The role of FX in global supply chains

Whether you’re starting up, scaling up or steering the course of a large organisation, if you have an international footprint your supply chain will be exposed to FX risk – a multifaceted force that, if overlooked, has the potential to reduce the value of operating internationally.

According to the Business Continuity Institute’s Supply Chain Resilience Report 2021, 23.5% of businesses are concerned they will experience disruptions caused by currency exchange volatility in the next five years. 

Global supply chains present opportunities for expanding the customer base, attaining lower purchasing costs, and developing better products. However, the cost of the international payments that underpin the movement of products and services across borders are subject to exchange rate volatility and uncertainty amid economic and political forces. 

This inherent FX risk can skew product pricing decisions, budgetary planning, and net cash flow management along global supply chains – undermining value creation and financial stability. To achieve profitability and stability, business leaders must mitigate FX risk in the supply chain by implementing a fit-for-purpose FX risk management strategy that aligns with their goals.  

This requires an understanding of how FX risk impacts global supply chains and the strategies that can be used to control it.  

Impact of FX risk in global supply chains 

The benefits of relying on global supply chains – lower costs, increased flexibility, improved quality, greater efficiency, and wider market reach – can soon be reversed by sudden exchange rate fluctuations. These constant market movements will inevitably cause supply chain expenses to shift – but it’s not always bad news. 

Importing 

For businesses that import goods and raw materials from outside the UK, any sudden depreciation in the value of the pound translates into a rise in operational costs and a reduction in profit margins, which they might pass onto consumers by raising prices. Conversely, an appreciation in the value of the pound reduces the cost of imports.  

For example, in the wake of the disastrous mini-budget in September 2022, when the pound plummeted to an all-time low against the dollar, Apple raised the launch price of its new iPhone range in Britain by up to £150.  

While some businesses that rely on importing components – such as the car industry – can offset the rising cost of doing so against the depreciation in export costs, others are more constrained. Particularly those that have no alternative other than to import raw materials and goods from abroad to sell to British consumers.  

Another symptom of these rising costs can hit workers where it hurts most: in their wallets. For example, many industries responded to higher import costs when the pound tanked following Brexit in 2019 by reducing workers’ wages, paid overtime and investment in training. 

Exporting 

For businesses that source raw materials or goods domestically and sell their products overseas, a depreciation in the value of the pound can be a boon. These market movements boost export competitiveness, making their goods cheaper and more attractive to foreign buyers. What’s more, these financial gains aren’t eroded by rising import costs.  

For example, The Office for National Statistics confirmed that in the year following the EU referendum in June 2016, when the pound felt the weight of the vote to leave the bloc, exports from the UK rose sharply, hitting a peak of 9.7% in March 2017. 

Conversely, an appreciation in the value of the pound typically makes exports more expensive and less attractive to overseas markets. However, businesses that produce their goods using raw materials from overseas can benefit from a drop in the price of imports while the pound remains under pressure – helping to offset this reduction in export competitiveness. 

Overall costs 

If we scratch the surface of these international trades, we can see that it’s not just international procurement costs and sales that are impacted by exchange rates; it’s the entire chain. The expansive nature of modern supply chains means multiple points span the globe – exposing cross-border businesses to additional layers of FX risk, including: 

  • Inventory management costs, such as overseas storage facilities. 
  • Logistics costs, such as transporting raw materials from overseas suppliers to business premises, and delivering products to international customers. 
  • Administrative costs, such as international trade tariffs. 
  • Labour costs for overseas staff. 

Minimum Order Quantity (MOQ) 

Many wholesale suppliers – both domestically and overseas – implement an MOQ. This commits importers to buying a certain amount of stock because it’s more cost-effective for the supplier to mass-produce items. This exposes UK importers to the risk of ordering too much inventory, breaking their budget and leaving them with a surplus they can’t sell; while UK exporters that adopt this strategy must attempt to maintain stable MOQs amid currency volatility. 

If the importing country’s currency strengthens, it may reduce the cost of goods in the local currency, encouraging the supplier to set smaller MOQs as the goods become more affordable. Equally, they might set higher MOQs if the importing currency weakens to offset potential losses or increased costs associated with importing materials or goods. 

Dynamic pricing 

Fluctuating exchange rates often require suppliers in the chain to adjust the price for a product or service to reflect changing market conditions – notably charging a higher price at a time of greater demand. 

This strategy can be inhibited by common challenges, such as a lack of real-time data that restricts accuracy of pricing adjustments. To be effective, dynamic pricing, therefore, requires access to currency market insight and investment in technology – rather than updating exchange rates at an arbitrarily chosen time.  

This will allow suppliers to harness dynamic pricing to align exchange rate updates with their unique dynamics, empowering them to set flexible prices that remain competitive while protecting profit margins – effectively passing the risk onto the client. 

Managing FX risk in global supply chains 

From Brexit and pandemic-induced lockdowns to the war in Ukraine, a raft of factors that are beyond a business’s control have exposed the fragility of global supply chains. Against this turbulent backdrop, business leaders like yourself must double down on what you can control: your exposure to FX risk in the supply chain.   

Don’t let FX risk management be the weakest link in your supply chain. Establish a proactive hedging strategy that aligns with the level of risk you’re exposed to and seek protection from. The tools that facilitate this – such as forward contracts, options, and currency swaps – allow you to lock in a specific exchange rate for future transactions, providing certainty and stability in your financial planning. 

At Lumon, we blend our exchange rate acumen with a relationship-led service to help tailor your strategy to your unique risks and requirements. This comprehensive approach to FX risk management empowers you to replace shortsighted emotion-led choices with informed decisions that are underpinned by data and best practices.  

Whether you’re starting up, scaling up or steering the course of a large organisation, if you have an international footprint your supply chain will be exposed to FX risk – a multifaceted force that, if overlooked, has the potential to reduce the value of operating internationally. According to the Business Continuity Institute’s Supply Chain Resilience 

Report 2021, 23.5% of businesses are concerned they will experience disruptions caused by currency exchange volatility in the next five years. 

Global supply chains present opportunities for expanding the customer base, attaining lower purchasing costs, and developing better products. However, the cost of the international payments that underpin the movement of products and services across borders are subject to exchange rate volatility and uncertainty amid economic and political forces. 

This inherent FX risk can skew product pricing decisions, budgetary planning, and net cash flow management along global supply chains – undermining value creation and financial stability. To achieve profitability and stability, business leaders must mitigate FX risk in the supply chain by implementing a fit-for-purpose FX risk management strategy that aligns with their goals.  

This requires an understanding of how FX risk impacts global supply chains and the strategies that can be used to control it.  

Impact of FX risk in global supply chains 

The benefits of relying on global supply chains – lower costs, increased flexibility, improved quality, greater efficiency, and wider market reach – can soon be reversed by sudden exchange rate fluctuations. These constant market movements will inevitably cause supply chain expenses to shift – but it’s not always bad news. 

Importing 

For businesses that import goods and raw materials from outside the UK, any sudden depreciation in the value of the pound translates into a rise in operational costs and a reduction in profit margins, which they might pass onto consumers by raising prices. Conversely, an appreciation in the value of the pound reduces the cost of imports.  

For example, in the wake of the disastrous mini-budget in September 2022, when the pound plummeted to an all-time low against the dollar, Apple raised the launch price of its new iPhone range in Britain by up to £150.  

While some businesses that rely on importing components – such as the car industry – can offset the rising cost of doing so against the depreciation in export costs, others are more constrained. Particularly those that have no alternative other than to import raw materials and goods from abroad to sell to British consumers.  

Another symptom of these rising costs can hit workers where it hurts most: in their wallets. For example, many industries responded to higher import costs when the pound tanked following Brexit in 2019 by reducing workers’ wages, paid overtime and investment in training. 

Exporting 

For businesses that source raw materials or goods domestically and sell their products overseas, a depreciation in the value of the pound can be a boon. These market movements boost export competitiveness, making their goods cheaper and more attractive to foreign buyers. What’s more, these financial gains aren’t eroded by rising import costs.  

For example, The Office for National Statistics confirmed that in the year following the EU referendum in June 2016, when the pound felt the weight of the vote to leave the bloc, exports from the UK rose sharply, hitting a peak of 9.7% in March 2017. 

Conversely, an appreciation in the value of the pound typically makes exports more expensive and less attractive to overseas markets. However, businesses that produce their goods using raw materials from overseas can benefit from a drop in the price of imports while the pound remains under pressure – helping to offset this reduction in export competitiveness. 

Overall costs 

If we scratch the surface of these international trades, we can see that it’s not just international procurement costs and sales that are impacted by exchange rates; it’s the entire chain. The expansive nature of modern supply chains means multiple points span the globe – exposing cross-border businesses to additional layers of FX risk, including: 

  • Inventory management costs, such as overseas storage facilities. 
  • Logistics costs, such as transporting raw materials from overseas suppliers to business premises, and delivering products to international customers. 
  • Administrative costs, such as international trade tariffs. 
  • Labour costs for overseas staff. 

Minimum Order Quantity (MOQ) 

Many wholesale suppliers – both domestically and overseas – implement an MOQ. This commits importers to buying a certain amount of stock because it’s more cost-effective for the supplier to mass-produce items. This exposes UK importers to the risk of ordering too much inventory, breaking their budget and leaving them with a surplus they can’t sell; while UK exporters that adopt this strategy must attempt to maintain stable MOQs amid currency volatility. 

If the importing country’s currency strengthens, it may reduce the cost of goods in the local currency, encouraging the supplier to set smaller MOQs as the goods become more affordable. Equally, they might set higher MOQs if the importing currency weakens to offset potential losses or increased costs associated with importing materials or goods. 

Dynamic pricing 

Fluctuating exchange rates often require suppliers in the chain to adjust the price for a product or service to reflect changing market conditions – notably charging a higher price at a time of greater demand. 

This strategy can be inhibited by common challenges, such as a lack of real-time data that restricts accuracy of pricing adjustments. To be effective, dynamic pricing, therefore, requires access to currency market insight and investment in technology – rather than updating exchange rates at an arbitrarily chosen time.  

This will allow suppliers to harness dynamic pricing to align exchange rate updates with their unique dynamics, empowering them to set flexible prices that remain competitive while protecting profit margins – effectively passing the risk onto the client. 

Managing FX risk in global supply chains 

From Brexit and pandemic-induced lockdowns to the war in Ukraine, a raft of factors that are beyond a business’s control have exposed the fragility of global supply chains. Against this turbulent backdrop, business leaders like yourself must double down on what you can control: your exposure to FX risk in the supply chain.   

Don’t let FX risk management be the weakest link in your supply chain. Establish a proactive hedging strategy that aligns with the level of risk you’re exposed to and seek protection from. The tools that facilitate this – such as forward contracts, options, and currency swaps – allow you to lock in a specific exchange rate for future transactions, providing certainty and stability in your financial planning. 

At Lumon, we blend our exchange rate acumen with a relationship-led service to help tailor your strategy to your unique risks and requirements. This comprehensive approach to FX risk management empowers you to replace shortsighted emotion-led choices with informed decisions that are underpinned by data and best practices.