China's Currency Revaluation Could Affect Supply Chain

Filed in archive Supply Chain on May 17, 2005

A Gartner Research analyst warns that if China stops pegging its currency -- the Yuan -- to the American dollar, it could have a significant impact on companies' supply chains.

Why? It may eliminate some of the reasons that companies source their manufacturing in China. It may also change the balance of power between large retailers like Wal-Mart and manufacturers who have been forced to respond to RFID mandates.

Supply Chain Review reports:

"...if revaluation of the yuan occurs, its value will likely rise, eliminating many of the motivations for companies to source products from China. This could slow or reverse the outsourcing and overseas-sourcing plans that many U.S. and European companies are pursuing.

Many firms' business application IT strategies -- particularly those of retailers -- are based on the assumption of continued, rapid and inevitable expansion of global sourcing. Be aware that changes to your business application IT strategy may be required in the event of global events such as the yuan revaluation, and begin to prepare for this contingency.

The impact of such events can extend beyond an enterprise's own immediate sourcing needs. For example, if yuan revaluation occurred, this could reduce the negotiating power of large mass retailers by limiting their sourcing options.

While consumer goods manufacturers must continue to provide a high level of service to retailers, revaluation may reduce the level of major IT and process accommodations that manufacturers have recently yielded to large retailers in areas such global data synchronization and radio frequency identification (RFID).

Recommendations for companies participating in global supply chains: No immediate, drastic action is necessary. However, begin thinking about system requirements for "insourcing" supply chain processes, domestically sourcing goods or finding alternative international sources. Don't base decisions about system retirement on the blind assumption of continued global expansion and inevitable outsourcing of business processes."