I have the great fortune to be working on an interesting strategy consulting project (procurement-related) for a multi-national that will keep me in Europe for the next few weeks. I am also able to bring my family (Sidebar: The timing of articles may be a little more unique, as we work to get our bearings). The question of currency did not come up in our negotiations and that was fine by me (once we had agreed upon a suitable day rate). At the time, and certainly now, as we try to calculate the cost of our daily purchases in Euros back to dollars in an attempt to immediately determine if we are getting a great, good, or poor deal, I wondered how often contract currency comes into play during the negotiation process with a foreign supplier.
Since exchange rates, like the temperature and stock prices move fluidly through the day and over time, there is inherent risk in the decision of contract currency. A single contract may not pose a large risk, but it has risk, nonetheless. As contracts are rolled up to the category or commodity levels or to a specific region or cost center, the risk grows.
Many procurement organizations have a charge to negotiate contracts for direct materials in the currency in which the final goods are sold, but as you move to smaller markets, that does not seem feasible or desirable. On the indirect side, there is a tendency to negotiate contracts in the buying company’s home (or accounting) currency.
Beyond the financial risk of currency fluctuation, there other factors to be considered when dealing with foreign suppliers, for example, the tax implications on where and how the goods and services are received.
On the direct side there are IPOs and customs processes built into many transactions, but as the world shrinks, the likelihood that a foreign supplier is qualified to deliver services or indirect goods continues to grow.
There is an extraordinary amount of time and resources invested in the best way to bill, capture, and account for revenue. Are corporations as diligent on the supply side?
How does your company handle the effects of F/X?