How tech is protecting logistics firms from FX risks

As consumers, we all expect our goods to arrive on the doorstep yesterday. Businesses, too, demand much of their logistics providers. Yet logistics has so many moving parts that are super-sensitive to change that it can feel like a minor miracle that anything arrives anywhere, ever.

One such moving part is the little-explored matter of foreign exchange (FX), which has always been a risk factor for freight transport firms. 

Against a backdrop of currency volatility, managing FX risk has become an increasingly important business priority for such companies. 

Freight companies typically have to pay crews from various regions in different currencies, and then there is the payment of freight duties, as well as fuel costs. 

Fuel is typically bought and traded in US dollars, and the US dollar’s surge last year heavily dented the profit margins of many freight transport firms in Europe.

This is but one example among many of how freight firms are negatively impacted by currency fluctuations. Which begs the question: how do they mitigate such risk?

Supply Chain Digital wanted an answer to that, and other, questions around the foreign exchange issue as it affects logistics providers, and so we turned to an expert. 

Jason Gaywood is Head of Corporate Solutions at MillTechFX, a company that offers a FX-as-a-service solution.

Gaywood explains that freight transport and logistics companies are having to navigate an increasingly disruptive post-pandemic landscape. 

He says levels of supply chain disruption in Europe jumped by 38% in 2022 compared to 2021, and that an estimated 70% of supply chain management and logistics professionals expect pressure on global supply chains to continue throughout 2023.

We all know the causes: ongoing supply chain bottlenecks, labour shortages,  industrial action, geopolitical tension, more frequent extreme weather events and high inflation. It’s a wonder logistics providers don’t conduct their daily business from behind the sofa.  

Gaywood points out that, against this turbulent backdrop, 90% of world trade is conducted via shipping, with over 50,000 merchant ships trading internationally, and that it is the global nature of freight that exposes logistics companies to FX volatility.

“Many CFOs at freight transport and logistics firms have traditionally transacted in FX not because they want to, but because they have to, given their international exposure,” Gaywood says.

The multi-level involvement that logistics firms have with foreign exchange issues include: 

Payments   The FX market affects a variety of expenses and operating costs for shipping firms. These include payment of crews, maintenance work and port duties. International shippers often make these payments in different currencies, meaning payments require conversion to local currencies.

Freight duties  These are heavily influenced by currency volatility. For example, if the currency a shipping firm is paying freight duty in is strong (such as the US dollar last September), this dents profit margins and drives expenses up.

Fuel costs  Fuel typically accounts for up to 60% of a ship’s total operating costs. Because fuel is usually bought and traded in USD, the US dollar’s surge during the latter half of 2022 meant freight companies could buy less for the same money, pushing operating costs up even further.

Gaywood says that with currency volatility looking bedded-in “now is the time for such firms to implement risk management strategies against these threats”.

He adds: “Freight transport and logistics firms should consider implementing a robust risk management strategy to minimise their exposure to currency movements.

“Harnessing technology driven tools and getting the right processes in place will help enable companies to navigate mounting FX challenges and protect their bottom lines.”

Gaywood says there are a number of key steps firms can take to achieve this.

Compare the market  Having the ability to put currency trades up for competition is central to ensuring access to the best price, says Gaywood. “Yet many freight transport and logistics firms often rely on a single bank or broker to meet their hedging requirements,” he says.
“New technology driven solutions can tackle this problem, enabling transport companies to access rates from multiple banks whilst reducing the operational burden associated with this kind of market access.”

Transaction Cost Analysis (TCA)  This, says Gaywood, was created to highlight hidden costs, and enables freight transport and logistics firms “to understand how much they are being charged for the execution of their FX transactions”.
He adds: “Ongoing, quarterly TCA from an independent TCA provider can be embedded as a new operational practice to ensure consistent FX execution performance.”

Outsourcing  “There is a growing recognition that outsourcing does not necessarily mean less transparency or reduced quality of FX activities,” Gaywood says. “And when using the right partner, companies can improve transparency and execution quality.
“Outsourcing can enable freight transport and logistics firms to dedicate more time to core business matters, which is all the more important given that volatility and supply chain disruption are expected to persist over the next twelve months.”

Strong governance  Freight transport and logistics firms face several steps in the supply chain process that are complex. These include:
– Scheduling pick-up and delivery dates
– Preparing specialist transport equipment
– Setting out and arranging the right shipping lane (if transport is taking place via shipping)
– Ensuring the necessary insurances are in place.
“This operational complexity can make it difficult to maintain transparency,” says Gaywood. “Harnessing solutions that strengthen governance can help freight transport and logistics firms improve the cost, quality and transparency of their FX execution.”