As currency changes matter: improving the control of profitability and productivity in manufacturing companies
Author: Hilmola, Olli-Pekka
Source: International Journal of Productivity and Quality Management, Volume 1, Number 4, 28 February 2006 , pp. 321-338(18)
Publisher: Inderscience Publishers
Abstract:Several models have been developed to measure profitability and its components in the business unit level. The contribution of these models has been the insight that productivity and price recovery are two distinct parameters of profitability. This paper proposes a new extended model, which is based on the American Productivity Center (APC) deflation approach, and is capable of managing three distinct components of profitability: productivity, price recovery and currency recovery. According to this model, it is important to know the causes of price recovery change. For example, fluctuations in products' sales and purchasing currencies could erode all the positive price recovery achieved. This model is applicable for the profitability control of a manufacturing unit and it could be the important trigger in the use of financial hedging in certain situations. At the end of this paper, we also present the hypothetical system dynamics simulation model that highlights the enormous impact which currency changes have on the profitability in the situation, where sales are generated through EUR and purchases are solely based on the US dollar. We are also able to incorporate different delays and inventories of a manufacturing unit into our simulation model.
Document Type: Research article
Publication date: 2006-02-28