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 – and opportunity – for firms managing their global supply chains. Currency (FX) risk is defined as the risk of an investment’s 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 – 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.

Transcending beyond finance for managing foreign exchange risk

Zsidisin, G. A.;Gaudenzi, B.
2018

Abstract

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 – and opportunity – for firms managing their global supply chains. Currency (FX) risk is defined as the risk of an investment’s 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 – 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.
978-1-138-64310-9
FX risk, risk assessment, supply chain, business management
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11562/982677
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