20 Ways the Falling Euro May Impact Sourcing, Procurement and Supply Chain Strategies (Part 4)

Please click here for Part 1, Part 2 and Part 3 of this series.

In our final installment of this series, we'll close with our final five predictions looking at how a falling euro may impact sourcing strategies, focusing primarily on the increasing linkages between IT, procurement and treasury strategies. The early posts in this series have been well received, so we're likely going to flesh out the thinking a bit more and combine these four separate posts into a paper for access in downloadable format. Be sure to check back in the coming weeks if you'd like to see some additional thinking on the topic. Continuing on with today's installment:

16) Companies will quickly need to move beyond ERP and ERP systems for managing the execution of direct spend contracts. Today, there's often a misunderstanding of those outside the procurement function around the technologies that support the bulk of a company's spending. If you believed the marketing of certain vendors, it would be hard to even consider the fact that eProcurement (or the first "P" in purchase-to-pay (P2P) technologies) from providers such as Ariba supported only a narrow portion of a company's spend -- almost always on the indirect side. For direct materials, the bulk of most companies' spend is still managed and processed entirely by ERP and MRP environments. Yet these very systems are inadequate for managing the volatility associated with currency, commodity and broader risk, even in a transactional environment, leaving most companies today to use Microsoft Excel to manage all but the true transactional (e.g., creation of a PO or buying off a blanket PO) items in a supplier engagement context.

17) Commodity management software will emerge as a separate set of applications, becoming as ubiquitous for procurement as P2P, strategic sourcing and contract management applications. For companies with material spend spread across multiple commodities (e.g., multiple ingredients, metals, energy, etc.), vendors like Triple Point, with significant penetration across a range of commodity categories and broad-based solutions in this area, are better positioned than specialists focused on a single category to help in this regard. The ability to manage commodity, currency, supplier/counter-party credit exposure and risk in a single platform and then bridge the gap between the virtual contracts/hedging world and the physical world of logistics and production planning/scheduling will become increasingly important. We fully expect this sector to heat up dramatically, including hearing greater things from SAP and others.

18) Procurement organizations will increasingly need to form tighter collaboration bonds with treasury, factoring treasury's input into their overall sourcing and contracting efforts based on currency risk. Such thinking will truly need to be strategic, potentially even looking at broader management team decision-making. Consider the following two scenarios, courtesy of The Association of Corporate Treasurers, that highlight the importance of global contracting and hedging strategy. First, "Laker [an airline]...bought US aircraft, financed in US dollars. While its customer revenue was almost all from the UK, it did not hedge. The dollar rose. Laker could not service the increased debt, and collapsed." Second "Lufthansa, also buying airframes from the US, did hedge. When the dollar weakened significantly, Lufthansa found its (un-hedged) competitors were able to buy airframes at a big discount. Competitors then set market prices at levels at which Lufthansa could only compete at a loss."

19) In part due to 18, above, we expect to see greater emphasis given not just to locked currency hedging, but also specific options instruments which, for some type of premium, can help organizations take currency risk off the table without requiring the entrance into a hedging agreement. As Investopedia defines it, a currency option is "A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time...Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates." The Association of Corporate Treasurers suggests currency hedging through options is not deployed as frequently as it should be in part "because of a failure correctly to describe exposures," a perception that "options can be seen as expensive" and due to the fact "vanilla [currency] options add a small extra work in accounting under IFRS." But the real culprit is something else entirely. To wit, all too often, "no one explained the real situation to general management," and as a result the option -- no pun intended -- to explore currency options was not even on the table.

20) We wish we could close on a positive note. But we can't. Because it's our belief that one of our predictions with the highest probability of coming true is that organizational confusion will reign as a combination of banks, vendors, consultants and BPOs try and capitalize on the situation surrounding currency uncertainty, providing confusing advice to different parties in the company who will in turn feud over what to do about the situation. Unfortunately, the end result for many organizations will be delayed decision making, which could prove unnecessarily costly. In contrast, the most astute organizations will collaborate together from the start, assigning a small, cross-functional team (including members of procurement, treasury and supply chain) to serve as "point" on the issue. This group should be tasked not only with overall procurement related currency strategy including technology and financial instrument/hedging adoption and usage, but should act as a filter on information coming in from the outside, as dozens of providers jockey to offer their advice, products and services.

Thanks to everyone for tuning into this series. As a recap, you can read the earlier posts in the series here, here and here.

- Jason Busch

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