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Global Treasury Management With more than 300 brands of paper, detergent, food, health, and cosmetics products sold in over 140 countries and over 60 percent of its almost $40 billion in revenues generated outside the United States, Procter & Gamble is the quintessential example of a global consumer products firm. Despite this global spread, P&G's treasury operations--which embrace investment, financing, money management, and foreign exchange decisions--were quite decentralized until the early 1990s. Essentially, each major international subsidiary managed its own investments, borrowings, and foreign exchange trades, subject only to outside borrowing limits imposed by the international treasury group at P&G's headquarters in Cincinnati. Today P&G operates with a much more centralized system in which a global treasury management function at corporate headquarters exercises close oversight over the operations of different regional treasury centers around the world. This move was a response in part to the rise in the volume of P&G's international transactions and the resulting increase in foreign exchange exposures. Like many global firms, P&G has been trying to rationalize its global production system to realize cost economies by concentrating the production of certain products at specific locations, as opposed to producing those products in every major country in which it does business. As it has moved in this direction, the number and volume of raw materials and finished products that are being shipped across borders has been growing by leaps and bounds. This has led to a commensurate increase in the size of P&G's foreign exchange exposure, which at any one time now runs into billions of dollars. Also, more than one-third of P&G's foreign exchange exposure is now in non-dollar exposures, such as transactions that involve the exchange of rubles into won or sterling into yen. P&G believes that centralizing the overall management of the resulting foreign exchange transactions can help the company realize a number of important gains. First, because its international subsidiaries often accumulate cash balances in the currency of the country where they are based, P&G now trades currencies between its subsidiaries. By cutting banks out of the process, P&G saves on transaction costs. Second, P&G has found that many of its subsidiaries purchase currencies in relatively small lots of say $100,000. By grouping these lots into larger purchases, P&G can generally get a better price from foreign trade dealers. Third, P&G is pooling foreign exchange risks and purchasing an "umbrella option" to cover the risks associated with various currency positions, which is cheaper than purchasing options to cover each position. In addition to managing foreign exchange transactions, P&G's global treasury operation arranges for subsidiaries to invest their surplus funds in and to borrow money from other Procter & Gamble entities, instead of from local banks. Subsidiaries that have excess cash lend it to those that need cash, and the global treasury operation acts as a financial intermediary. P&G has cut the number of local banks that it does business with from 450 to about 200. Using intracompany loans instead of loans from local banks lowers the overall borrowing costs, which may result in annual savings on interest payments that run into tens if not hundreds of millions of dollars. Source: R. C. Stewart, "Balancing on the Global High Wire," Financial Executive, September/October 1995, pp. 35 - 39, and S. Lipin, F. R. Bleakley, and B. D. Granito, "Portfolio Poker," The Wall Street Journal, April 14, 1994, p. A1. |
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