By Keith Wade
Associate Professor of Transportation & Logistics at American Public University
Part of the strategy of most businesses is to expand global operations. The world is a global village and expansions to various parts of the world bring goods and services closer to the consumers.
From a business perspective, expansion is something that every business must consider as a way of increasing the customer base. While many businesses have succeeded, there are many risks that businesses expose themselves to in the process.
Encountering New Markets
Although expansions are mainly aimed at widening the reach of businesses, sometimes there are unintended expenses that can spoil the whole idea of increasing revenue margins.
A common issue is increased cost of supply chain management. New markets mean new routes for manufactured products that come with complexities that result in high freight costs. For example, piracy in the East African region makes it expensive to transport products to East and South Africa. For businesses targeting this region of the world, the risks of expansion are clear.
Even when the products have reached their destinations, there are the risks of acceptance. Sometimes products have to be redesigned to meet the local demands and tastes.
Risks of Trading Abroad
Most importantly, international expansions expose businesses to foreign exchange risks. Going abroad means working in local currencies, which means a lot of currency exchange. Foreign exchange poses the risk that the value of an asset or liability will be altered because of a change in exchange rates.
While there are many currency related risks, the most common is translation exposure. This is the risk that the translation of the value of foreign-currency-denominated assets is affected by exchange rate changes.
From a logistic point of view, international business expansions also lead to cargo shrinkage–the loss of products between the manufacturing point or point of purchase and the point of sale. In cargo transportation, the most common cause of shrinkage is theft by the cargo transportation or customs officials. While cargo shrinkage is possible in every means of transport, the problem appears to be most prevalent in international transportation.
Looking for better business opportunities abroad is a good thing; it increases the opportunities for revenues. However, in going international, businesses must understand and manage the risks of global operations.
This article originally appeared on the Two Sides of the Logistics Coin blog.
About the Author: Dr. Keith A. Wade is an Associate Professor of Transportation & Logistics with American Public University. He teaches courses in Supply Chain and Logistics Management. Prior to working full time in teaching, Dr. Wade worked in the Logistics field for over 15 years. He was most recent a Director of Supply Chain & Logistics Management for Ford Motor Company in which he managed logistics responsibilities all over the world. Dr. Wade earned a PhD from Michigan State University in Supply Chain Management, an MBA from the University of Detroit, and a BSBA from Oakland University. Dr. Wade is a Six Sigma Black Belt.
Comments are closed.