You pay your supplier with your money, most likely in US dollars or euros.
If I told you that, today, your money is worth a lot more than 3 months ago, would you pay your supplier the same amount as you did a year ago? If you say yes, you are leaving profits on the table.
I’m Yuping Wang. I’ve been sourcing for over 20 years. Since I have suppliers all around the world, my eyes are always on the movement of the exchange rate and my currency value.
If you are buying products from another country, you need to know how to seize the opportunity of getting a better price when the exchange rate moves in your favor!
Why Does The Exchange Rate “Change”?
In the world we live in, the exchange rate changes daily, even hourly. In fact, they change every single minute. Why?
The driving force behind the change is trading. Currency is just like stocks, bonds, and commodities (e.g. oil, corn, or gold) – currency is a product.
This product of currency is traded in the stock markets every day.
Trading creates a balance or imbalance in supply and demand. The exchange rate adjusts upward or downward as supply and demand fluctuate.
Trading alone cannot drive an exchange rate change if all exchange systems are based on fixed rates. Since most countries function in a free-market economy, most countries use an exchange system based on floating rates.
In a fixed-rate exchange system, the country’s central bank buys and sells all foreign currencies at a fixed rate. The central bank will have total control over the rate.
In the floating rate system, the exchange rate is determined by the market’s organic demand and supply.
In reality, there is no absolute fixed or floating exchange rate system. In a fixed rate system, black market trading often exists to compensate. In a floating rate system, central banks often use their monetary policy to influence the market’s demand and supply.
How Does Exchange Rate Affect Your Product Price?
The exchange rate is embedded in the supplier’s quote to you.
If you are buying from China, most likely your supplier quotes you in US dollars. Here’s what happens, then, when the exchange rate changes:
- They Raise Your Price. When the exchange rate goes down, your supplier may raise your product price, because otherwise, they’ll receive less money in Chinese Yuan/RMB.
- They Won’t Say A Word. If the exchange rate swings the other way, your way, the supplier will receive more money in Chinese Yuan/RMB. In this case, they won’t say anything unless you bring up the topic to re-negotiate your current pricing.
So what should you do to fully take advantage of the exchange rate change?
You’ll need to pay attention to exchange rate fluctuations on a weekly or minimum monthly basis to understand exactly what’s going on. If you don’t monitor, you will miss out on the opportunity to re-negotiate your price. In fact, many people don’t even know when the exchange rate was in their favor.
Ask more and you shall get more! When dealing with the suppliers you must face the fact that you don’t get what you deserve, you get what you negotiate! At the time of this writing, the US dollar is going strong against the Chinese Yuan. This is your opportunity to ask and go after that profit that belongs to you.
Students in the Sourcing Warrior Mastermind all learned how to renegotiate when the rate is in their favor. They are getting better prices and celebrating their wins. If you want to join me, and the amazing community of sourcing warriors, just click here to learn more about my Sourcing Warrior Mastermind course. One small win in re-negotiating your product price will pay for the course. Let’s do it together!