Three Tips to Mitigate Foreign Exchange (FOREX) Risk in Procurement

Last week Goldman Sachs came out with what feels like a rather conservative forecast suggesting only a slight decline in the euro relative to the dollar over the next 12 months (if the forecast proves accurate, recent volatility will mostly amount to temporary noise). According to the WSK's take on the forecast, "Goldman says it reduced the forecast because of increased risk premium being built into the euro surrounding the ongoing debt crisis in Greece and the threat of contagion throughout the currency zone." Yet, "the forecast calls for a strengthening euro because of ongoing broad depreciation pressure on the dollar, but starts at a lower base to factor in the euro's higher risk premium."

Even if you think Goldman's forecast is conservative (or wrong), the degree of volatility and uncertainty built into the current economic environment is unprecedented. And in Spend Matters' view, it's time for procurement and supply chain organizations to take action to mitigate the risk their companies face as well as the uncertainty over the global economy and FOREX markets. Below, we suggest five steps companies can take to mitigate currency risk and demand uncertainty (as well as broader supply risk that will likely result).

1. Try to buy and sell locally as much as possible. The global sourcing boom founded on buying low and selling high (in LCCS and Western markets, respectively) might be dead -- or dying -- but the concept of serving markets locally with local sources of supply is the best hedge against currency volatility that an organization can have. Buy and sell in local currencies as much as possible. It's that simple.
2. Understand currency's historical impact on demand (both imports and exports as well as local consumption). The volatility of currency market can cascade (sometimes quickly) into local government and consumer buying habits quicker than one might expect. Use past data as inputs into forecasting models to help gauge the impact of currency swings and volatility on local market demand. This will help organizations allocate procurement resources and focus based on a variety of needs including local/regional demand forecasts, supply risk (supplier financial risk) and, of course, total landed cost for both sourcing export and non-export situations.
3. Work closely with treasury. It goes without saying that treasury is responsible for monitoring overall FOREX exposure in a business. But basic hedging -- which most of us have no doubt been doing for sometime -- to offset risk for both dollar-denominated and non-dollar denominated global sourcing programs is just the ante to taking risk off the table in today's markets. Treasury's insight into regional markets -- as well as their connections with banks and traders -- can provide invaluable insight and early warning about supply markets that matter. Get to know them. And keep treasury on speed dial.

Now more than ever, procurement and supply chains must concern themselves with the global currency markets. If it's not at the top of your list of priorities to make sure that your supply chain is global – even if you're just selling into one regional market -- it should be.

Jason Busch