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Forces for global sourcing
Global strategic sourcing procurement strategy advantages and disadvantages
Forces for global sourcing
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Fluctuation of Currency exchange rates
Rao. (2008) , exchange rate risk in the automobile industry, small currency exchange rate fluctuations have negatively effect on the stock returns of firms. Using quantitative research method, the research investigated the effect of currency exchange rate movements on stock returns of European based motor vehicle companies with market interests in USA concluded that the short movement in exchange rates have no significant effect on the stock returns of the companies investigated in the research
According to Juan (2008) money used in global purchases is moved between the domestic countries and the foreign partners in global sourcing and the stability of the domestic currency used enables the international trade to be easier as instability makes global sourcing more complex introducing more risks in the markets. If trade amounts to millions of dollars per transaction then a slight deviation of about 0.5% on the exchange rate creates a huge effect on the effectiveness of global sourcing strategy and the profitability of the whole supply chain of the firms.
Recent contributions in global sourcing show that depreciation in exchange rates are beneficial to some firms in promoting economic growth through technology transfer between the firms. Exchange rates have a strong effect on the current account balances as within three years of a depreciation event, for example, the account balances depreciate by three percent points of GDP. This is through a reduction in saving without meaningful reduction in investment of these firms which creates the need of developing countries to create confidence in their economic policies, (Marcus, 2011).
Higher currency inflation rates have a relation with higher i...
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...bout by market liberalization in the industry. The Government should formulate policies and proper strategies as a key to improving the sector’s financial performance and proper global sourcing strategies will enable firms to save a lot and be able to compete and sustain themselves in the markets. Currently dependency of motor industry on government legislation requiring assemblers to procure certain items locally is a manifestation of a fragile relationship between buyers and suppliers in the motor vehicle industry and the lack or no of commitment of large buyers towards supplier development in the motor vehicle industry due to lack of incentives from the governments. Hence it is apparent that there is need for incentives within the sector’s business environment, rather than government regulations and controls in the sector, (Kenya motor industry report, 2007).
Saputo has production plants in Canada, America, Argentina and Australia, and many of their products are sold on the international market. Due to the fact that products are sold internationally, exchange rates affect the end price of products in different countries. For example, many of the raw materials used in the Argentine plants, such as milk, is imported from Canada. Therefore, the exchange rate between Canada and Argentina affects the cost of raw materials for the Argentina plant. If the Canadian dollar appreciates against the Argentine peso, the cost of raw materials will increase for the production plant, and vice versa.
Meade (1988) stated that, because of the exchange rate rapid decline so much since early 1985 in the US and because the monthly trade statistics has been examined so thoroughly for any sign of a turnaround in the nominal trade balance, the J-curve phenomenon has received much attention. The statistics often implies that the negative effect of depreciation is reflected in the J-curve as the continuation of nominal trade deficit. Between early 1985 and 1988, the exchange value of US dollar in terms of currencies of other countries, registered a sizeable depreciation. The deficits recorded in the trade account were mirrored in the current account deficit. Meade depicted the significance of the exchange rate to the trade account as well as current account through the use of the J-curve highlighting that the phenomenon is used as a long-term goal to curb the deficits, however in the short-run, depreciation will increase the nominal deficits accumulated by a country.
Over the past 150 years, Canada’s relationships with other nations has led to the development of many trade sanctions. The nations involved in these trade sanctions haven’t always had the greatest relationship, allowing Canada to become the tie between the nations, advancing the development of countless Canadian industries. Due to Canada’s relatively small population, its automotive industry, hasn’t been able to grow as a self-sustained industry, leading the industry’s development to occur solely through economic sanctions. The two dominant forces these automotive sanctions face are the United States and Europe, each having a large stake in the development of the industry.
Globalization has led to an increase in multinational companies that produce different types of goods. Although these multinational corporations have been reaping substantial benefits as a result of market expansion, they face a greater risk of losing their international revenues as a result of fluctuations in exchange rates. Changes in the exchange rate between the countries expose the home company to various risks such as transaction exposure, translation, and economic exposure. As a result, the value of the firm is affected by fluctuation in the exchange rate. To effectively manage the exposures, companies use various hedging strategies such as the use of forwards contracts.
Analyze the major exchange rate risks associated with transaction and translation exposure within the Chinese market. Based on what you have gleaned from your analysis, predict the major changes that you believe will occur in the next 24 months. Justify your
In a capitalistic country with a free market, foreign competition is expected. This is no exception for the automobile industry where America competes with its various rivals. Competition from elsewhere encompasses that from Italy, Germany, and of course, the renowned Japan. The Japanese vehicle industry is especially competitive; according to the Automotive News Data Center, five out of the ten best selling vehicles of the year are Japanese vehicles. This data applies to the U.S. market over the first 9 months of the year. Expectedly, the automobile industry is an important and significant market. Motor vehicles are a major form of transportation as many people in the U.S. own at least one car.
The automotive industry is one of the most important sectors of the economy for every country in the world. It involves a large number of corporations and institutions engaged in the manufacturing process of motor vehicles including designing, developing, manufacturing, marketing, and selling. It contributes to the global economic growth by generating a significant return and creating a ripple effect on supporting the supply chain as well as providing job opportunities for the skilled workers (ACEA, 2016).
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
Foreign exchange transaction risk exists when the future cash transactions of a firm are affected by the exchange rate fluctuations. In the Amplifon Group, the foreign exchange transaction risk is highly limited thanks to the autonomy of the business operation of each country, incurring costs and revenues in the same currency. However, there still exists the transaction exposures arising from investments in listed financial instruments denominated in a different currency to the investing company’s functional currency.
Lean manufacturing and just-in-time processing are great business strategies that can severely stress a supply chain. The supply chain and supply chain management is a critical operations management element for any major company to succeed and remain competitive in the global market. The supply chain is one of many pieces critical to maximizing value to the end customer and requires close management to minimize external impacts. If a company is relying on another company to supply the raw materials needed for their production line, then impacts to this other company could impact their supply chain. Careful risk management is needed to optimize performance. As a company expands into global markets and global suppliers, this risk and management challenge is multiplied. The global nature of the company could impact important activities such as transportation, funds transfers, suppliers, distributors, accounting and information sharing. Disruption to the supply chain can significantly reduce revenue, cut market share, inflate costs and threaten production. A major disruption would have obvious impacts to profit, but could have additional intangible impacts to the credibility of the company if products are not delivered on time.
Exchange rates have proven to be a very important concept which determines international trade across nations – both in terms of risk determination (foreign currency risk) and for investors to make more calculated decisions. Exchange rate is defined as the price at which one nation’s currency can be converted to another. The puzzling nature of exchange rate determination can be owed to the greater volatility of exchange rates as compared to the macroeconomic fundamentals used for its determination and also due to model misspecification. In order to prove the difficulty in exchange rate forecasting, three structural models have been described, the monetary, the Mundell-Fleming and the Dornbusch model.
Foreign exchange risk is the potential loss due to change in the value of the assets or liabilities of the bank resulting from the fluctuations in exchange rate. Banks transact for their customers or for the banks’ own accounts. Any adverse movement can degrade the value of the foreign currency and causes bank’s loss.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
Honda, like other automotive companies, also came to the conclusion of firming a joint venture. At the moment, Honda was already famous for motorcycles in UK, but it was less well known in terms of the automobiles. While Honda’s cars enjoyed reputation for good quality and durability, the import restrictions limited its success it the European market. However, the European market was essential for the company’s global expansion. With the joint venture, Honda could avoid the restrictions on the import quota by assembling cars locally, because these cars would be considered locally produced. Moreover, a local partner could assumedly offer a better insight of the market.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...