Currency risk can be hard to identify. When we talk about currency risk, or foreign exchange risk, we refer to the possibility that a business' financial performance or position will be impacted by changes in the exchange rates between currencies.
The events of 2020 and 2021 have positioned the electronics manufacturing (EMS) industry in a very precarious position. EMS companies and suppliers alike have been faced with a global component shortage, which places the entire supply chain at risk on a macro level. Whenever a part of your supply chain is based in a region with a different currency, your profit margin is at risk. Your suppliers’ expenses (e.g., workers, taxes, mortgages) are incurred in their local currencies - which means you may not be prepared for changes in cost should the value of your currency depreciate along the way. This type of risk leads to uncertainty and confusion, but we are here to help. Here are our top three suggestions for how you can minimize foreign exchange risk for your organization.
Do your research.
This may seem straightforward, but it is crucial to foreseeing currency exchange risk. Without accounting for the extent of exchange fluctuations, it’s very difficult to navigate them. Stay up-to-date on the locations of your suppliers. Keep an eye on the value of your home currency. Ask for transparency when it comes to where your components are coming from. Monitoring the value of your home currency in comparison to the value of the foreign currencies along your supply chain will help prepare you for any changes, and being prepared is the key to staying ahead.
Check your Terms and Conditions.
The terms and conditions you negotiate with your customers are the foundation for your business relationship. One way to protect yourself from foreign exchange risk is to insert a currency exchange clause into your agreement. You have the ability to make this clause as strict or lenient as you choose - but its presence serves as an immediate resource to mitigate exchange risk. Agreements of this nature can be difficult to negotiate but offer a certain level of security long term. Examine your terms and conditions, and consider whether a currency exchange clause makes sense for your business.
Optimize your process.
One reason currency fluctuation comes as an unexpected cost is because most EMS companies do not closely monitor it. Relying on outdated cost BOMs, or pricing that has not been benchmarked to the latest market situations can be risky.
The best solution is putting systems and processes in place that allow you to quickly and easily access the latest information about pricing in the supply chain. One way to best achieve this is to use API integrations with suppliers that pull real-time contract pricing instantly and without human intervention. This practice gives you the ability to quickly analyze the impact of minor fluctuations that may have occurred between when a price was originally quoted and the current market pricing.
QuoteCQ, CalcuQuote’s request for quote (RFQ) management system, is one easy way to achieve this. By being connected to the top component distributors in the world, you can do a real-time search of an entire BOM within seconds to refresh a stale quote. The efficiency of the re-quote process makes it easy enough to do at the click of a button. This gives you and your customer the confidence that there will not be any hidden surprises in either the price or availability of components in the supply chain. Optimizing your manual processes is a crucial way to ensure you are making the most of your time, and currency value.
You and your competitors are facing the same volatile market. While this thought may not be cheering, it should be a comfort to know everyone is taking off from the same start line. Doing your research, examining your terms and conditions agreement, and optimizing your process will allow you to get a leg up on your competitors, and minimize your exposure to foreign exchange risk.