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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference Supply Chain – Management Practices for Currency. Indiana Logistics Summit & 52 nd Dr. LL Waters Transportation Conference. Dealing in foreign currencies offers rewards and risks

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Indiana Logistics Summit&52nd Dr. LL Waters Transportation ConferenceSupply Chain – Management Practices for Currency


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Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference

  • Dealing in foreign currencies offers rewards and risks

  • Treasury risk management has to be seen within an integrated risk framework

    Reference:

    “CFO – Architect of the Corporation’s Future”, John Wiley & Sons, 1997


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Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference

  • Business risk is a matter of perspective.

    • Finance, operational managers, institutional investors, all see risk differently.


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Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference

  • Business risk arises from the likelihood that something good won’t happen, as well as the threat that something bad will happen.


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Indiana Logistics Summit &52nd Dr. LL Waters Transportation Conference

  • The population of risks can be divided into 5 (five) main groups:

    • Strategic Risks of plans fail

    • Financial

    • Operational Risks of human errors or omission

    • Commercial Risks of business interruption

    • Technical Risks of physical assets failure


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

Financial Risk

  • Risks of financial controls fail

    • Treasury risks

    • Lack of counterparty / credit assessment

    • Sophisticated fraud

    • Systems failure

    • Poor inventory/receivables reconciliation


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • All types of risk affect the strategic direction and ultimately the company’s ability to generate shareholder value.

  • In the past – risk might have been the insurance manager’s responsibility.

    • Financial control mattes are the treasurer’s responsibility.

    • Consumer relations might have been the sales and marketing responsibility.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Today functionally segregating risk management is out-dated!

  • An integrated view of business risks and risk management is required.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • What is the reason for such a change?

    • More and more people study business performance

      • Banks, investors, consumers demand more evidence how the company plans to maintain a strong balance sheet.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Competitive pressures escalate

    • Economic use of limited resources requires the company to lower its exposure of risks, which it is not in the business to take.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Risk management can create new advantages

    • The investment community may favor a stock, if it understands the rationale underlying the total risk management effort.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Individual loss or gain can match business loss or gain.

    • Senior executives with successful risk taking enjoy better career prospects.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Corporate fortune can reverse overnight.

    • News hits the stock market, a company’s position can flip- flop instantaneously.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Global regulations grow more complex

    • Corporations have the obligation to disclose to shareholders which risks they are in business to take, and what they are doing to manage them.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Risk management means dealing with uncertainty.

    • What can go wrong, or fail to go right?

    • How often?

    • What counter-measures exist, or could be installed?

    • How likely are they to be effective?

    • What about risks we don’t know?

    • Awareness of what risks might arise, where and crucially, how material they are to the company.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Focus on materiality, not source

  • Risk management requires an integrated approach

    • Elimination of risks, eliminates opportunity for profits

    • Greater risks bring greater returns


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Corporate management decides on risk appetite.

    • Is the risk consistent with the company’s current philosophy?

    • With its history of gains and losses?

    • With investor’s understanding of how much is at risk?

    • With management’s skills and experience?

    • With the business’s cash flow, debt position, balance sheet strength – and so on?


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Foreign currency risk as part of risk management

    • Foreign currency-a currency other than the functional currency of the business.

    • Foreign currency transactions require settlement in a currency other than the functional currency.

    • An exchange gain or loss occurs when the exchange rate changes between the purchase date and the sale date.


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • How can you avoid/manage foreign exchange gains/losses?

    • Foreign exchange exposure occurs through

      • Economic exposure

      • Transaction exposure

      • Translation exposure


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

Foreign exchange gain and loss can be managed.

  • Through avoidance

    • customer’s may not like it

  • Leading and Lagging

  • Netting

    • Bilateral

    • Multilateral


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Re-invoicing

    • using a central office, which takes over foreign exchange exposure.

  • Hedging

    • By forward contracts

    • By purchase of futures

    • By purchase of options

    • By engaging swap contracts


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Examples of foreign currency management

    • By compensating business arrangements

      • BMW buys parts in the US for Europe

      • BMW manufactures cars in the US

      • Siemens’ management of exports and imports


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • By hedging

    • Mercedes Benz

    • Porsche

    • VW


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Indiana Logistics Summit & 52nd Dr. LL Waters Transportation Conference

  • Strategic approach to currency management

    • Centralize foreign exchange/ finance activities around the world to better realize exposures and fully integrate treasury operations with underlying business process systems.

Thank you for your attention.