Does everyone on your team understand currency volatility? It is already important © Getty Images
Does everyone on your team understand currency volatility? It is already important © Getty Images

Brexit: How do you deal with currency volatility?

29 March 2018

For 55% of UK respondents to the CIPS Brexit Survey, currency fluctuations have made their supply chains more expensive. Foreign exchange rates and raw materials pricing continue to be volatile.

“The value of the pound against the euro reflects the perception of how the negotiations are going,” says John Glen. “If the perception is we are struggling, the pound will depreciate. Even if you’re a global company, your reported profits could go down because of the exchange rate.”

“Brexit opens up lots of risk around currency and the changing value of goods,” adds HSBC director of corporate FX sales Gareth Lloyd-Williams. Managing currency volatility is therefore becoming a key part of procurement’s job, and perhaps something younger professionals – who weren’t working during the turbulent 80s and 90s – are unprepared for. Lloyd-Williams advises procurement professionals to get close to their treasury departments, to discuss appropriate uses for hedging.

According to the CIPS Brexit Survey, 24% of procurement professionals have seen clauses added to contracts to allow prices to be renegotiated following currency fluctuations. “You need to have a better understanding of the currency situation,” says Ben Lambert of Efficio. “No buyer wants clauses around changing prices.” He advises having a dead band around currency in contracts: “Something like: ‘If the pound drops or rises 10% against the euro, we will adjust prices based on the average from the last three months.’”

Alongside contract clauses, Lambert also suggests looking at panel sourcing for commodities or categories. “Having a mix of sources means if the currency shifts, you can move to a different supplier,” he says. “It spreads the risk and gives more flexibility.”

Collaboration is critical to maintaining good SRM, adds Sushank Agarwal, principal at Efficio. “Alongside contractual [conditions], you need more collaborative discussions,” he says. “State: ‘We don’t want you to go bust, but equally we don’t want to be massively overpaying you, so what can we do to share [the risk]?’”

The fall of the pound directly after the Brexit result in June 2016 (sterling fell to its lowest value since 1985) had a significant negative impact on former CIPS president Richard Masser’s business, Crestwood Global Product Solutions. But since then, he has been pleasantly surprised.

“Talking to our customers and suppliers, people knew what was going on,” he says. “They understood it’s a shared responsibility. You can’t go to suppliers expecting them to bail you out of a problem that wasn’t of their making.”

He adds he has always included clauses in contracts around currency and raw material pricing fluctuations, but that it has to be a two-way street: “Recently the pound strengthened, so we had a conversation about it.” 

Other procurement questions answered:

When will we know what to do?

What can procurement do right now?

How do we stop hour-long queues at Dover?

What does it mean for supply chains?

What will happen to British farming?

What does it mean for the public sector?

Could procurement negotiate it better?

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