefficiencies and cost savings, with FX costs playing a big part in that calculation. The real trick is being able to move quickly when the answer to those calculations is to move supplier to a different territory.

"By focusing a five-year strategy on restructuring their supply chain management and bringing in a range of supply chain specialists, Unilever managed to find $14 billion in cost-saving initiatives."

Supply chain examples: six businesses getting it right

Setting up a banking footprint in a new territory that allows you to trade there can be tricky and time-consuming, however, so having that capability of being agile in where you source from is key.

By utilising alternatives to traditional correspondent banks, businesses can cut that set-up time from weeks and months to days (and even minutes once they are set-up).   

5. Utilize modern technology to execute your strategy

Strategy is nothing without execution. With fluctuating currencies and volatile supply chains, retailers need to have the right tools to bring their strategy into the real-world.

Modern payment rails and infrastructures mean payments happen faster, more transparently, and at lower cost than traditional correspondent networks. This allows global retailers to ensure efficiencies in their supply chain management, keep stakeholders along the chain happier, and gain more insights into how their supply chain is performing.

Platforms that allow retailers to manage their FX movement, both in terms of how they are buying and selling but also in terms of how and where they store currencies, are another obvious route to take. This ability to easily manage currencies, and at low-cost, means retailers can gain efficiencies when buying and selling and then ‘bring profits home’ at the right moment.

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You can never eliminate FX risk, just manage it

Global FX markets are like a seesaw, when one currency goes up or down, the consequences can only be seen in relation to the other side of the equation.

For retailers managing FX risk in their supply chain, and trying to achieve gains where possible, a coherent and dynamic strategy has to be put in place, while also acquiring the tools to make that strategy happen. Sometimes you’ll win, sometimes you’ll lose, but the goal is to reduce uncertainty.

Money makes the world go around – but we can choose the direction our money moves around it.

To discuss how TransferMate can help retailers, and other businesses, manage FX risk, multiple-currency holdings and trading globally, contact the team today.