One way for a company to adjust to favorable and unfavorable exchange rate adjustments to its manufacturing costs stemming from shipping footwear from plants in one geographic region to distribution warehouses in another region is to
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Any time the sizes of the per pair cost adjustments are large, you should experiment with different cross-region shipping patterns to see if you can minimize the cost effects of unfavorable adjustments and maximize the cost effects of favorable adjustments.Keep your attention focused on what actions, if any, to take in altering the pattern of proposed private-label shipments from your plants to particular distribution centers in order to capitalize onthe favorable/negative exchange rate cost adjustments and to mitigate the unfavorable/positive exchange rate cost adjustments shown on the decision screen. Watch the changes in “margin over direct costs” to help you search out the “optimal” shipping patterns—of course, higher margins are better than lower margins here. While the company bears the risk of exchange rate fluctuations, you and your co-managers can reduce the company's exposure to adverse exchange rate fluctuations either by: 1. Building plants in all of the world's markets and using whatever plant capacity is unused in making branded footwear to bid for private-label contracts in that same region (this strategy also has the big advantage of avoiding any tariffs on private-label imports—which can give you a big cost advantage over rivals that do not have plants in the region and have to include the tariff costs in their price bid) or 2. Putting more emphasis on bidding for private-label contracts in those regions where the current year exchange rate cost adjustment is favorable and less emphasis on winning the bids in regions where the current year exchange rate cost adjustments are unfavorable. Table 2 below utilizes actual exchange rate shifts over a 24-hour period in early 2004 to illustrate each cross-rate combination that is used in The Business Strategy Game and shows how the size of the corresponding exchange rate adjustment to production costs would be calculated. Even though BSG does all the exchange rate cost adjustment calculations for you, you may find that spending a few minutes working your way through part of Table 2 will help you get better command of what is going on with the cost adjustments and why exchange rate shifts can matter in deciding how many pairs to ship from which plants to which distribution centers. It is always up to you and your co-managers to decide what actions to take, once you see the sizes of the cost adjustments in the boxed table on the Corporate Lobby screen and once you see the sizes of the cost adjustments associated with your shipping decisions