The Financial Opportunity In Supply Chains’ Rising FX Risks

Foreign exchange (FX) volatility can be detrimental to businesses with heavy reliance on cross-border operations. Trade tensions between the U.S. and China, as well as Brexit, are among the biggest current geopolitical events that continue to rock the FX market, and companies are at risk of taking significant financial hits as a result.

Nearly half of companies surveyed by Western Union for its UK FX Barometer said they are “worried or very worried” about FX risk mitigation and hedging. That concern is growing for financial decision-makers in the retail, wholesale, and food and beverage industries, researchers noted. Western Union also found that small- and medium-sized businesses (SMBs) are particularly vulnerable to the FX volatility shaking up global trade.

In a recent interview with PYMNTS, Western Union Senior Currency Strategist Nawaz Ali spoke about the tension of currency hedging that companies endure today, with many firms taking a “one-off” approach to hedging.

“This means the decision on when to ‘pull the trigger’ takes on a far greater significance than it should, and can result in hesitation,” Ali explained. He added that corporates should instead tackle their FX risk mitigation in more manageable — and more regular — occurrences to prevent “buyers’ remorse” and protect themselves against financial losses.

New research from Dun & Bradstreet (D&B) and Cranfield School of Management, “The Global Supply Chain Risk Report” for Q3 2018, suggests that a more consistent approach to FX risk mitigation and management may not only prevent financial losses, but could emerge as a profit center for corporate buyers.

“Larger companies often hold the power in the buyer-supplier relationship, and decide whether to pay suppliers in local or foreign currency to maximize financial benefit,” explained Dr. Heather Skipworth, senior lecturer in logistics, procurement and supply chain management at Cranfield School of Management. “During the past quarter, exchange rates across the world have been in a state of fluctuation, partly due to trade issues — not just Brexit, but also the U.S. trade war with China, for example. It seems that buyers may increasingly be seeing an opportunity to use these fluctuations for their own ends.”

Historical data from D&B suggests that Supplier Criticality — that is, the percentage of companies that say their suppliers are critical to their operations — has declined 20 percent overall, a reflection of growing competition among suppliers and a trend that lends corporate buyers even greater power in the relationship. Supplier financial risks have declined over time, too.

However, according to researchers, foreign exchange risk increased 4 percent during Q3 in the wholesale, infrastructure, services, manufacturing and finance sectors, which are seeing more of their transactions occur in different currencies. This increase could reflect corporate buyers’ increasing use of different currencies to pay their vendors to take advantage of FX fluctuations, particularly the exchange rate between the pound and the euro.

“The analysis of Dun & Bradstreet data shows that the biggest increase in risk exposure during Q3 was amongst financial services companies, with three out of the four risk metrics increasing — a trend that has been building throughout 2018,” said Dun & Bradstreet Head of Product Development, Supply and Compliance Chris Laws in a statement. Foreign exchange risk alone increased 8 percent for this market in Q3, and by 13 percent since the start of the year, the report found. At the same time, supplier criticality has decreased, and supplier financial risks have similarly declined in Q3.

“It may be attributed to more sophistication on the part of buying companies in the finance sector,” D&B said, “which tend to have sophisticated credit analytics and are able to manage finance risk more effectively.”

According to the data, it seems corporate buyers are increasingly managing that finance risk by strategically using various global currencies to save on procurement costs. As such, vendors in the supply chain are facing greater exposure to FX currency volatility risks, signaling the need for more strategic (and consistent) mitigation of those risks in the current market climate.