Many of our blogs are relevant no matter what time of year we write them. Maybe we might have to amend an FX price or two to keep them current, but generally the content evolves around certain best practices that work no matter what’s happening in the present environment.
This, blog, however, is certainly relevant as at June 2022 where we’ve witnessed and insane rise in the cost of fuel over the last few months. And, at the time of writing, the image that accompanies this post was taken at a location near to where our co-founder, Mark Ridley, lives and details the fuel prices at that time.
Since the start of the pandemic in March 2020 the supply chain industry has been in battle on several fronts. A shortage of inventory, delays getting product into the States due to back-logs at major ports, and not least of all the cost of a shipping container.
Now, we throw in the rising cost of fuel.
We’ve written blogs over the last year or two in relation to cost and why the focus maybe should be on the expenses you can control rather than those you can’t. I suppose one could argue you could control the expense of importing product by not importing as much or with the same frequency, but then you’ll manufacture and/or sell less which impacts the bottom line regardless.
So, what can you control?
The price you pay for your imported goods and raw materials.
Simply put; if you are paying global vendors in U.S. dollars and not their currency you could be overpaying by as much as 5%. Furthermore, you have some currency exchange risk in there that you can’t see and therefore can’t manage so as the dollar weakens your vendor will inch up the dollar price per widget.
How are you overpaying by 5%?
Your vendor, in most cases, doesn’t want dollars and will convert to their local currency. Bizarrely they convert to their currency to repay loan facilities, employees, utilities, income taxes, and other local expenses.
Your vendor based the dollar price on a local currency margin value and because they have quoted you a dollar price it means your vendor carries the exchange rate risk. If the dollar weakens (i.e. USD to EURO moves from 1.05 to 1.10) it means your vendor will convert the dollars to a lesser currency amount and this could be below the margin required.
To combat this, it’s customary to ‘pad’ the dollar amount by 4-7% as well as limiting the payment terms to, maybe, 7 to 21 days.
If, you were to ask for a quote in your vendor’s currency as well as in dollars;
- they will gladly provide both.
- they will not force you to pay in one or the other, so you remain free to choose.
- you’ll find the currency value, when using GreenShootsFX prices, often to be 5% lower.
- you’ll find the vendor will likely increase the payment terms by 30-60 days.
- you can fix the FX rate today for delivery when the payment falls due.
You can’t control the cost of a container.
You can’t manipulate the price of oil.
You can control whether you pay vendors in dollars or their currency.
Therefore, you can control protecting your margin, improving your cash flow, and you therefore control increasing your net profit.
Connect with us today and take 15 minutes to learn how to adhere to best practices with zero cost to you, and minimal changes to the way you operate.