by Andrew White | November 19, 2015 | Comments Off on The Rise of Global Supply Chains and the Impact on them of Exchange Rate
There was a really interesting narrative in the recently published IMF World Economic Outlook. I copy it here in full:
“During the past several decades, international trade has been increasingly organized within so-called global value chains, with different stages of production distributed across different economies. Production fragmentation has grown as economies increasingly specialize in adding value at some stage of production rather than producing entire final products. Exports of domestic value added have gradually declined as a fraction of gross exports, while the share of exports consisting of imported intermediate products, that is, foreign value added, has increased. At the same time, the share of intermediate goods in total exports is rising, while the share of final products is declining. As a result, export competitiveness is determined not only by the exchange rate and price level of the export destination economy, but also by the exchange rate and price level of the economy at the end of the production chain.”
That last sentence is the key: “…[E]xport competitiveness is determined not only by the exchange rate and price level of the export destination economy, but also by the exchange rate and price level of the economy at the end of the production chain.”
The quote is taken from chapter 3 in the WEO: Exchange rates and Trade Flows: disconnected. The analysis has come about due in part to the longstanding fall in commodity prices that are materially impacting how supply chains around the globe are performing. What the narrative highlights is that it is not only the sales price of the finished product and exchange rate of the exporting economy that dictates success (and a profit); the series of exchange rates and price levels of the intermediate value chains also plays a key role. As such, global and strategic supply chain planning needs to take into account multiple steps of price and exchange rate. Commodity prices are very low by historical standards but exchange rates (and so intermediate prices) are dynamic due to a number of factors.
I used to be a supply chain analyst (14 years ago) and now I am an information management analyst. My former focus permitted me to look at technologies that help with modeling global supply chains, even to the point of including constraints related to tax and duty draw-backs. Exchange rate models would also be included here for longer term planning models – and so medium term to strategic sourcing plans can be evaluated. My old employer (Logility, Inc) sold such solutions, as did other vendors, but my colleague, Tim Payne, now covers this space.
More recently as an information management analyst I now understand more broadly the challenges and uses of low quality data and how to establish business level governance on that data in order to sustain effective data quality and use. And as an economist by education, I have an affinity to economic models, so the combination of data and algorithm, to determine short and long term sourcing and supply chain strategies, makes perfect sense to me. However, I also know from experience that modeling and using such global supply chain models are complex and hard to understand, and embed into operational scenarios. But with more dynamic and changing exchange rates, this need must surely be rising.
The US is toying with its first interest rate increase since 2006. This will make the dollar stronger, and so impact exports negatively (products are more expensive) but at the same time, intermediate products exported will also be more expensive. The euro zone is toying with more quantitative easing and increasingly more negative interest rates. This will weaken the euro and thus make exporting intermediate products cheaper. China has its own concerns and other emerging markets are also under pressure due to dollar outflows from recently high investment levels. So if I had to summarize a key point from the IMF report it would be this: global trade is only as profitable as the global supply chains that support it – and the factors that dictate global value chain profitability are more dynamic and complex than ever before. My guess is technology can play a role here to help cope with complexity.
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