Do you understand exchange rates & how it impacts Supply Chain Management? Many struggle with this. Let’s practice – https://lnkd.in/eHNiCXrm
Let’s say you just graduated from a SCM program. You have accepted a job offer from Boeing as a Buyer in Seattle. You will help Boeing identify suppliers to help meet its material needs. You must immediately find a supplier which can supply Boeing with electrical wiring harnesses. You find a supplier in Japan by the name of Toshiba. You have selected Toshiba because this company meets all of your cost and performance (e.g., quality, service, flexibility) expectations.
You negotiate a contract to purchase these electrical wiring harnesses from Toshiba, based in Japan. You decide that the contract calls for payment to Toshiba in Yen (foreign currency). When the contract is signed, the exchange rate is 132.24 Yen per 1 U.S. Dollar. It just so happens that you agree to pay 132.24 Yen for each electrical wiring harness (how convenient). No exchange rate fluctuation clauses are built into the contract (the price for each electrical wiring harness will always be 132.24 Yen – whether the Dollar strengthens or weakens). The terms & conditions of the contract are eventually completed & payment by Boeing is made at a future date. However, the exchange rate on this future date is now 124.73 Yen per 1 U.S. Dollar. See comments section if you got the answer wrong.
__
As a result of exchange rate fluctuations…
a. Toshiba’s revenues have actually increased for the contract, & Boeing’s costs have also increased.
b. Toshiba’s revenues have actually decreased for the contract, & Boeing is indifferent.
c. Toshiba’s revenues have actually increased for the contract, & Boeing is indifferent.
d. Toshiba is indifferent, & Boeing’s costs have increased.
e. Toshiba is indifferent, & Boeing’s costs have decreased.
Answer: d.
__
Has the dollar weakened or strengthened? Weakened.
__
In the example above, did you make the right decision by calling for payment to Toshiba in Yen rather than U.S. Dollars? Explain.
Answer: No.
__
In the example above, has the U.S. Dollar strengthened or weakened relative to the Yen?
Weakened.
__
If the payment to a foreign supplier is in U.S. currency, then the U.S. buyer assumes no risk & gets no reward from exchange rates. True or False.
True
__
If payment to a foreign supplier is in foreign currency, then the U.S. buyer is worse off with a strong U.S. Dollar, & better off with a weak U.S. dollar. True or False.
False
__
If payment to a foreign supplier is made in U.S. currency, & the dollar weakens, then the U.S. buyer’s costs increase & the foreign supplier is indifferent. True or False.
False
__
If payment to a foreign supplier is made in foreign currency, & the dollar strengthens, then the U.S. buyer’s costs decrease & the foreign supplier is indifferent. True or False.
True
__
If you got any of these wrong, see my comments, or:
https://lnkd.in/em9J5968
If you need more help with this stuff, see:
https://lnkd.in/em9J5968
https://lnkd.in/e9PVDimh
https://lnkd.in/e8rKkpY9
https://lnkd.in/eHrpVpRA
Answer: d.
d. Toshiba is indifferent, and Boeing’s costs have increased.
Toshiba is going to get the same amount of Yen per part no matter what happens. Toshiba will get 132.24 Yen for every part no matter what. Also, they are a Japanese company so they have their currency and do not need to exchange it for another currency. They are good to go. How about the American buyer (you)?
Day 1 – $1 = 132.24 Yen
Day future/later $1 = 124.73 Yen
Has the dollar weakened or strengthened? Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised.
In the example above, has the U.S. Dollar strengthened or weakened relative to the Yen?
Weakened. Why?
Day 1 – $1 = 132.24 Yen
Day future/later $1 = 124.73 Yen
Well, in the future, when you go the bank they will only give you 124.73 Yen for $1. Before, they would give you 132.24 Yen per dollar. So, in the future, the same amount of U.S. dollar gets you “less” Yen. That means it has weakened. You have to come up with more U.S. dollars to pay for the same part because you need more U.S. dollars to pay them the 132.24 Yen that you promised.
In the example above, did you make the right decision by calling for payment to Toshiba in Yen rather than U.S. Dollars? Explain.
Answer: No.
You decided to pay a foreign supplier in their currency. That means you have to go to the bank and exchange your U.S. money for yen. During the life of the contract, the dollar became weaker. That means you get less yen back for the same amount of U.S. money. That means you have to come up with more U.S. money to buy the same amount of material. You are costing your company more money. You should have been paying the foreign supplier in dollars. You will not be getting a merit raise this year.
SCM + Finance is important:
https://www.linkedin.com/posts/sime-curkovic-61617a115_do-you-know-what-this-means-210-net-30-activity-6823267005957750785-xcFH