Opportunity v. Risk in Low-Wage Country Sourcing
by Kelly Barner
If anything has given companies an incentive to focus on the risk in their supply chain, it is the rise of low-wage country sourcing as a way of competing on a global scale.
When we talk about countries being ‘low cost’, what we actually mean is ‘low-wage’. After all, alternate regulations and raw material availability aside, it is the cost of labor that varies the most between different parts of the world. Labor rates therefore represent the largest portion of procurement’s opportunity to reduce cost. Low wage just doesn’t sound as ‘nice’ as low cost, especially in a corporate social responsibility driven business climate. So, what does low-wage country sourcing mean for your supply chain?
Low-wage country sourcing: What about your supply chain?
With the expanded role of low wage labor in the supply chain, corporate awareness about risk management is on the rise. The understanding of just how much disruptions and quality issues cost the company is altering the decision-making process concerning sourcing from low wage countries. In response to this, companies must make the difference between low wage and low more than just terminology. It must mirror actually the difference between purchase price and total cost of ownership.
Just as we have seen with many of the other components of formal procurement, including savings, spend, and cost, nothing is as straightforward as it seems. We think we have controlled product costs, for instance, only to find that we have unintentionally increased service costs, equipment downtime, or demand for related consumable materials.
China has been a favored low wage country to work with, but as global demand has caused wages there to increase, companies are faced with the choice between paying more to continue sourcing in China and moving to lower cost, but higher risk countries. And, in fact, China is so huge and so populous that it will take many smaller countries able to provide sufficient alternative labor to replace it.
Each country has relative cost and risk factors that reflect not only their geographic location, but also their reason for being low wage
There is no advantage associated with getting low wage labor in Cambodia, for instance, if the political and economic instability of the country increases uncertainty that materials will be delivered on time (or at all). Their infrastructure (specifically utilities and transportation) is underdeveloped and their legal system is unpredictable. A supplier could be there one day and gone the next. As a result of their risk profile, Cambodia might be low wage, but is likely to prove very high cost to do business with.
Companies looking to find a low wage country to source in for the first time, or looking to move away from China, will have to study a number of risk factors before making a decision. One of the key factors will be what you are looking for the low wage country to provide? Are you looking for inexpensive manual labor or less expensive skilled labor? Answering this question will provide a short list of countries that may be candidates. Beyond this, procurement will have to do their homework to understand the relevant risks, including:
- Currency exchange and stability
- Government stability and oversight
- Transportation distance and method reliability
- Child labor regulation and enforcement
If the company decides to do business in a low wage part of the world despite the risk, the task for procurement becomes one of identification and monitoring. The identification process – including targeting specific geographies and risk indicators, is a strategic process well worth procurement’s effort and the company’s investment. Ongoing monitoring, on the other hand, is a task best handled using automation. After all, if the organization has made the decision that lowering their wage cost per effort is a priority, that should include risk monitoring in addition to whatever services are being delivered overseas.
Automation makes it possible to deliver near real time risk monitoring 24/7/365 and on a global scale for a fraction of what it would cost procurement to do it – and with more reliable altering capabilities.
Ironically, procurement may have to invest quite a bit of expensive, high skilled labor (their own) to find a country with the best ability to provide inexpensive, less skilled labor. But as we have learned, understanding the total cost of any procurement strategy requires us to capture both the direct (labor cost) and indirect (risk cost) factors that will have an impact on the total cost of securing labor from a specific country.