Barriers to Cheaper Production in Emerging Economies

June 16th, 2008 at 08:11am Michael Lamoureux

A recent article in Global Logistics & Supply Chain Strategies, as reprinted in Supply Chain Brain, on Emerging Economies: Cheaper Production — and More Headaches described the hidden price tag of low-cost labor. Although many of these have been covered here in this blog and over on Sourcing Innovation over the last two years, they’re worth a recap.

• Longer Lead Times
  Let’s face it. You can’t source products from China next-day, even if you are able to air-freight. With all of the import and export requirements, including the new 24 hour advance manifest rule, it’s at least two days now, and probably three. Have to ship it by ocean-bound cargo carrier? At least 13 days, and that’s if you manage to score a couple of almost-miracles in the process. If not, you’re probably looking at a minimum of 21 days, on average.
• Guaranteed Cost Increases Over Time
  Outsourcing bolsters developing economies, which builds and expands the middle-class who, in turn, demand higher wages.
• Increased Logistic Risks
  With multiple ports and carriers involved, there are greater opportunities for interruptions due to strikes, slowdowns, disasters, and political embargoes.
• Currency and Foreign-Exchange Rate Risks
  An outsourcing focus on a developing country will eventually raise the price of its currency, which will decrease your savings. If your home country currency is simultaneously declining, you’re hit with a double whammy.
• A Lack of Visibility
  The current hodge-podge of supply chain systems in the marketplace make it hard to forge a coherent view of the global supply chain.
• Infrastructure Nightmares
  The transportation infrastructures of some countries are not up to snuff and it can be a logistical nightmare to get stuff from the factory to the port in a timely basis.
• Free Trade Agreements
  The current explosion of bilateral and multilateral free-trade agreements offers a source of confusion, and overlooking one can cause a host of headaches down the road when you get hit with new taxes and increased documentary requirements because you don’t operate in the Free Trade Zone.
• The Need for Security
  Cargo security is a pressing issue in many developing nations. In some countries, some manufacturers have taken to shipping small shipments in unmarked packages using couriers and busses to try and thwart thieves in their attempts to steal lightweight valuable products like cell-phones, laptops, jewelry, and pharmaceuticals that fit in small boxes.
• Total Cost of Ownership That’s More Than You Think
  There’s the unit cost, the freight costs, the export duties and associated costs, the import duties and associated costs, and the additional management, travel, and communication costs that arise from selecting a supplier half-a-world away.

For more on global trade, see the wiki-papers on Low Cost Country Sourcing and An Introduction to Global Trade on the e-Sourcing Wiki.

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Entry Filed under: General, Global Supply Issues/Risk