Everybody is aware of the trans-Atlantic trade implications of a weak US dollar, which has lost another 12% of it’s value against the Euro in the last year. European exporters are struggling if they deliver to US customers, whose purchasing power has been greatly diminished in the last few years (see the graph on Kevin Graham’s recent Currency Fluctuations post for the visual). I’ve recently had several discussions with companies who purchase in Euros, sell in USD, and want to explore changes in their supply chain to reduce the currency exchange impact.

Less well known is the currency exchange rate’s implications in Central and Eastern Europe (CEE). The Czech currency is stronger by 25% against USD, Polish currency by 26%! That creates a tremendous challenge for suppliers in this region, which unfortunately coincides with their rise as a viable low-cost sourcing option. Yes, it is true that only few suppliers from these countries export to the US, but the repercussions in their primary export zone, Western Europe, are significant as well (+15% for CZK; +16% for PLN). The common refrain I hear from suppliers in these countries is…disaster, no profit.

The majority of small suppliers have no strategy or ability to hedge against currency fluctuations. Instead, they’re just trying to survive. But how long can they continue as their currency’s relative value effectively prices them out of the low-cost sourcing market?

It is actually pretty easy predict what will happen if this trend will continue. Suppliers from Poland and the Czech Republic will increase prices with new contracts, but they will slowly lose their competitiveness. Buyers will prefer new cooperation with suppliers that provide added value. And if they have majority of cost in local currency or cannot increase productivity elsewhere very quickly, buyers will be slower to move away. But other companies that have more flexibility will quickly move their supply base to countries and regions where their US dollars or Euros go a bit further.

Yes, the other scenario exists. The future could see CEE currencies driven down in value. Every hard hit exporter would welcome that. But in the mean time, it’s worth noting that not all countries within the CEE region are riding the same upward trend in currency value. As the table below shows, Turkish and Russian suppliers are feeling a limited impact, and Romania is even moving in the opposite direction!

The bottom line is, currency fluctuations are certain to impact sourcing decisions more and more as supply chains go global. So, having a strategy for minimizing their risks is a savvy move that is likely to help calm the exchange rate waters.

Tomas Oplatek is a Commodity Manager for Metals in Ariba’s Global Sourcing Organization. Based in Prague, Tomas works with a global corporations on strategic sourcing projects in Central & Eastern Europe.

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