Measuring the risk of sourcing from low cost countries: a macro perspective

Abstract

In times of global financial crisis, every penny counts. Given the mounting cost pressure, a growing number of multinational firms (MNFs) have turned their eyes toward low cost countries where they can get access to cheaper materials and labour. However, an indiscreet strategy of sourcing from low cost countries can backfire, since a multitude of invisible supply chain risks may incur hidden costs and subsequently offset cost saving opportunities. Examples of such risks include long lead time, volatile foreign currency exchange, custom duties, greasy payment, regulatory restrictions, damage/loss during transit, communication barriers, and lax quality standards. Considering the potential impact of these risks on global sourcing, this paper aims to identify risk factors that significantly hinder the effectiveness and efficiency of sourcing from low cost countries and then measure the degree of association between these risk factors and the income level of countries. The secondary data analyses show mixed results by either defying the common sense or corroborating the findings of earlier studies underscoring the problems of sourcing from low cost countries.