20 Ways the Falling Euro May Impact Sourcing, Procurement and Supply Chain Strategies (Part 1)

- January 4, 2012 12:01 AM
Categories: Commodities, Jason Busch, Sourcing |

Earlier this week, I realized that I still had a bunch of euro bills lying around in the various drawers of our apartment, left over from fifty or so trips since the creation of the European Community (formally the ECC). All together, the scattered currency could make for a feast with an excellent bottle of wine at a three-star Michelin restaurant, at least at today’s face value. But later this year, if the currency crisis we’re already seeing escalate in 2012 becomes worse, there’s a chance the various bills might not even be legal tender to buy a bottle of plonk (which may become an increasingly consumed beverage, contributing to the hangover and continuous headaches foisted on France and Germany by a bunch of PIGS).

In other words, under a worse case scenario, the currency may very well end up worthless unless it’s converted back into country-issued currencies in the future (e.g., Deutsche Marks, Francs, Guilders). But even considering a likely brighter future — any future, to be more exact — for the Euro, we have no doubt that company sourcing, procurement and supply chain strategies are likely to be greatly impacted by the current volatility and decline in the shorter term. But what strategies and considerations should companies be taking at this stage in the game? We’ve got a few ideas. But perhaps it makes sense to take a step back and consider a list of broader possibilities about how the Euro’s decline and general currency volatility will impact global contracting, buying and inventory decisions throughout 2012.

So without further ado, let us begin our laundry list of twenty items for consideration based on an office cooler discussion we had with our MetalMiner colleagues yesterday (some of which is likely to work its way into the basis of themes and content for our Commodity Edge conference in March):

  1. General Eurozone volatility (economic, currency, etc.) is likely to have a very significant impact on the role that companies place on broader hedging and contracting (e.g., commodity, currency) strategies in 2012. Companies that don’t fully think through and scrutinize the implications of even smaller decisions are likely to create unnecessary buying (and selling) exposure. Here are just a few questions to ponder: Why place a longer-term contract today, if it may be cheaper tomorrow? Is the right strategy to buy on the spot market, negotiate short-term agreements with suppliers and/or take out a currency hedge? And what of the underlying raw material components driving cost in the contract? How best to think through these elements? It’s complicated — and each decision should be looked at with the utmost care.
  2. We must fully consider the time lag between when commodity producers fully react to changes in the Euro. Based on the speed of markets today — and concern for the future of the European Community — such producer moves are likely to come sooner rather than later across the commodity spectrum (metals, ingredients, food, energy, etc.). Procurement organizations should consider producer pricing strategies and reaction/time lag in near and medium-term contracting decisions.
  3. Based on the above (2), companies should fully consider any and all arbitrage opportunities based on the time lag between producer price adjustments. Such strategies may involve contracting decisions with producers or distributors as well as global sourcing strategies and financial/commodity market hedging approaches using futures contracts.
  4. Procurement and supply chain organizations will need to more tightly integrate collaborative planning efforts (e.g., S&OP) for contracts that are pegged in euros on the sales side but where purchases are not yet made. The chance for large P&L exposure dictates that procurement should lead the charge in minimizing downside risk at the expense of having open positions in the market. Clearly, when an organization has fixed contracts in euros, the way in which it also considers its raw material purchases — both direct and on behalf (as it should be doing) of lower level suppliers in the supply chain on a demand aggregation basis — will take on greater and greater importance. Moreover, in the case of fixed contracts (buy- and sell-side), it will become increasingly important for US and Asian companies to find ways of hedging a falling euro.
  5. With a euro that is likely to continue to fall, there is a potential risk of significant commodity inflation as well as broader commodity volatility globally (some arguments we’ve seen suggest commodity deflation later in 2012, but here at Spend Matters and MetalMiner, we see shorter-term — and potentially mid-term — inflation ruling the day, at least for the initial quarters to come). The way in which companies react and plan commodity strategies for 2012 should be given even more consideration given the Eurozone crisis. In addition, organizations should take preemptive steps to invest in the right set of technologies to better plan, forecast, execute and manage their open commodity positions.

Stay tuned as our analysis of the sourcing, procurement and supply chain implications of the Euro decline and Eurozone volatility continues. And be sure to join us — and register for — our Commodity Edge conference this March!

- Jason Busch

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