The world is a global village with a global market that allows businesses to procure products from any country. Unlike before, buying and importing goods from China is easy, thanks to governments collaborations and trade agreements.
The U.S. dollar is one of the widely used currencies for international purchases. Like other currencies, it is subject to changes in the forex market, which determines its value against your local currency. Thus, if you regularly make cross-border purchases, the exchange rate when placing your order significantly impacts your purchasing cost or the total amount you pay for the products.
Let’s dive in deeper and how at the impact exchange rates have on procurement costs. This information will help you prepare and budget when shipping products from China.
What Aspects of Procurement Costs Are Affected by Changes in Exchange Rate?
It is well known that international purchases are usually settled in US dollars, A host of economic factors causes changes in the exchange rate of the U.S. dollar. The main factors that can cause an increase or depreciation of the value of the U.S. dollar are rising prices or inflation, monetary policy, economic growth, shifts in demand for the currency, and export prices.
Changes in exchange rates can have a huge impact on sourcing costs. If you regularly source across borders, exchange rate fluctuations will affect your total cost of acquiring goods in terms of the unit price of your products, international shipping costs, handling fees paid across borders, etc.
Let’s explore the three main procurement costs that are directly affected by exchange rates.
Unit Price of the Product
The exchange rate directly influences the price quoted by the supplier, which is one of the most important factors to remember when procuring goods from a foreign supplier. If the supplier’s pricing is in a different currency, a local currency with a high value, the unit price will be lower. On the other hand, if the currency is weak, the unit price will increase.
Concisely, fluctuations in the exchange rate, such as the value of the U.S. dollar against the Chinese Yuan, directly influence the affordability and competitiveness of the procured products.
International Shipping Costs
A drop or rise in the exchange rate directly impacts international shipping costs if the shipping charges are quoted in a different currency. For example, if you are using the U.S. dollar, an increase in the dollar’s value against your local currency means you will pay more shipping costs.
High transportation expenses result in a high product price once it arrives at the destination to cover the shipping costs.
International Payment Processing
Currency exchange fees and payment processing fees are two costs that must be budgeted for when procuring products from China or any other country. The fees are calculated based on the exchange rate when transacting.
A stronger local currency results in lower payment processing fees, while a weaker currency causes a sharp fee increase.
How Much Does the Factory Usually Adjust the Price Within the Range of Exchange Rate Changes?
Several factors determine the extent to which a factory adjusts the price within the range of the changes in the exchange rate. They include but are not limited to market dynamics, industry, competition, and financial status of the factory at the time of purchase.
Here are four factors often considered by the financial time when adjusting the price to match changes in the exchange rate.
Cost Structure
Every factory has its cost structure that determines the cost of its products. If the factory costs are calculated in the local currency, the Chinese Yuan, the facility enjoys more flexibility to change the prices in response to the exchange rate changes.
However, if the costs are heavily reliant or influenced by a foreign currency such as the U.S. dollar, it’s more constrained in adjusting prices.
Market Competition
The severity of the competition in the market influences product pricing. Suppose the market is highly competitive, with hundreds of suppliers offering the same or similar products. In that case, the factory will be more hesitant to change the prices in response to exchange rate fluctuations.
It’s also important to note that too much deviation from the current market rates can result in the factory losing a significant percentage of its market share.
Long-Term Contracts
Most factories enter into a contract with suppliers who commit to ordering their products in the product. In such cases, the prices remain fixed over a specified period outlined in the contract. The price may be adjusted slightly in response to temporary exchange rate changes, but the contract must include this.
If not, the factory has no option but to absorb the impact of the exchange rate fluctuations and wait till the contract period elapses to renegotiate the prices and include a price adjustment clause in the contract document.
Profitability Considerations
Profitability is key to the success and growth of the factory. The finance team works in tandem with the other department to develop policies that cushion the factory’s profitability and sustainability to unprecedented changes in exchange rates.
If the exchange rate changes increase the cost of production, the factory may decide to increase the prices of the products to protect its profit margins. The adjustment depends on the factory’s assessment of its profitability and the elasticity of product demand in the market.
Why Do Suppliers Usually Include an Expiry Date in Their Quotations?
Suppliers include an expiry date in their quotations for four main reasons, namely;
- Exchange rate volatility: The exchange rates are very volatile and can change when least expected to, increasing procurement and shipping costs. Suppliers include an expiry date to protect themselves from unprecedented exchange rate fluctuations.
- Cost stability: By now, you already know how the exchange rate influences the cost of importing products. Suppliers include an expiry date to maintain cost stability and cushion themselves from potential losses.
- Currency risk management: Currency risk management helps suppliers to mitigate or manage the effects of exchange rate fluctuations. The expiry date helps them to manage changes in currency value better. It specifies the period in which the quoted price is valid, thus allowing them to hedge against potential currency risks or adjust their prices if needed.
- Safeguard profitability: If the exchange rate increases, the cost of buying the products increases, and as a result, the profit margin drops. Including an expiry date helps suppliers to remain profitable by cushioning themselves from currency exchange rate shifts.
Concisely, suppliers include an expiry date in their quotations when importing products to maintain cost stability, manage exchange rate volatility, manage currency risks, and protect their profit margins.
How Do You Determine the Trend of Exchange Rates Overtime?
Tracking exchange rates and predicting how they will change takes work. Here are a few tips on how to get it right and adapt your business dealings with foreign suppliers accordingly.
Hire a Professional Financial Analyst
A Financial analysts have the skills and expertise to predict whether exchange rates will rise or fall in the coming period. They will analyze the markets on your behalf and advise you on when to place the order, the price, and the expiry date to include in your quotation.
Use Expert Website
Several renowned websites are known for offering accurate and timely advice on exchange rates. Use them to obtain valuable information about the currency as you prepare to place your order. Check reviews posted online by other users to be sure that the information posted on the website is valid.
Monitor the Latest Speeches and Remarks Made by International Political Figures
Speeches and remarks by political figures often directly impact the supply and demand of a currency. For example, if a speech results in high demand for the U.S. dollar, its value will increase, and the opposite is true.
How Do You Make the Right Purchasing Decisions Based on Changes in Exchange Rate?
Your purchasing decision should be based on the prevailing and projected exchange rate fluctuations. Here are two scenarios to help you make informed decisions.
What purchasing decision should be made in response to an increase in the exchange rate?
Firstly, the increases make the products more expensive. In that case, looking for alternatives, such as sourcing from domestic suppliers or exploring other markets where the exchange rate is more favorable, is recommended. You can also negotiate with the supplier for a price adjustment or look for new suppliers with better rates.
Secondly, an increase will strain the budget by reducing the funds available to purchase the products. Consider your purchasing priorities and explore cost-saving measures like bulk purchasing and scouting for supplier discounts. You also need to allocate the available resources more efficiently to safeguard the profitability and sustainability of your business.
What purchasing decision should be made for falling exchange rates?
A lower or failing exchange rate means that the products are available at a lower price. Leverage the favorable exchange rate to increase imports from the supplier. It’s also an opportuning to renegotiate the prices and favorable terms.
However, it would be best to consider potential risks, such as future exchange rate projections and how the currency’s stability will influence your business’s financial stability.
Additional Pieces of Information You Should Focus on as a Purchasing Professional
The above information will help you make informed purchasing decisions. Here are other vital pieces of information that you should also consider to be on the safe side.
- Market Research and Supplier Analysis
Keep tabs on the market trends, industry dynamics, and the market’s competitive landscape. Do extensive research to identify reputable, reliable, and cost-effective suppliers.
- Product Specifications and Requirements
When placing an order, ensure that the product specifications and technical requirements are clearly articulated in your quotation. Indicate the quality standards and the technical requirements to avoid unnecessary tussles with the supplier.
- Carry Out a Cost Analysis and Total Cost of Ownership
When shipping products from abroad, your analysis shouldn’t stop at the total cost. It would help to consider other costs, such as customs duties, transportation, storage, maintenance, and potential future expenses. Calculate the total cost of ownership over the entire product lifecycle to determine its long-term value to you and the intended customer.
- Contractual Terms and Conditions
Read the entire purchase agreement or contract before signing to know your rights and obligations as the buyer and the supplier. Look at the payment terms, pricing, warranty, delivery schedules, dispute resolution mechanisms, and any potential incentives or penalties. Consult your legal team if any of the clauses is unclear.
- Ethical and Sustainability Considerations
They include the supplier’s labor conditions, environmental practices, adherence to regulatory standards, and environmental practices. Doing business with a supplier whose practices match your values will positively impact your reputation and contribute to long-term sustainability.
- Stakeholder Collaboration
Involve the internal stakeholders/departments such as finance, operations, legal, and end-users. Their input will help you make the right decisions. Collaborate closely with them to gather their input, ensure alignment, and address specific concerns or needs.
Conclusion
The exchange rate has a direct impact on procurement costs and processes. Pay close attention to the rates to determine when to place your order. Don’t try to wing everything yourself; instead, involve the internal stakeholders such as the finance team and, if possible, hire an independent financial analyst to monitor the market trends and changes in the exchange rate. Don’t rush or leave anything to chance!
