MANAGING VOLATILE EXCHANGE RATES IN GLOBAL SOURCING

IMPORTANCE OF EXCHANGE RATES IN INTERNATIONAL SOURCING

EXAMPLE: U.S. Firm |Japanese Supplier

12 equal payments of 20.248 M Yen eachCurrent Rate: 202.48 Yen/$

IMPORTANCE OF EXCHANGE RATES IN INTERNATIONAL SOURCING (cont)

Month

Projected Yen

ExpenditureExchange

Rate

Actual U.S. Dollars Needed

1 24.248 M 202.48 100,000.00 2 " 192.30 105,293.80 3 " 180.15 112,395.20 4 " 180.45 112,220.80 5 " 169.63 119,365.60 6 " 174.10 116,300.90 7 " 161.10 125,685.90 8 " 153.65 131,780.00 9 " 155.50 130,212.20 10 " 154.30 131,224.80 11 " 163.50 123,840.90 12 " 162.10 124,910.50

TOTAL $1,433,230.60

U.S. DOLLAR CONTRACT EXPOSURE

WITHIN A YEAR THE APPRECIATED YEN INCREASED SOURCING COST BY ~ 20%

APPROACHES FOR MANAGING EXCHANGE RATES FLUCTUATIONS IN GLOBAL SOURCING

MACRO-LEVEL STRATEGIESAffect the Sourcing Decision itself or Pertain to the Volume-Timing of Purchase

MICRO-LEVEL STRATEGIESEmployed after the source has been selected and are used to protect the buyer from the risk of exchange rate fluctuations

MICRO-STRATEGIES

PROPORTION OF USE

1 PAYMENT IN U.S. DOLLARS (Risk Avoidance)

0.85

2 BUYING FOREIGN CURRENCY FORWARD (Risk

Avoidance)

0.20

3 BUYING FOREIGN CURRENCY FUTURES (Risk

Minimization)

0.35

4 RISK SHARING CONTRACT AGREEMENT

0.55

5 PAYMENT IN SUPPLIER CURRENCY

0.05

COMPARISON OF APPROACHES: COST IN U.S. DOLLARS FOR THREE PLANNING CASES

10% DECREASE UNCHANGED 10% INCREASE(2.1765DM/$) (2.4580DM/$) (2.7394DM/$)

PAY IN US$ 983,808$ 983,808$ 983,808$

BUYING FORWARD

1,000,207$ 1,000,207$ 1,000,207$

FUTURES 982,120$ 985,800$ 988,090$

RISK-SHARING (50-50)

1,038,464$ 983,808$ 939,090$

RISK-SHARING ("Window")

1,064,354$ 983,808$ 915,666$

BASELINE (SUPPLIER'S CURRENCY)

1,093,120$ 983,808$ 894,371$

BUYING POWER OF US$

MACRO-LEVEL STRATEGIES

1. USING EXCHANGE

RATES IN THE SUPPLIER

SELECTION DECISION

2. USING EXCHANGE

RATES IN THE VOLUME-

TIMING OF PURCHASES

DEVELOP A PORTFOLIO

OF GLOBAL SUPPLIERS

PROPORTION OF USE

0.20

N/A

0.10

SUPPLIER SELECTIONJAPANESE YEN CONTRACT: 15.365 MKOREAN WON CONTRACT: 88.41 M

Order # Exch Rate U.S. $ Needed Exch. Rate US $ Needed(Yen/S) (W/$)

Aug 1 1 153.65 100,000.00 804.1 100,000Aug 15 2 153.87 99,857.02 884.8 99,920.89

3 153.80 99,902.47 880.7 100,386.064 155.25 98,969.40 879.3 100,545.895 154.30 99,578.74 879.1 100,568.766 154.40 99,514.25 860.0 102,802.337 161.40 95,198.27 874.0 101,155.618 163.50 93,975.54 874.0 101,155.619 164.00 93,689.02 868.9 101,749.3410 162.10 94,787.17 867.5 101,913.5411 163.10 94,206.01 867.3 101,937.0512 158.10 97,185.33 861.4 102,635.2413 153.40 100,162.97 858.1 103,029.9514 153.50 100,097.72 857.9 103,053.9715 153.60 100,032.55 856.3 103,246.5316 153.66 99,939.49 855.8 103,306.8517 152.30 100,886.41 855.0 103,403.5118 147.20 104,381.79 851.8 103,791.9719 142.80 107,598.04 844.3 104,713.9620 139.75 109,946.33 844.3 104,713.9621 139.55 110,103.91 835.2 105,854.89

May 22 22 140.67 109,227.27 831.1 106,377.092,109,239.70 2,256,263.00

VOLUME-TIMING PURCHASES (EXAMPLE)

USE FORWARD BUYING POLICY WHEN THE VALUE OF THE YEN IS INCREASINGUSE SHORT-TERM PURCHASING POLICY WHEN THE VALUE OF THE YEN IS DECREASING