Friday, December 12, 2014

The Risks of Offshoring: A Multi-Faceted Perspective

An article in the the November 2014 issue of Supply & Demand Chain Executive by IHS economist John Mothersole titled "Supply Chain Risk: How to Effectively Evaluate Sourcing Risks and Opportunities" reviewed the results of an IHS/Supply & Demand Chain Executive study on supply chain executives' perspectives on volatility and risk in their supply chains. The study found while 50% of respondents "view China as one of the most likely sources of volatility in their supply chains", 25% declared interest in expanding their supply chains in China in the future.

Mothersole argues that this seemingly illogical correlation comes "from a fundamental mispricing of risk." He suggests companies use a more nuanced estimation of country-based cost and risk according to three factors: enforceability of private contracts, losses due to corruption, and losses due to crime. This more all-encompassing approach, somewhat similar in concept to the Reshoring Initiative's TCO Estimator, suggests that lower-risk companies are in fact lower-cost countries for supply chain choices.

For example, in the chart below, you can see that some higher cost countries, such as the U.S. and Japan, actually have much lower risk factors and therefore lower sourcing scores, metrics which provide a single measurement combining risk and price.

For more on the risks of offshoring, see our recent blog post on IP risk and cost in offshoring.



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