Transcending beyond finance for managing foreign exchange risk

Almost every business organization is affected, either directly or indirectly, by global sup- ply chains. Organizations have experienced the benefits and risks of global supply chains for decades. Besides the opportunities related to global markets and cheaper production costs in emerging countries, there are several risks that global organizations need to manage. For example, during the summer of 1997, Indonesia, South Korea and then a larger part of Asia experienced a strong, unexpected devaluation of their currencies (Pesenti and Tille, 2000). In another example concerning the toy industry, some producers discovered that their supply chain partners were not able to pay debts for supply due to the currency appreciation (Johnson, 2001). As alluded in these examples, financial market dynamics may impact the cost structure of products and logistics services in global supply chains. For these reasons, companies need to improve the capability to analyze, forecast and manage the operational and financial effects foreign exchange (FX) risk may have on performance. FX risk and its management should transcend beyond the accounting and financing func- tions. Beside the traditional accounting and financial approaches for managing currency risk, organizations should consider adopting operating and contracting strategies extending beyond the firm to the customer and supply base. Purchasing and marketing serves a critical function in bridging firms with their global operations, both upstream and downstream in their supply chains respectively, while legal often serves a critical role in protecting firms contractually both domestically and internationally. Currency rate volatility poses a risk \u2013 and opportunity \u2013 for firms managing their global supply chains. Currency (FX) risk is defined as the risk of an investment\u2019s value fluctuation due to the changes in currency exchange rate, and can significantly affect profitability, organizational cash flow and the ability to competitively price products (Burnside, 2012). Buyer-supplier negotiations and relationships are also influenced by issues related to currency dynamics and should be considered as structural determinants of a currency risk mitigation strategy \u2013 hence the importance of including purchasing and marketing in creating approaches for managing FX. The purpose of this chapter is to investigate the role of the boundary spanning functions of purchasing and marketing, as well as legal, in developing and implementing strategies firms pursue in managing currency/foreign exchange risk. Our overall goal is to provide an initial framework for examining strategies to adopt for managing the effects of currency rate vola- tility, transcending beyond the traditional instruments developed by the finance function of organizations. As shown in our framework, financing strategies are a key set of tools and approaches for managing FX risk. However, with the complexity of global supply chains today, we believe organizations and businesses should take a more holistic approach in devel- oping an array of approaches for managing FX risk exposure

Supply chain finance and cyber risk: an illustrative case study

Organizations and supply chains are increasingly exposed to cyber breaches and risk, which may detrimentally affect data security, firm performance and supply chain financial flows. The purpose of this chapter is to provide an illustrative case of how cyber risk, and specif- ically cryptolocker attacks, represents a challenge for firms managing supply chain financial processes in terms of cash flows, credit risk and its associated financial implications. A case study of Paul Hartmann SpA (Italian division) provides insight as to how their firm views and manages cyber risk and its effects on supply chain finance (SCF). Findings from the case study describe how cyber risk can negatively affect the cash-to-cash cycle (accounts payable, inventory, accounts receivable), obscures supply chain cash flow visibility, and creates disruptions to both product and financial flows. Further, this chapter describes how cyber risk can detrimentally influence credit ratings, liquidity, and can potentially lead to insolvency if not managed

Mitigating foreign exchange risk exposure with supply chain flexibility: A real option analysis

Uncertainty and risk abound in supply chains. One such form of risk existing in global supply chains comes from volatility associated with currency fluctuations— Foreign Exchange (FX) risk. Although the study and practice of using financial hedging instruments are well documented, there are also emerging supply chain strategies firms may adopt for mitigating FX risk. The purpose of this multi-method study is to investigate how supply chain professionals perceive and mitigate FX risk, as well as to measure how investing in supply chain flexibility strategies affect firm financial performance. Using a mixed-method approach based on qualitative case studies and simulation experiments using the lens of Real Option Theory, we are able to show how investments in supply chain flexibility strategies can mitigate FX risk in terms of cash flows and profits. Theoretical, methodological, and managerial implications are provided for better understanding FX risk in the emerging supply chain finance discipline

SUPPLY CHAIN APPROACHES AND STRATEGIES FOR MITIGATING FOREIGN EXCHANGE (FX) RISK

Many organizations are exposed to Foreign Exchange (FX) risk in their global supply chains, which can significantly affect a firm\u2019s ability to competitively price products and wreak havoc on net cash flow and profitability. Beside accounting and financial approaches for managing the effects of fluctuations in currency valuations, organizations may also consider investing in supply chain flexibility through operational (e.g. production flexibility, sourcing flexibility, natural hedging) and/or contractual (e.g. escalation clauses, payment terms) strategies for mitigating this form of risk. The purpose of our research is to understand if and how firms invest in supply chain flexibility for mitigating the effects of FX risk. Our study is utilizing historic company data for simulating the financial effects of creating supply chain flexibility in response to unfavorable FX valuation changes. Our research will provide CSCMP members with an analytic approach for determining how to best invest resources and create options for supporting their global supply chain strategies given their exposure to FX risk

Supply chain finance: Historical foundations, current research, future developments

It is widely agreed that supply chains encompass and integrate material, information, and financial flows across organizations. There is a robust history and continually expanding research agenda investigating supply chain management practice and theory associated with material and information flows and processes. However, the management of financial flows from a supply chain perspective and in combination with the other flows, usually referred to as supply chain finance (SCF), has been under-investigated. Our understanding of SCF approaches and solutions in purchasing and supply management (PSM) is only starting to form. The purpose of this editorial is to provide some grounding of initial studies and concepts of SCF, illustrate new and emerging thought in this discourse with articles published in this special issue, and speculate how the SCF domain may evolve in theory and practice with the advent of new digital technologies and big data analytics