Daily Archives: July 17, 2016

With Currencies Crazy, Is It Time to Return to Barter?

This is more of a question / thought experiment than anything else, but it’s a good question.

Brexit has thrown the British pound into chaos again. (Nothing new, it’s happened before, it will stabilize eventually, but it will happen again.)

Canadian and Australian dollars have recently made substantial declines from highs that put the dollars almost on part with the American dollar to lows that put it a mere two thirds to current values around the three quarter mark.

The Greek financial crisis is still ongoing and could threaten the Euro further.

And so on.

An organization enters a long term (multi-year) contract with an international partner under the expectation of value, an expectation that is crated based upon a current and projected currency exchange rate — which can change radically overnight when a single country, or in some cases, a single bank, decides to do something extremely unexpected or extraordinarily stupid.

All of a sudden costs can double. That’s considerably more fluctuation than is in the reserve budget.

But what if there was no exchange of currency. What if it was an exchange of a raw material or service for another raw material or service, where each raw material or service came from the organization or a partner in the same country. Since the value of a product or service, adjusted for inflation, is relatively constant over time and since the relative value of one versus another is also relatively constant over time, such a contract would not be subject to rapid changes in value differences regardless of what happened in the currency markets.

Now, you’re probably thinking that this wouldn’t work — you buy from X and don’t sell them anything, but who do they buy from and what do they buy? And what do their downstream partners need? Remember, they have bills to pay too and if their supplier requires a raw material in abundant supply that could be supplied by one of your customers, that has to pay you anyway, all could work out.

For example, just because you’re buying rare earth metals for electronics manufacturing, doesn’t mean bartering is off the table. The rare earth metals provider, which provides a refined metal, might be buying from a mining company that is part of a conglomerate owned by a single company that requires specialized mining equipment on a regular basis. One of your biggest customers could be a producer of this equipment that buys all of its hardware and associated services from you. If you arranged for payment in mining equipment of your choice in today’s dollars, and the seller was happy with that conversion, you could pay in mining equipment over time, regardless of how your relative currencies rose and fell.

This might not have been imaginable years ago given all the supply chain visibility, data, and optimization models that would be required to identify the right value-generating deals that could keep costs constant over time, but with modern supply chain systems that enable visibility from the raw material to the end customer, all supply relationships, demands and spend, and multi-level optimization models, this is now a reality. And currency risk could effectively be made a thing of the past in large, critical categories. It could require more multi-party agreements, but if all parties benefit, why not? It’s not like you have to courier contracts around the world — create a secure collaboration portal, agree, e-sign, and you’re done.

Now, just like buying on behalf of the supplier to get lower costs through greater volume leverage is still only done by the leaders, SI expects that this is something that only leaders would do for at least the next decade, if it was done at all. What do you think? Will leaders catch on?