About Insidesupplychain

Inside Supplychain helps with assigments which are a keyfactor in the fields of Logistics, Supply Chain en Production, assignments on the cutting-edge of operations, tactics and strategy. This can be implemented in a temporary position at production, but also  in a position as staff or management.

When issues of significant change are at large at the customer, Insidesupplychain can help.

Inside Supplychain excels where Change, Continuous improvement en Operational excellence are key to success.

“The secret of success is constancy to purpose”

Benjamin Disraeli

Currency wars affecting the Supply chain

Since a short time we hear more frequently the word currency war fall into news. For example, last week once again it became bitterly clear that Japan’s money supply further runs on open under the direction of the Japanese Prime Minister Abe and therefore bringing the yen in a free fall (30% since the start of Quantitative Easing aka QE). To stimulate Japanese exports and thus giving the economy a boost. We already know that China in between 1983 and 1993 has devalued the Yuan by more than 50%. After another substantial devaluation in 1994 of 50%, the yuan has been unchanged since then and far undervalued at a rate of 8:28 for 1 U.S. dollar. Not without result though, Chinese GDP doubled between 1990 and 2000. Since 2009 the USA started it’s famous QE programs which means no more than running the printing presses. Bernanke (chairman of the Fed, the central bank of the U.S.) has even admitted that Quantitative Easing is intended to increase inflation so moving consumers to spending more instead of saving but also because a weaker dollar will boost exports. That is exactly where the problem lies. Governments stimulate their economies by depreciating currency and therefore stimulate export or employment. At the expense of other countries trade. These countries will then in turn devalue its own currency and so get them all into a downward spiral and a currency war is a fact.

An important weapon for governments against depreciating currencies of competing countries is setting trade barriers to protect their own economy. This is done usually by setting tariffs and import quotas. This disrupts trade, make supply chains inefficient and increase overall costs. Also forex (foreign exchange) impact may be significant by widely fluctuating currency with growing risks which increase cost and putting pressure on margins.

A recent example shows the impact and complexity of currency wars and trade barriers on supply chains. Probably from June onwards, the EU will introduce an import duty of up to 70% on solar panels from China. This is the result of a trade dispute between the two powers. This is about importing solar panels produced in China into the EU. The EU suspects China from subsidizing Chinese producers of solar panels making it able to produce below cost prize. The result is that European importers of Chinese solar panels at the moment do not know if they already have to implement the tax on the sale price. If they charging the import duty directly on the price it will directly impact on sales and Europeans will probably massively change to European produced panels (the desired effect of the European Commission), or perhaps more likely, the market of solar panels will collapse because installation will be many times more expensive and no longer not as interesting than it is at present. If not to speak about possible countermeasures that are expected from the Chinese government when the EU continues to charge the import duty. At the time that the U.S. proposed extra charges on imports of solar panels from China, the Chinese levied a 30% on imports of automobiles from the U.S.

It is not the first time that the world has become embroiled in a currency war. Since releasing a worldwide gold standard in the mid-19th century they hit occasionally with each other in financial burden.

When in 1914 the gold standard was abandoned it was also a breeding ground for global currency wars. Already in 1921 the first one was a fact. Germany suffered under the conditions laid down in the Treaty of Versailles, which were at the end of the First World War heralded. The country was forced to make reparations to countries affected by the First World War such as Belgium. The then president of the German central bank saw an opportunity to devalue the German Mark. The D Mark quickly went into a hyperinflation allowing the currency devalue so quickly that if you wanted to eat at a restaurant in 1923 the dinner guests preferred to pay in advance as the food at the end of the evening already was more expensive. France also devalued the French franc in response to the hyperinflation in Germany. From then until 1930 both economies grew strongly by foreign investment and cancellation of the reparations for Germany. In contrast, the United Kingdom under the leadership of Winston Churchill chose to return to the gold standard. It led in that period to 50% deflation in the English coin, many foreclosures and millions of unemployed. After the Great Depression erupted in October 1929 it went further downhill for England. Large banks went bankrupt because they had done in illiquid assets through short-term debt, similar as Lehman Brothers did in 2008. Eventually even the UK was no longer able to hold it grounds and left the gold standard in 1931. The British pound fell dramatically and within a few months, the currency depreciated by 30% against the dollar. At that time there were many bank runs in the US and President Roosevelt was therefore obliged to devalue to regain the economic situation. FDR however took drastic measures and through a special law passed for the situation all the gold owned by individuals, dealers and businesses was confiscated under penalty of fine or imprisonment. Through this rigorous action all the gold was bought. In a short time the U.S. was able to devalue the dollar by 70%. By these actions of the U.S. and Great Britain the economy slowly began to grow again but of course at the expense of other countries. After many international conferences and the conclusion of the Tripartite Agreement in 1936, the first currency war came to an end.

From 1967 to 1987, a second currency war happened after the end of the Bretton Woods system, the hard link between the dollar and gold. By the end of Bretton Woods, currency could free float. The value of currencies which were only affected by the value of the currency on the currency market. Also during this second currency war the higher-level goal of governments was to stimulate the economy or to promote employment. However currency wars teach us just that and can only be effective in the short term. Latter never achieves a sustainable way. Nixon also tried to devalue the dollar by promoting employment and was therefore a short-term stimulus to exports. However, it soon attracted other Western currencies into her trap and the effect was lost soon. What remained was a fixing inflation and disrupted supply chains.

Again, governments try by influencing the national currency to stimulate the economy. However, it will only lead to internal conflicts, protectionism, disrupted supply chains and extensive inflation.

How can one make an organization more robust and guard itself against the whims of governments and making the supply chain more robust:

1. Hedge against fluctuating exchange rates by keeping strategic stocks (hedging). Of course, this brings with it additional costs by keeping additional stock (think of 3R, ROCE and WACC) but also additional risk in the form of longer lead times and less flexibility.
2. Invoicing in a stable currency (a world reserve currency like the U.S. dollar, Euro, Japanese Yen, British Pounds or Canadian Dollars) as long as they are held by central banks. Yet this seems contradictory since precisely the central banks are the cause of the problems and at present four of the five world reserve currency are influenced by politics and strengthen the currency war. In addition to the Canadian dollar, the Canadian central bank has decided not to intervene in its own currency and it has not done so since 1998.
3. Maintaining shorter payment agreements, thereby decreasing risk on changing circumstances. This exerts pressure throughout the supply chain as it directly affects cash flow of customers and suppliers.
4. Diversification of supply chains which are less dependent on consumption or marketing of countries involved in currency wars.
5. The shortening of supply chains through product innovation and design for supply chain. By specifically taking Forex into account of a product, an organization can proactively respond and be more flexible.

It will be understood that the latter two mentioned solutions are more into long-term durability. The organization must be however already anticipate on both from process and cultural based. Lessons to be learned from this is that currency wars are of all times and are repetitive. The only adequate solution is therefore always a long-term solution, and certainly not being dependent from our governments and volatile politics.

ASML to bid on Cymer = entrepeneurship

This week ASML announced the bid on all outstanding shares of Cymer. Although the Cymer take over is not a done deal, it will certainly be a breakthrough in the success of EUV technology in the semicon industry. Earlier this week analysts were more hesitant towards this bid but now seem to be convinced of the added value as well (see this article in the wall street journal earlier this week). It’s certainly not a cheap deal and ASML has to pay big bucks for this acquisition. But it will not only bring EUV in the fast mode towards high productivity. It will be a direct cash generator when servicing the current install base of immersion and DUV systems and will also have a positive effect on the margin of ASML’s sold systems. If not to say about the effificiency created in the supplychain. It is a best practice of vertical and horizontal integration of the supplychain. It must be a win-win!

To put one’s head in the lions mouth

Airbus is close to finalising plans for its first aircraft factory in the US, in a move that would dramatically ramp up its battle with Boeing. I wonder if this deal will really find closure and boosting the local economy and employability of the state Alabama. Or to see that protectionism is still very much alive in the United states and therefore preventing Airbus penetrating the US market. Just like the lost mega-deal of Airbus with the US Airforce for a 35Bn dollar defense contract. We’ll see, to put one’s head in the lions mouth.

The next generation

This week I stumbled upon an interesting article by Neil Howe. Neil is an publicist and famous American demographer. Mostly famous by his book “The fourth turning”, explaining new generations appearing every 20 years in a cycle of 80 years. The time has come for a new generation called the “milennials”. After the last generations of boomers and gen X’ers that are the leaders of todays worlds. Which can be recognized in excesses of leadership gridlock, refusal to compromise and rampant individualism (as we see in the Netherlands for instance with Geert Wilders) it is now the turn to the teamplayers….so read “the class of 2012” and embrace change!

Inside Supplychain’s renewed website is LIVE

As of today Inside Supplychain’s  renewed website is live.

Of course being able to serve our customers wishes even better but also to share my passion for operations, logistics and supplychain management. This is why I added a blog where I’ll be able to share my thoughts and recent articles on the broad field of SCM.

I will also share and spend time on the activities and tasks currently executed or upcoming. Needless to say, all in a discrete manor.

Completely in the SCM thought it will be in English as well, to be fully open, transparent and internationally oriented.