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

Cost Driver Uncertainty and Price Risk in the Supply Chain: A Research Agenda

Uncertainty and risk is a fact of managing supply chains today. There are numerous sources of risk that can detrimentally affect firm and supply chain performance, and in many ways. However, one common factor of risk manifestation concerns financial losses. The last twenty years of research has experienced a significant increase in investigating how firms can manage supply chain risk and create resilience from product flow disruptions in the supply chain. Although this is a critical area for academic study and business practice, supply chain disruptions are just one form of risk that many firms experience in managing their supply chains. Other forms of risk can likewise arise in a firm’s supply chains, such as the loss of revenues from counterfeiting and damage of reputation from supplier performance. One form of risk, which is starting to gain traction in the supply chain management literature and practice, concerns financial loss exposure due to volatility and uncertainty of cost drivers in the supply chain. Examples of these can include the volatility of commodity prices and shifts in foreign currency valuations along global supply chains, among others. Although commodity price volatility and foreign exchange risk have traditionally been mitigated through financial hedging approaches (Brown, 2001; Eaker and Grant, 1987), there are limits to the effectiveness of these approaches, especially in circumstances where commodity prices or currency valuations shift in unexpected directions, such as experienced by Southwest airlines with hedging fuel prices in 2016 (Levine-Weinberg, 2016). These challenges continue to create financial problems in firms due to the dramatic changes occurring in supply chains from the COVID-19 pandemic. For example, commodities such as lumber (Tatevosian 2021) coffee (Anonymous, 2021), as well as services such as container freight charges (Murray, 2021) have experienced significant price swings during the past year. Our research program focuses on investigating the various uncertainties associated with cost-driver uncertainty and price risk, and hence, how this can affect a firm’s profitability. Examples of cost driver elements experiencing volatility include material purchases, energy costs, packaging costs, transportation costs, foreign exchange risk, and changing government policies such as tariffs and trade embargos. In addition, our research program aims at addressing how companies act in order to mitigate these risks, using both financial tools and supply chain approaches. Our goals in the research stream is to garner a more holistic view of cost driver uncertainty by investigating the multitudes of threats existing in the supply chain, and how organizations adopt and optimize risk mitigation tools in order to protect the firm’s profitability. This research program will use a multi-method approach for studying the uncertainty associated with cost drivers in the supply chain. We will first conduct an exploratory study through interviews with supply chain professionals, and then an empirical investigation - using a survey instrument - across a significant sample of companies

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

Measuring the financial effects of mitigating commodity price volatility in supply chains

Firms can choose from an array of approaches for reducing the detrimental financial effects caused by unfavorable fluctuations in commodity prices. The purpose of this paper is to provide guidance for effectively estimating the financial effects of mitigating commodity price risk volatility (CPV) in supply chain management decisions. This paper adopts two prominent and complementary methodologies, namely, total cost of ownership (TCO and real options valuation (ROV), to illustrate how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. The paper provides insights through a case study to demonstrate the application of these methods together and establish the benefits and challenges associated with their implementation

Estimating the Financial Effects of Mitigating Commodity Price Volatility

Firms can choose from an array of approaches for reducing financial losses caused by commodity price changes in purchasing process. This paper provides procurement managers with guidance for more accurately estimating the financial effects of mitigating commodity price risk volatility. Based upon two prominent methodologies, namely Total Cost of Ownership (TCO) and Real Options Valuation (ROV), this paper illustrates how commodity price risk mitigation strategies can be analyzed with respect to their effect on costs and performance. A case study allowed to practically simulating how TCO and ROV can provide useful insight in estimating the costs, risks and benefits related to the use of commodity price volatility mitigation approaches, as well as the benefits and drawback of each cost estimation metho

Forecasting models and risk assessment tools for commodity price risk in supply chains: An information processing perspective

Many firms are exposed to risk associated with volatile commodity prices. However, in order to manage this form of risk, organizations first need to forecast and assess the extent of their risk exposure to commodity price movements. The purpose of this paper is to provide insight to forecasting models and risk assessment tools for managing commodity price risk from an Information Processing Theory (IPT) perspective. This study utilizes case study data from 12 manufacturing companies located in Germany, Italy, and the U.S. The firms in this study employ a variety of methods to forecast commodity price volatility and assess commodity price risk using different approaches for acquiring, integrating, distributing, and creating shared meaning of information. Market indices, external service providers, informal discussions, and formal market research are primary sources of commodity price volatility information. Only four companies in the study interpret information using quantitative approaches, with the remaining firms primarily applying managerial judgment. In particular, organizations facing greater detrimental financial consequences from commodity price risk exposure are more likely to invest in formal forecasting models and information processing capabilities to reduce uncertainty. The volume of spend exposed to price volatility, in conjunction with the use of management approaches such as financial hedging to mitigate risk exposure appears to influence the development and use of forecasting models and formal information processing capabilities. The urgency of decision-making and trust in the supply chain also appear to influence the assessment process