There are many external influences that can impact the supply chain and in this blog we focus on two areas: economic uncertainty and the exchange rate.
Economic uncertainty is hard to plan against. But supply chain experts know the devastating effect that unplanned economic uncertainty can have on businesses and that is why it is important to be knowledgeable of economic conditions, even in countries where businesses don’t operate. This is because economic uncertainty in one country can have a ripple effect to the next, as debt issues and currency devaluations are impacted. What businesses need to understand is that all supply chains are global nowadays.
Take the recent Brexit decision and the how the changes are likely to affect the economy; changes such as, the possibility of higher costs for manufacturers and higher prices for consumers due to any tariffs on trade between the UK and EU. Also, higher administration costs for businesses as custom controls and revised border controls make travel between the UK and Europe less predictable. These types of unknown economic risks have led to a cause of concern and economic uncertainty.
However, economic uncertainty can also lead to opportunities being created for businesses which look to stay ahead of any changes on the horizon and capitalise on them.
Any exchange rate shift should be at the forefront of a business’s risk assessment plan. It is important that companies keep ahead and understand the impact of currency fluctuations. One of the main problems for exporters is when buying in a currency with a high valuation and then selling in a weaker currency. Any strong changes affecting either currency will impact profit margins.
There is also the issue when currency changes are adjusted for differences in inflation as well as mismatches between costs and investment in one currency and revenues in another.
However, it is not always easy to predict exchange rate changes. There are risk management tools which can help businesses understand currency risks but it is important for a business to understand where and how exchange rates can distort the value of the company. This means that portfolio, structural and transactional risks all need to be known and understood. Every risk will impact value and cash flow in a different way, so each will require a different risk management approach. If we take a look at each risk we can start to understand how the exchange rate can affect the supply chain:
If a business operates in a foreign currency then it will be affected by currency portfolio risks. Because of the very nature of supply chains then any exchange rate fluctuations will have an impact on cash flows.
Structural risks come about when a business’s cash flow coming in and cash flow going out reacts differently to currency fluctuations. These types of risk are hard to manage because there is a fundamental mismatch in cash flows.
These risks are considered the easiest to measure and manage. These types of risks often come about with timing differences from cash flows and contractual commitments. These risks will affect cash flow in the short-term and these risks are usually easily identifiable.
It is important to understand where and how currency risks exist within a business. Understanding how currency fluctuations impact a business in different areas can help in planning for offsetting any risk and aid effective management of that risk. Whatever the type of risk, businesses need to assess them, plan against them and look for growth opportunities. Businesses need to explore the likely impact of the risk and plan for those eventualities.