Review the case study “Dell Mercosur: Getting Real in Brazil” at the end of Chap

Question

Review the case study “Dell Mercosur: Getting Real in Brazil” at the end of Chapter 19 in the textbook. Address the following components in a well-written response. Remember to cite any sources used, including the textbook (APA format is not required, but it is recommended).
o Briefly identify the steps of an exposure management strategy.
o Describe and evaluate Dell’s exposure management strategy.
o Identify some programs or strategies that management of Dell Mercosur could implement to provide it with operational hedges?

Explanation / Answer

1) Exposure management strategy involves four steps: i. Forecasting the degree of exposure in each major currency in which the MNC operates. ii. Developing a reporting system to monitor exposure and exchange rate movements to assist in protecting the MNC from risk. iii. Assigning responsibility for hedging exposure and determining whether to centralize or decentralize exposure management. iv. Selecting appropriate hedging tools including diversification of the MNCs operations, a balance sheet hedge, and exposure netting. Dell's Exposure Management Strategy in Brazil: -> Dell employs the use of purchased option and forward contracts. This is used as a hedge in order to protect the company against transactions that are whereby denominated in currencies other than the United States Dollar. Specifically, Dell uses forward contracts to protect monetary assets and limit liabilities. ->Because of the tariff-free provisions of Mercosur and the close proximity of Dell’s manufacturing facilities in the south of Brazil, Dell is well positioned to service all of Mercosur with its Brazilian manufacturing operations ->Dell’s revenues in Brazil are denominated in reals, and most of its operating costs are also denominated in reals Operational Hedging Strategies:Overview Operational hedging is designed to mitigate long-term currency risk by providing companies flexibility in their supply chains, financial position, distribution patterns and market-facing activities so they can make swift adjustments to where they manufacture, source, and sell. It involves decisions regarding the location of production facilities and capacity, sourcing of inputs, choice of logistics network, product design and offerings, choice of markets and how opportunities in those markets are pursued. The objective is to manage the sensitivities in cost and revenue, so as to offset the exchange rate risks while managing the competitive positions. Operational hedging strategies can be crafted by assessing the likelihood of various risks and the magnitude of their impact on cost and revenue elements across the supply chain, for various exchange rates and pertaining to different periods. Operational hedges can be unique to a given situation or company and can be established in a variety of creative ways. Strategies That Can be Used By Dell: ->Relocating manufacturing and strategic supply bases to final markets: They can build international production systems that are less vulnerable to exchange rate risks by investing in local production and local procurement. -> Optimizing sourcing and supply chain networks to limit weak dollar risk: They can create flexibility in their sourcing, production and logistics networks that enables optimal decision-making in the face of exchange rate fluctuations. Such flexibility will allow them to delay decisions until demand dynamics are better known and to concentrate production and sourcing in a location that limits exchange rate risk at any given time. ->Redirecting sales and marketing investments towards stronger currency markets: They can build a capacity into their financial systems to identify and leverage currency dynamics that yield region based margin variations. They can further build flexibility into their sales and marketing channels to divert resources into stronger currency markets and thereby achieve better sales. ->Pursuing exports through product development to enhance global appeal: They can develop universal product platforms which give them the flexibility to customize products on short notice and tailor them to regional taste in markets with high demand. They can then concentrate their product supply and marketing initiatives towards stronger currency markets as exchange rates fluctuate. ->Increasing productivity in off-shored and outsourced operations: Thy can invest in improving productivity through operational improvement programs in their offshore operations to offset the rising cost from exchange rate appreciation. If they face long-term exchange risks should prepare themselves well ahead of time. They can do this by: 1) Identifying and assessing all types of risk exposures, including operational and strategic, that a company faces as a result of long-term exchange rate shifts; 2) Implementing operational hedging strategically to mitigate risks and leverage opportunities. Best Wishes

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