Currency risk is an inherent aspect of bidding on contracts for goods and services in foreign countries. It encompasses every risk involved in doing business through foreign exchange (forex). As long as every country on the planet uses its own sovereign currency, this is an ever-present risk in any global procurement firm’s finances. This is why one of the key steps to managing this risk is through the use of a supply chain finance (SCF) arrangement. In a nutshell, an SCF arrangement involves international banks and fintech platforms that allow procurement firms to optimise their end-to-end finances.
SCF arrangements are useful for any company that wants to maximise its profits and ensure its long-term growth while doing business within the notoriously volatile forex market. Indeed, a guide to the forex market by FXCM notes that while the daily trading volume of the world’s currencies makes it the largest market in the world, it’s also highly volatile – the prices tend to change very quickly. This is because the exchange rates between any two currencies depend on continuously fluctuating supply and demand, which in turn is determined by a wide variety of both economic and political factors. This is why you can’t afford to ignore currency risk.
Even the smallest changes in price can translate to thousands of dollars lost (or earned) for procurement firms involved in global bidding processes. Apart from streamlining all the financial aspects of global procurement, an SCF arrangement also gives firms a wider and more practical understanding of forex market movement. In turn, this can inform your decision making whenever making deals that involve large amounts of foreign currency, which directly mitigates currency risk.
Another way to manage this risk is by having more than one supplier. While there are certain suppliers that have strategic value to your firm’s growth, sometimes, it’s better to have options. Whenever feasible, consider a variety of domestic and international suppliers. The more options you can weigh up and consider, the better you can pivot with unexpected forex fluctuations. This is why actively creating flexibility in terms of suppliers is at the top of the Supply Chain Quarterly’s guide to currency risk mitigation. While doing this might come at a significant cost, it’s also an investment in your long-term ability to pivot with the global markets.
Last but not least, it’s important to always consider data protection with every transaction you make. From your suppliers to your clients, any payments made should be accompanied by the corresponding security protocols. Inquire about the TLS/SSL encryption protocols that protect your SCF platform. Invest in internal cybersecurity experts and strategies. While the rapid development of fintech has made foreign currency transactions much more convenient, it has also put sensitive financial data in the shop window with hackers from all over the world looking on. In the digital era, you can’t manage currency risk without taking data protection seriously.
These are of course not the only tips and strategies you need to consider in order to manage currency risk throughout the procurement process. But if you can secure an SCF arrangement, have a dynamic choice of suppliers, and ensure data protection throughout your transactions, you can already significantly lower the procurement risks related to dealing with foreign currency.