Currency fluctuations and the impact on Global Supply Chains

Let’s take a look back to the global situation about this time three years ago.  Circa early 2008

To set the stage, we had come out of the several scares in the summer and fall of 2007 as increasing leverage debt bets in finance had begun to show cracks.  The great recession as it has begun to be known, had “officially” just started in December 2007.  Demand had already begun to weaken globally, especially in the Western economies.

In the spring of 2008 the dollar was heading towards a multi-year low.   Commodities prices were spiking higher, especially oil.  Oil was on its way to an all time high in June 2008.

 

As it rolled towards its peak, the impact of oil (in my opinion mostly a symptom of the currency) and the decline of the dollar were having an impact in logistic circles.  Among some of the noticeable items were;

1) The term near shoring started to gain more traction in logistic circles.

2) There was an intense focus on fuel surcharges by clients & transportation companies.

3) An increased emphasis on the reconfiguration of inventory.

4) An increased focus on the reduction of inventory locations.  

5) Companies were examining currency impacts in contracts with vendors, suppliers, ect

6) The net benefit during this time was sales growth in emerging markets. 

 

 The majority of the above took place as result of the continued decline in the Dollar.  Think back to summer of 2008.  Most of our actions were based on this trend continuing.  What happened?  The trend reversed, oil fell off a cliff, the dollar moved much higher, and demand accelerated downwards.

So if you are reading this far you are probably thinking, “Great, thanks for recap but I know what happened”

The reason I bring this up is the action in the dollar.  As the world’s reserve currency, the dollar impacts all currencies.  It is the driving force.  If you look at chart of the DXY (dollar index), it broke the November 2010 lows.

Over the last several weeks/ months what events have transpired? 

1) We had multiple events in Africa and the Middle East. 

2) Escalation of the events in these locations….Libya, Hamas bombing of Israel

3) We had the third largest economy in the world have a devastating earthquake and subsequent tsunami.  

4) A potential nuclear catastrophe in Japan (Thoughts and prayers are with all the people of Japan).  

What is the point of this?

During this time of uncertainty the dollar should be screaming higher.  BUT it is not.  In fact it is breaking down at the exact time it should be moving up.   I believe we will test and then break the 2008 lows in the dollar.  The danger here is that we as humans tend to extrapolate the current situation or trend into the future.   In my opinion the dollar is the key instrument to watch.  If we break the 2008 low, I believe people will begin to panic.    

This is often the time of bottoms.  I believe the dollar will then bottom and begin moving higher out of this panic stage.   So one is now sitting there thinking “Great I have a recap of events from 3 years ago and your view of what will happen in the dollar.  How is this actionable?”

Risk Management

As logicians we have to constantly manage risk in our supply chain.  An abrupt change in currency is a risk factor.   Can a company completely manage a supply chain around the analysis above, no way; it is not prudent risk management.   As stewards of our company’s assets we have to assess the situation and make decisions.  No one knows the future and our data will never be complete.   But I do believe mistakes will be made as people lean into the current trend.  

There are two takeaways here in my opinion.

1. Objectively look at the other side as you manage risk.  Remember we are all human.  As I stated us humans have a tendency to extrapolate what is happening today into the future.  Consider all factors.  Access the risk before events change.  A lot of people will state, of course this is what we always do.  The point here is not to argue that fact.  The point is to realize that we will naturally make decisions based on the recent trend.  I have a feeling a lot of deals done and decisions made over the next several months will have more of an emphasis on protecting the company against the dollar’s decline.  Realize our natural bias, examine contingencies and ensure equal weighting is give to the other side.

2. Take a calculated risk.  The best price and terms are negotiated at bottoms not tops.  I have stated my thesis above.  I believe one will have an edge in negotiations if focused on both sides.  Remember if the events unfold, the focus will be on the decline of the dollar, not its increase.   Maybe it is as simple as a few throw away terms in an agreement.  You know the specifics of your business.  We could outline multiple scenarios.  But a small calculated risk could make the difference to ones company or even their career.  

It would be very powerful to be sitting in a meeting in 4 to 6 months articulating the steps one took to manage risk in regards to currency or its impacts.   Even more powerful if you were able to outline the edge you were able to provide the company. 

Logistics W/O Boarders

Kevin