Foreign Exchange Risk: Don’t Get Caught in the Supply Chain Web
There could be foreign exchange (“forex” or FX) risks in your supply chain. For example, if you are buying from an overseas supplier in one currency, that supplier could be buying from a vendor in another currency to make their products. This indirectly exposes you to multiplied foreign exchange liability, which they will likely pass on to you in higher costs. How do you mitigate FX risks in the supply chain?
- Understand even the simplest forex solution has downsides.
The simplest forex risk management strategy is to exclusively make and receive payments in your own currency. But there are some perils when taking this approach.
- You could pay higher prices if suppliers with different native currencies time their payments to take advantage of exchange rate volatility.
- If you receive only US dollars internationally, you might lose customers to competitors who offer dual currency invoicing.
- You could inadvertently absorb vendor costs to convert US dollars to their local currency. This could also happen downstream.
To effectively manage forex, you need to assess threats all along the supply chain.
If you source raw materials from a country where the local currency appreciated against the US dollar, it can be difficult to switch to a supplier in another country where the exchange is more favorable. This also applies to countries that apply tariffs unexpectedly. You can mitigate risks with a diversified supply chain. Best business practices suggest having at least two suppliers in different countries when possible.
Exchange rate risk isn't someone else's problem – it’s yours.
Maintaining long-term trading relationships in foreign countries means your exposures will require continual monitoring. You’ll need to collaborate with suppliers and customers to understand and alleviate potential risks. Developing a cohesive internal strategy with CFOs, Treasury, Procurement, and Finance to analyze the supply chain and FX implications is key. For more information on currency management, contact Synovus Treasury and Payment Solutions, your Treasury Consultant, or Relationship Manager.
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