Should multinational companies change their supply chain strategy in response to ongoing foreign exchange volatility?
Yes or No?
My initial reaction to this question was a somewhat cautious yes. Dealing with foreign exchange variables is an ongoing challenge for any company with business that crosses borders. And I think it is clearly important for multinationals to be vigilant in their tracking of economic factors like foreign exchange rates, as they have impacts on their cost model and competitiveness. However, we are not dealing with “typical” forex adjustments. Knee-jerk reactions to dramatic fluctuations in exchange rates could leave your business even more vulnerable than before. A more prudent response is to rely on fundamental strategies like hedging, to minimize your exposure and review your business model in line with the markets where you buy, produce and sell to determine if you should adjust your supply chain.
While foreign exchange is obviously a very complex issue, in this case the answer is fairly easy. Very few semiconductor companies would change strategy based on foreign exchange rate volatility, as those swings are just as likely to go another direction after you shift the strategy. For most of our business at Xilinx, we charge customers in USD and buy from suppliers in USD. We do have operations with people who we pay local currency in various regions; but clearly we are not going to change that with every short-term shift in currency.
The best hedge against global and local uncertainty, including against foreign exchange volatility, is a flexible supply chain. Global supply chains should be designed to strike a balance between cost, service and resiliency to external risks. Advanced analytics should be leveraged to achieve this. Predictive analytics allow better understanding of risk drivers like exchange rates, labor rates and fuel costs. Prescriptive analytics can then recommend supply chain strategies and tactics that provide scalability and flexibility. The important question for companies to answer is how to add flexibility and resiliency to their supply chain while attaining the lowest landed cost.
As companies construct their supply chain strategy and make major capital expense decisions, it is common practice for them to take into account changes in labor conditions, oil prices and growth projections. For multinational companies, this extends to include fluctuations in foreign exchange rates. Multinational companies do need to test their supply chain strategies and adjust them as required for foreign exchange volatility. For example, multinational companies have international suppliers from whom they procure raw materials; based on how frequently contracts are negotiated with these suppliers, changes in foreign exchange rates could provide opportunities to leverage lower cost suppliers.
Foreign exchange rates represent one of many variables to consider as we define and evolve supply chain strategy. Near term volatility in exchange rates yields a mix of challenges and opportunities, which our supply chain professionals are well equipped to optimize—leveraging data analytics, supply chain flexibility and treasury terms. With respect to supply chain strategy, the strategy must enable analytics, flexibility and agility as well as the underpinning processes and systems. Exchange rates therefore become the variable to be addressed within the strategy, rather than the driver of the supply chain strategy itself.