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We’ve all stood in a bank or outside a foreign exchange and looked at the currency board, calculating internally the ‘price that we buy’ and the ‘price that we sell’. We carefully estimate how much we’re likely to receive for the cash (real or digital) in our hand, and silently begrudge the margin being made on our money.

And that’s before we see the commission fees on our receipt afterwards.

This trade-off is happening countless times every day in global supply chains, and businesses of all shapes and sizes are affected by those margins and commission charges. As well as these fluctuating exchange rates and fees, foreign exchange (FX) risk is something treasury departments have to tackle regularly – what happens if all those euros you’re holding to pay European suppliers suddenly becomes 20% less valuable?

It’s something Apple experienced in recent years, when currency fluctuations in the dollar meant they missed out on $2.83 billion in a single quarter. Those sorts of figures really stand out when we see them at that scale, but any business that does business in a different currency can see their profits shrink just as proportionally as a global giant like Apple.

Protecting your business against FX fluctuations in the Global Supply Chain

  1. Identify FX Risks in your Supply Chain

FX risks can be hidden within your supply chain. If you are buying from a supplier in one currency, they could be buying their products in another currency – indirectly exposing you to their risks. If they get hit, they’ll likely pass those costs onto you.

This means that CFOs, Treasury leaders and finance departments need to collaboratively analyse their supply chain and identify where the risks lie, and to what degree.

A 2018 survey of 200 chief financial officers found that 70% of respondents had suffered reduced earnings in the prior two years due to avoidable, unhedged FX risk.

HSBC

While this is no easy task, by simply listing your suppliers and where they may incur FX risk and examining the contracts in place with them, you may be able to add protections (such as agreed refunds if a major swing takes place, or agreements to shorten the payment period) for your business that would minimize damage from currency fluctuations.

2. Have a diverse supplier base

We’ve talked about creating a diversified supply-chain can help mitigate against financial risks before, and it’s no different when it comes to FX calculations. If you’re sourcing all your raw materials from just one country, and that country’s currency strengthens against your own (whether that’s a sudden shift or a gradual one) you’ll find it more difficult to quickly switch suppliers to one in a country with a more favourable currency exchange rate.

It’s therefore imperative to have at least two different potential suppliers for any of the materials or products that you use in your own process, wherever possible.

It must be pointed out though, that this is not always practically possible. Sometimes, one country is far cheaper to source materials than another, so business demands you go there and only there. In this type of case, it’s important to at least investigate other potential suppliers, and go through due diligence in advance.

It’s also important not to simply switch suppliers on a whim – cost savings may only kick in after a couple of months, and by then the currency rates may have returned to more favorable territory.

3. Currency Hedging

A core strategy for many businesses when it came to FX risk is to hedge currency. In simple terms, hedging currency is like an insurance policy where a company enters into a financial agreement with a supplier to lock-in the exchange rate for a future deal (or deals) – known as a ‘forward contract’.

For example, if a car manufacturer in the US agreed to sell $10m worth of cars to a dealer in the UK, the two companies can agree the exchange rate until the payment is due, even if the British £ has gotten weaker or stronger against the dollar in the period in-between. This can even be done at a sliding scale or by sharing the risk – it all depends on the contract agreed.

A series of reports on mid-caps and SMEs found that over 80% of SMEs trading internationally had experienced losses or gains due to currency fluctuations – one-third of them over $1 million.

ACCA (the Association of Chartered
Certified Accountants)

Of course, currency hedging can work both ways – you may lose out on money if the currency fluctuates in one direction. Also, hedging can be time-consuming, intricate, and costly.

4. Simplify Currency Hedging through Modern Payment Systems

Using local payment rails via a third-party service can entirely eliminate FX risk.

With modern payment systems, the currency hedging process can be simplified significantly.

Using local payment rails and banking infrastructure modern platforms (such as TransferMate’s) can now allow businesses to protect against fluctuating FX rates and reduce risk when doing business internationally.

Businesses can book rates on the platform automatically, lock in rates for future transfers, and save on traditional wire fees and FX mark-ups.

5. Buying foreign currency

One way firms try to ‘beat’ the currency markets is to buy foreign currency when rates are favourable, and use that currency when buying supplies or products, therefore removing the exchange rate from the equation.

Of course, there are downsides to this. Firstly, currency speculation is just that – speculation – and a company can get caught holding currency that is not as valuable as they thought it would be when they come to use it. Secondly, it can eat into cash reserves because buying currency is essentially opening a bank account and putting cash into it, rather than investing it for greater returns. Finally, buying foreign currency requires expertise and administrative time, which many companies do not have.

6. Mitigating FX risk as part of an overall, collaborative strategy

As you can see from the broad options outlined above, businesses have lots of ways to mitigate against FX risk. The chosen path needs to be part of a coherent internal strategy that aligns with the overall goals of the business, based on input from Treasury, Procurement, Finance and the leadership team.

The chosen path needs to be part of a coherent internal strategy that aligns with the overall goals of the business, based on input from Treasury, Procurement, Finance and the leadership team.

Each will have their own priorities and roles. Treasury will be primarily concerned with cash flow management, procurement will need to lead in supplier analysis and contracting, while finance will need to deliver that strategic focus and overall execution. The alignment with business goals will come from the leadership team.

By not making mitigating FX risk as ‘someone else’s problem’ within the organization, your FX risk management policies will become a natural extension of your overall strategy.

‘Cross-border supply chains are built on trust. The supplier trusts the buyer to pay them what is owed, FX risk breaks that trust.’ says Stephen Carter, Director of Product Marketing at Ivalua. ‘By paying the supplier exactly what was invoiced, trust grows, and with it the supply chain. Organizations need to have real-time control and visibility of FX, at the invoice level. Ultimately, it’s supply trust that puts a customer first in the delivery queue or guarantees the best possible price.’

Managing FX can have a big impact on the bottom line

As Apple discovered, proactively managing your FX risk can have a significant impact on your bottom line. In the world of international finance and payments, money is made on the margins, so it’s incumbent on businesses to make those margins work for them and not the other way around.

Just like so many of us have learnt to walk away from the airport currency exchange kiosk when on holidays, despite the convenience, businesses need to figure out alternative strategies so they maximize their spending money.


To learn how TransferMate can help you manage your FX risk, click here.

It had looked, for a short while, that we had ‘solved’ the supply chain problem. From simple but effective tracking barcodes, all the way up to the blockchain and AI technologies, supply chains were one of the first areas where combining technologies led to remarkably efficient processes – and helped usher in the era of globalization.

For a long time, procurements role within this was primarily focused on finding the lowest prices of goods that could move through the supply chain, creating additional value for their business by driving purchases through preferred suppliers and increasing economies of scale. Concepts like ‘just-in-time’ supply chain management added layers of complexity, but procurement departments proved to be agile and innovative, often leading from the front.

However, friction in the supply chain stubbornly remained and, in some cases, grew.

Factors beyond anyone’s control, from Brexit to the China-US tariff war, alongside the most recent crisis coming in the form of the pandemic and the blocking of the Suez Canal, showed that supply chains weren’t as resilient as we thought and that we’ll never truly ‘solve’ friction in the supply chain.

Common friction points in the global supply chain

As well as those geo-political challenges, many of the old problems did not go away, or took on another form. Different systems and processes – all still primarily in the control of people – need to talk to each other seamlessly to create more simplified and integrated supply chains.

This ideal vision, even with all the technologies available to us, simply hasn’t come to pass. 

In one piece of research based on studying a global logistics provider and their customers found that, between the purchase order being placed right through to the product landing in its destination, over 200 steps took place. In other words, 200 potential sources of friction.

The price of computer and electronic products is estimated to increase by 11.4% due to increased shipping costs alone

United Nations Conference on Trade and Development (UNCTAD), Nov 2021

These sources of friction can be loosely placed into two buckets – process and people.

Typically, purchase order execution, missing information or documents, delays of entry filing, poor visibility (and therefore control) over the supply chain, trade compliance procedures not being followed, etc. are the areas where human error and time delays can significantly impact on supply-chain efficiency and cause friction at multiple points along it.

These then, are the areas most ripe for improvements because, while technology and automation aren’t the silver bullet, they can be game changers when you’re looking for a competitive advantage.

How procurement departments can reduce friction in their supply chain

There are several ways in which a procurement professional can reduce friction in the global supply chain.

While there are an incalculable number of ways to improve each of those steps along the supply chain – often dependent on what industry you are in and where you are sourcing from or sending to – there are several general principles that can be applied to almost any business.

1. Track better, manage better

Agility is one of those watchwords that have been thrown around within the business sphere over the last five years or so. It can sometimes feel like a catch-all term that is really telling the reader ‘do better, and do it faster’, which doesn’t feel too helpful.

It’s better to define agility closer to ‘find problems quicker to solve problems quicker’, which is a bit more actionable. Finding problems quicker means having visibility over them.

When you are using multiple systems, from spreadsheets to emails to external platforms, gaining visibility over your supply chain can be very difficult. And this goes two ways – your customers will want to have visibility of the products coming to them and will run into similar difficulties.

With this visibility comes agility, and the ability to better manage spend on a rolling basis.

‘When managing spend, it’s critical to have total visibility of the whole source to pay journey. Without this, possible savings disappear into the gaps between the procurement and finance teams’ says Stephen Carter, Director of Product Marketing at Ivalua. ‘By improving visibility, any friction points in the process can be spotted and quickly addressed. This will unlock supplier liquidity, strengthen links in the supply chain, and add savings to the bottom-line.’

Setting up systems that fully integrate with the supply chain then becomes a key priority for procurement professionals looking to identify friction points along the chain. One of the primary ways of getting visibility over your supply chain is automating your payment process.

2. Automate your payment process

Managing international payments, reconciling invoices, and dealing with local regulations can be a big administrative drain on your resources.

Digitizing your entire payment process will give your finance team much more control and visibility over spending, while also reducing errors, and helping to prevent fraud in the process. Having the ability to create and execute multiple payments easily in multiple territories, all housed within a single platform, will not only save time but money as well.

Digitizing your entire payment process will give your finance team much more control and visibility over spending

It gives your team greater ability to control and maximize cashflow, while also potentially saving on FX rates if the system you use has local banking rails. For the customers, automating payments and leveraging local payment rails will mean that suppliers will be paid accurately and on time, reducing debtor days in the process.

All these friction points will be reduced, or eradicated entirely, by automating payments.

3. Leverage (multiple) preferred suppliers

Funneling spending through a number of preferred suppliers will improve relationships over time, help you identify and solve friction points, and reduce costs through bulk and long-term buying. This has always been the way procurement works, although this has been changing recently with the global upheavals.

53% of executives plan to dual source raw materials.

(McKinsey, 2020)

Because of these global events, ‘Resilience’ is another watchword being thrust upon procurement officers, and the balance between resilience and cost-savings will be a real challenge over the coming years. This will be particularly true if no global shocks like we’ve seen over the last number of years occur. If all remains stable, questions will inevitably come from leadership and board level on why costs are higher than they need to be.

One solution is to ensure that you have more than one preferred supplier for each area required. This, again, is fairly standard today, but businesses will need to create more diversity in their preferred suppliers list, such as geographic location, so that if something happens in one part of the world you can quickly pivot to another.

4. Collect the Data – and Analyze it

What’s not measured is not managed, and it’s no different when it comes to supply chains. While it’s often a tedious and laborious task, analyzing your supply chain to produce actionable data is also a very necessary one.

Begin by mapping out all the steps, producing a flow-chart (or similar) to see all the links in the chain. Collecting data on each of these steps will then allow you to identify problems, such as deliveries being consistently late, or invoices not being paid on time due to inaccurate information being provided.

30% of companies don’t analyze the source of supply chain disruptions.

(BCI, 2020)

Then, if you can, compare these steps with others in the market and what they are doing. This can be difficult data to collect – after all, you wouldn’t make it easy for your competitors to do the same – but you may find some interesting insights with some basic inquiries.  

After that, it’s a matter of analyzing the data you’ve collected.

Where are you sourcing from? Are their alternatives? Can delivery of the final product to the customer be executed in a different way? By simply asking these questions, innovative solutions may emerge. If your supply chain is of a significant enough size, it may be economically beneficial to purchase software for analyzing your supply chain, although these can be expensive.

The real benefit that comes from collecting data is getting internal buy-in for future change. With data, people are much likelier to act because they see the immediate benefits.

Collaborate and Iterate to Reduce Supply Chain Friction

Building a frictionless supply chain is an impossible task – we can only search for improvements. As a truly collaborative exercise, the supply chain must be treated as a genuinely collaborative process, rather than one where you’re stitching disparate parts together.

Procurement professionals are the central spoke in this wheel, bringing multiple stakeholders together (often from different countries with different currencies, languages, regulations etc.), so are therefore best placed to reduce friction along each link in the chain. However, procurement officers can’t do this all alone; it requires collaboration within the business too.

By investing in technologies and processes, friction in the supply chain can be reduced considerably, especially when the above steps are taken (relatively) regularly and new iterations of the supply chain process are created to improve each time.

While we can never ‘solve’ the supply chain problem, we can work towards giving procurement professionals the tools and support to make everyone’s life a little bit easier, and supply chains a lot more efficient.  

To learn how TransferMate can help you reduce friction in your supply-chain, click here.

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