Adding the Eurozone Crisis to the Reasons Why Local Sourcing Makes Economic Sense

Before the New Year, the FT ran an article titled Supply chain: Inflation encourages trend to 'near-source' production. The piece does a decent job of summarizing some of the major reasons that organizations are evaluating local sourcing (also see our 2011 coverage of the subject here, here and here). But one piece of reporting that stands out in the piece is how Tesco, the large UK retailer, has opted to insulate itself from the currency swings and risks tied to the Eurozone crisis. Noting, "the eurozone crisis is also injecting a fresh element of risk into the supply chain," the FT reports that Tesco "said recently that it would refrain from entering into long-term contracts with European suppliers for the moment."

Spend Matters is beginning to hear Tesco's view echoed from other companies sourcing on a global basis. But simply buying on a contract-to-contract or spot basis with European suppliers is not the only answer to the challenge, given the relationship of pricing and contracts to the euro, dollar and Asian currencies. Procurement organizations across the board are going to need to quickly realize this January (if they have not already) that simply working with treasury to hedge currency fluctuation is not going to be an adequate strategy alone in the current market. In addition, procurement organizations will need to take a very close look at all of their existing contracts including longer-term contracts that are denominated in euros already.

Regardless, the ultimate means of hedging exposure to the extremely volatile currency markets as the EU continues to meltdown is simple: buy locally, sell locally. The best hedge against currency fluctuation from a buying perspective (although not necessarily a P&L reporting or roll-up viewpoint, based on how the broader organization reports or consolidate earnings) is to buy in local currencies for the markets where you plan to sell products/services, and then sell in local currencies the end products/services in the same markets.

- Jason Busch