Production Management of Exchange Risk
Sometimes exchange rates move so much that pricing or other marketing strategies cannot save the product. This was the case for U.S. firms in the early 1980s and again in the 1990s and for Japanese firms in the early 1990s as well as the 2000s. Firms facing this situation must either drop uncompetitive products or cut their costs.
Product sourcing and plant location are the principal variables that companies manipulate to manage competitive risks that cannot be dealt with through marketing changes alone. Consider, for example, the possible responses of U.S. firms to a strong dollar. The basic strategy would involve shifting the firm’s manufacturing base overseas, but this can be accomplished in more than one way.
Input Mix.
Outright additions to facilities overseas naturally accomplish a manufacturing shift. A more flexible solution is to change the input mix by purchasing more components overseas. Following the rise of the dollar in the early 1980s, most U.S. companies increased their global sourcing. For example, Caterpillar responded to the soaring U.S. dollar and a tenacious competitor, Japans Komatsu, by “shopping the world” for components. More than 50% of the pistons that Caterpillar uses in the United States now come from abroad, mainly from a Brazilian company. Some work previously done by Caterpillar’s Milwaukee plant was moved in 1984 to a subsidiary in Mexico. Caterpillar also stopped most U.S. production of lift trucks and began importing a new line—complete with Cat’s yellow paint and logo—from South Korea’s Daewoo.