20 Ways the Falling Euro May Impact Sourcing, Procurement and Supply Chain Strategies (Part 2)

Please click here for the first post in this series.

Continuing on with our laundry -- or would that be euro laundered -- list of the 20 ways the falling Euro and Eurozone volatility may impact sourcing, procurement and supply chain strategies in 2012 and beyond, we'll keep exploring a number of broad-based sourcing, contracting and hedging strategies. Check back later this week as we begin to explore the implications of related supplier management and supply chain risk strategies based on the crisis, plus the technology considerations and investments companies should consider given the situation at hand (in particular, we think sourcing optimization/advanced sourcing, contract management, savings tracking/implementation and commodity management applications will all have an important role to play).

In the meantime, let's continue with our list of items for today:

6) Procurement organizations should expect more requests for suppliers to require contracts to be priced in dollars. Despite the rocky nature of the US economy and the billions in deficit spending that the US continues to make on a daily basis -- adding to the roughly $15 trillion in US debt, or $135K per US taxpayer -- the dollar still represents a safer store of value that the highly volatile and declining Euro (a sad reflection on the times, we believe). Global companies should be prepared for the implications of an increasing number of dollar denominated contracts and European firms that are more likely to price global supply contracts in dollars should factor in rising hedging costs as an upfront total cost consideration.

7) In the current procurement and supply chain climate, it's likely that many suppliers are going to try to hold quoted prices longer and will not want to renegotiate existing agreements where a declining Euro would impact their margin in a negative manner -- their incentive is to hold at today's currency rate. Moreover, suppliers are likely request longer-term agreements with payment terms that provide discounts in exchange for early and more frequent payment schedules where the Euro is involved. Suppliers will want to be paid upfront and early, a situation which will likely provide additional leverage to companies in negotiations if they have a balance sheet healthy enough (or banking relationships) to fund early payment discount programs.

8) For contracts in a supplier's favor given a falling euro, vendors will be much firmer about not letting customers get out of agreements. For new agreements, expect more contact language with teeth as suppliers try to offset the declining euro, commodity risk and demand volatility. In many of these cases, the letter of the contract will be less important than the overall relationship at stake (see 9, below).

9) Following the previous point, expect the contracting process and the honoring of existing agreements to potentially strain buyer/supplier relationships in 2012. Procurement organizations will need to weigh the combined legal, supply continuity and relationship risk of engaging with suppliers in a manner that alters the basis of existing agreements and relationships and/or creates an adversarial situation in new arrangements. Procurement, supply chain and business leaders must remember that the spirit of relationships in such a context can matter as much as written contract language when it comes to getting the most out of a relationship in the longer term.

10) Expect greater short- and mid-term volatility for underlying commodity prices that impact finished part/component/goods purchases as well as specific raw material buys. Spend Matters and MetalMiner believe that commodity volatility will increase because of the combination of regional slower demand in the EU, market speculation and significant uncertainties in global demand (US, China, India) amidst a downturn/recession in the EU. On a related note, producer prices will fluctuate more, and in combination, we will also see currency volatility playing a material role in underlying commodity price volatility as well. Above all, remember the commodity cocktail has significantly more than one ingredient and the addition or subtraction of a single variable may significantly impact the broader pricing and futures equation.

Check back for our next installment in this series, which is currently planned for mid-week.

- Jason Busch

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