ALLIANCE DESIGN CONCEPTS FOREIGN EXCHANGE RISK Case Solution
The weakness of this strategy is that the customers might not be willing to take this additional risk because they would not be certain about the final price quotation at the time of their project and they might not be willing to pay too high a price to Alliance. Even if Alliance, pads the margin within the final quotation by a few percentages then the customers and suppliers might question it and they might not be willing to take the risks. Even if the acceptance period of 30 days is declined, it might not create benefits for Alliance as exchange rates change on a daily basis.
Strategy 2: Internal Process Changes
The strength of this strategy is that the working capital of the Alliance would be strengthened and the cash conversion cycle would decline and thus reducing the exchange rate risk for the company. For instance, Alliance can reduce the receivables terms to bring quick inflow of cash and negotiate extension in paying the suppliers. The weakness of this strategy is that despite the internal process changes, the foreign exchange risk might affect significantly on the profitability of the company. Changing the cash management or equipment procurement policies can enhance the internal operations of the company and sales but it might still not mitigate the foreign exchange risk because this risk can impact severely on prices and costs at any given point of time.
Strategy 3: Foreign Exchange Services
The strengths of this strategy are quite valuable and significant. Opening of a foreign exchange account would surely reduce the service charges on the most frequent transactions of the company and CAD funds could be quickly converted to USD funds long before they are paid to the supplier. The biggest strength of this strategy is the forward contracts. Company can simply lock in a fixed exchange rate and completely eliminate the risk of depreciation of the currency. However, the weakness of this strategy is that the company will have to manage its accounts and if enters into forward contracts then it would not be able to take the advantage of the favorable currency movements.
Propose an implementable mitigation strategy for Alliance Design Concepts. The strategy can include a combination of any of the strategies mentioned in the case, and/or other strategies that you may have come up with. Your strategy should explicitly address the business process regarding quotation/sourcing/payment.
Based on the analysis of the strengths and weaknesses of each of the three strategies proposed above, I recommend Andrew Wag staff to implement strategy 2 and 3 at the same time and use the combination of these strategies to mitigate the foreign exchange risk. Implementing the internal process changes would enhance the operational efficiency for the company and improve its working capital management. The cash position of Alliance would be improved. Lastly, implementation of strategy 3 would reduce the service charges on most frequent transactions and Alliance should enter into the forward contracts to mitigate the foreign exchange risk. Both of these strategies combined would mitigate the foreign exchange risk and enhance Allianceâ€™s profitabily………………
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