We’re a few weeks away from the opening ceremonies of the 2016 Summer Olympic games, to be held, this time, in Rio de Janeiro, Brazil. With them, a surge of millions of people will enter the city from all over the globe.
It’s a massive opportunity for cross-border commerce, and payments technology companies are taking advantage. But away from the face of the consumer, the Olympics also offer a new hub for international procurement.
According to the official Rio 2016 Olympics website, by the time the games start, the Olympics committee will have already procured more than 30 million goods, including sports equipment, accommodation items, like beds and mattresses, and way more.
And that’s just for the Olympics as its own organization; other businesses from across borders will be grabbing at the opportunity for new business and will need to procure from overseas while operating in Brazil.
“You can’t talk about the Olympics and not talk about international procurement,” says Reggie Peterson, director of indirect supply programs at procure-to-pay firm AmeriQuest. “The Olympics are a global activity.”
According to Peterson, the Olympics will see businesses procuring goods from sports equipment to bug spray. While the Games offer a big opportunity for businesses there, cross-border procurement, Peterson said in a recent interview with PYMNTS, can lead to incredibly risky business practices.
Of course, foreign exchange volatility is a big issue.
“Companies have got to be really concerned about the currency exchange rates through Brexit, of course, and other types of political unrest or uncertainty in the environment,” the executive said, adding that, with companies purchasing items in their local currency, they’re going to have to be extra diligent about FX volatility.
Foreign exchange fluctuation may be one of the most difficult aspects of international procurement, as even the big guys can rarely get a good grasp of it, Peterson explained.
“You have models, software, algorithms, everything else, and you still don’t know,” he said of the challenge of forecasting FX rates. “The only thing you can do is put yourself in a position of being very knowledgeable and hands-on with the types of data that you’re using. To constantly be aware of political changes, such as an increase in tariffs, because those have a direct effect on company revenues.”
But international procurement brings other risks to a company, both on the buyer and supplier sides. And the Olympic games are likely to lift the veil on those challenges.
For instance, with the sheer volume of people expected to flock to Rio, logistics is likely to be a nightmare, Peterson warned. Delays, on top of likely logistics and shipping price hikes, could impact a company’s bottom line and strain supplier relationships if purchase contracts that include agreed-upon delivery times and locations can’t be fulfilled.
To complicate matters further, Peterson noted that businesses procuring from overseas not only have to manage supplier risk (which includes assessing things like quality control regulations, which differ from jurisdiction to jurisdiction), but procurers have to also keep watch on its suppliers’ suppliers.
For example, if a supplier’s supplier is based in Europe, any impact there (like Brexit) will eventually trickle down.
“If anything happens in the euro area that may disrupt anything in the supply chain, then that increase in cost is going to come to you eventually,” the executive said. “You have to really be connected with your suppliers, and your suppliers’ suppliers, and even their customers.”
Cross-border procurement also heightens the challenges of dark purchasing, Peterson said, stating that companies’ inability to track expenses is a “big issue.”
“If you don’t know where your expenditures are going and how they’re being effected, that’s the biggest risk of all,” he said. “We talked a lot about trade risk, but if you don’t know where they’re going or if you don’t know where your company is spending money, who the suppliers are, you may be paying more for items than you anticipated.”
That may be the case due to a lack of research into suppliers, local tariffs and regulations, or it could be due to FX volatility. Stretched-out payment terms can prove a challenge for both buyers and suppliers, Peterson added: Suppliers may struggle with cash flow as they wait to get paid, but corporate buyers, too, can see a hit on the bottom line thanks to FX volatility between the time a payment is made and when a supplier receives it.
“The issue is the time it takes in between paying for an item and when you actually collect the cash,” he said. “The longer the payment term, the greater the risk there is for exchange rate volatility, and changes most likely won’t go to your advantage.”
In this regard, faster payments may offer a benefit to the businesses involved in international procurement, whether it be through credit cards, Peterson said, or through other faster payment initiatives. Until then, cross-border procurement is riddled with threats to the corporate bottom line, for both buyers and suppliers. For those firms taking advantage of the Olympics, without proper due diligence, Rio may be more of a money pit than an opportunity for international business.