The current fluctuation in exchange rates has significantly impacted the tech industry. With the global chip shortage and supply chain challenges being consistent themes since the start of the pandemic, the current foreign exchange headwinds are adding yet another layer of complexity. The strong value of the dollar surged to its highest level in 20 years, resulting in the decline of billions of expected earnings for U.S. companies, including several large OEMs.
The fluctuation of local currency is extremely volatile. There is no longer a back-and-forth swing anymore. Instead, it’s continuing to spiral and decline in many countries. U.S. companies with offices abroad should account for the unique economic challenges that are impacting IT procurement processes and pricing. For instance, the war in Ukraine has disrupted global energy and food markets, leading to a ripple effect impacting Europe and the Middle East.
As a result of the war, currency fluctuation is extremely volatile in the Commonwealth of Independent States (CIS) region as a result:
Global Economic Impact
The power of the U.S. dollar continues to grow stronger. This may sound like great news, but for many countries, especially underdeveloped nations, the strength of the dollar is wreaking havoc on economies. The costs of imported food, pharmaceuticals, and fuel—typically priced in USD—have been skyrocketing, adding further stress to already struggling economies.
According to Bloomberg Economics, the Egyptian pound needs to decrease in value by 23% to alleviate the country’s currency crises. Economists report that in 2021, $100 worth of oil used was valued at 1,572 Egyptian pounds. Due to the fluctuations in currency valuations, the same $100 worth of oil is approximately 1,950 Egyptian pounds today. Egypt is currently using an “unofficial” exchange rate called the Black Market exchange rate. There can be a 5, 10, or even 15% difference between the two on any given day. The Black Market rate changes daily, which makes it extremely difficult to lock in a rate as we have been able to do in the past. Unfortunately, there is a shortage of USD in Egypt, forcing the country to use the alternative exchange rate. This makes it tricky for customers to plan and budget accordingly. Resellers and distributors are asking for upfront payments in lieu of standard net terms. And in the near future, distributors and manufacturers are planning to raise prices of bid and non-bid items due to the volatile foreign exchange rate.
Strategies to Minimize Currency Fluctuation Risks
In today’s volatile market, organizations with overseas operations are seeing IT costs rise significantly between the quoting process and the transaction. So, what can companies do to minimize these risks?
- Plan in USD to minimize currency fluctuation risk
- Work with your partners to build in a variance buffer to allow for fluctuation changes
- Minimize the time in between the transaction and the quoting, invoicing, or purchase order
- Look at statistics and use hedge rates to plan for potential cost changes
- Anticipate paying upfront to secure products and lock in the exchange rate
Overall, it takes proper planning and flexibility during these challenging times. Stockholding* or warehousing, pre-ordering products, and securing allocation are ways to lock in rates while alleviating lead time constraints. It’s also important to be open to local in-stock inventory and to understand local unofficial exchange rates may need to be applied vs. country bank exchange rates, as there are fluctuation variations between the two.
The Path Forward for Global IT Procurement
Despite these challenges, don’t stall on your IT purchases. It may seem wise to delay procurement of IT equipment and services until currency fluctuations stabilize, but there is no way to predict the future. Not investing in the necessary technologies to run your business can open you up to cybersecurity risks, lead to operational inefficiencies, result in dissatisfied clients and employees, and cause reputational damage—all leading to even greater financial loss.
With inflation and transportation costs rising, delaying purchases beyond their date of requirement might actually result in more expensive purchases. Minimizing the time in between quotation to transaction can only benefit you. Lead times are also still significantly impacted post-pandemic and have not gone back to how they were pre-pandemic.
The war between Russia and Ukraine has impacted currency volatility as we have discussed. We do not foresee positive change progression in both lead times and currency volatility until the latter part of 2023. Currently, the best thing is to be adaptable and plan in advance.
Understanding and tracking economic conditions is a big undertaking. And with already limited IT and procurement resources, looking to a partner that specializes in this area can greatly benefit your company. To learn more, please visit our global procurement solution.
Listen to this podcast for more tips on how to navigate global IT supply chain challenges.
*Stockholding services may be offered in certain cases.