1/10/2005
Importers and Manufacturers - Coping with the US Dollar Effect

By ELI PALACHI, MBA, CA, Senior Manager

A client recently solicited my counsel, concerned about the rise in the exchange value of the Canadian dollar against its US counterpart, and how this would affect the competitiveness for some Canadian manufacturers, especially those who export goods to the US. Companies structured this way must analyze their business models and determine how to better position their companies in order to better withstand exchange-rate fluctuations. A significant part of this analysis must be for business owners to focus internally on controlling costs.

The following are some suggestions I made to my client to help manage eroding profit margins:

Forward Exchange Contracts

A forward exchange contract is a binding
obligation in which a company and the bank agree to deliver one currency in exchange for another, at a rate agreed on today, for delivery on or before a future date. Essentially, this allows the company to fix the exchange rate on future payables or receivables.

Re-evaluate Production Process

a) Equipment

Examine inventory of equipment and machinery. Now may be the time to invest in state-of-the-art equipment to improve efficiency. Leasing new equipment may be the most attractive option since this allows a company to use operating lines for general operations and to refresh equipment on a regular basis.

b) Personnel

Since payroll is likely to be the most significant expense, there may be room for considerable reductions in current staffing levels. Evaluate everyone's responsibilities and duties. Ensure all staff are working at their optimal levels. Mediocrity is not acceptable in any organization; it demoralizes star performers and impacts the motivation of entry-level staff.

c) Plant Layout

Take an objective walk through the manufacturing facility. Ensure the plant layout is as efficient, “lean,” and automated as possible. This could result in a reduction of manufacturing lead time, a possible decrease of necessary space, improvement of inventory turns and an overall competitive advantage.

Products

Review sales and profit margin by product. Make sure every product is profitable and has sufficient importance to continue manufacturing. Examine inventory levels and how much product is kept on hand to fill orders. This “fill rate” could possibly be reduced and still provide an adequate supply.

General Cost-cutting

The following are some cost reduction areas on which a company could concentrate:

- assess fringe benefits
- review current telephone, courier, cell-phone, pager and postage costs
- tighten up credit policies
- evaluate purchasing policies with respect to the cost of supplies and raw materials
- consider renting unused space and office equipment
- review and update business insurance coverage
- control business travel and entertainment expenditures
- monitor energy consumption and switch off all lights and equipment each night.

Prior to implementing any changes, all sides should be considered. A “zero-based” budget should be prepared rather than basing future budgets on previous years. This will help to improve efficiencies in allocating available resources.

My final piece of advice to my client was to remember not to be short-sighted when cutting costs. It is important that the necessary infrastructure to remain competitive in the marketplace is maintained.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.