Look at What Currency Risk is Doing to Your TCO!

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Supply Chain Management training - currency exchange

Prepare Now for Currency Risk

We talk a lot about TCO. That’s our business. But there is a huge currency risk issue rumbling and I don’t hear and haven’t heard anyone talking about it.

It has to do with the Chinese Yuan, and ALL of you are affected by it, whether or not your direct supply base is in China.

Mind you, this is not an academic or theoretical article. I can send you places to go look for those, but you won’t find them in my blogs, articles, or books. You need to be reading this blog if you are in the purchasing and supply chain management profession.

First off, ask yourself how much of your supply line is hinged on China. You really have to look deep, but it’s the supply chain that matters, not just your suppliers. The answer is, almost every supply chain runs through China. It’s scary. And there’s only one reason: COST.

Now, the Chinese government does something known as “pegging”. This means that they artificially manipulate the value of their currency. In this case, they intentionally keep it undervalued. They do this in the open marketplace.

What’s the benefit of undervaluing your currency? It makes everything you sell cheaper for other countries to buy. Other countries get more Chinese Yuan for every unit of their currency, therefore they are inclined to buy more.

That’s why US exports always increase and improve in a bad economy – because when the chips are down, currency values goes down, and other countries suddenly find your exports to be much cheaper….and so it becomes Black Friday for US goods, and other countries start buying like crazy.

I’m sure by now you want me to get to the point. Why are we going through this exercise???

Well, in 2005, the Chinese decided to slowly decrease the amount by which they artificially devalued their own currency. They introduced a monetary policy that allowed their currency to increase in value by up to 1% per day.

THAT EQUATES TO UP TO 1% COST INCREASE PER DAY TO ANYONE BUYING CHINESE GOODS FROM OTHER COUNTRIES.

Now I just read an analysis that if the Chinese government stopped pegging its currency, it would trade at an estimated 3.73 Chinese Yuan to 1 USD (US Dollar). It’s currently at 6.09 Chinese Yuan to 1 USD!

So let’s use some real numbers. Let’s say you want to buy a direct materials component from China for which they are charging $1,000 Chinese Yuan per unit. Let’s do this under 3 exchange rate scenarios:

Supply Chain Managemtnt training - exchange rate
Now do you see what I’m talking about? HOLY COW!! The US price conversion is going through the roof! TCO is taking off like a Ferrari…..only to a bad part of town!

By the way, the US government is pushing for the last scenario – no pegging of Chinese currency at all. This will introduce devastating inflationary pressures in every supply chain that runs through China. This IS going to happen eventually. You need to be worried! Better yet, be prepared.

Do you have currency risk mitigation plans in place? Do you have sourcing arrangements in place that allow you to shift your supply line away from currency risk situations when needed? What are you doing about currency risk in your supply line?

Currency risk is just one part of TCO, but it could get huge if your supply line runs through China. And it probably does.

Work with me to be the best there is in the purchasing and supply chain management field. I’ll train you and your organization to produce world class results, period. And it costs you nothing, because you will save so much more TCO than you were before.

See you next week!

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