The effect of low-cost country sourcing on supply chain administration cost

Abstract

While the key advantage of low-cost country (LCC) sourcing is in low prices, other aspects of conducting sourcing from these countries remain problematic. This research quantifies the effect of LCC sourcing on the cost of supply chain administration, and examines the possible role of firm size and industry in this relationship. The research draws on survey data, with respondents from manufacturing firms operating in Finland. The results indicate that the supply chain administration cost among manufacturing firms seems to rise with the increase in LCC sourcing. The results also suggest that companies in technologically intensive industries experience higher costs, whereas firm size does not have an effect on costs. The research contributes to the debate on the cost-related effects of LCC sourcing, by offering quantified results that can be used as the reference point for managers contemplating the pros and cons in increasing the share of LCC sourcing.

Keywords:

• international sourcing
• low-cost countries
• supply chain administration costs
• survey

Funding

The research was funded by the “Finnish Foundation for Economic Education (Liikesivistysrahasto) [grant number 31982]”.

Notes

1. CIS includes the following countries: Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine.

2. It should be noted that the variable measuring sourcing from South and Central America does not include Mexico. The share of Mexico of the total value of Finnish imports in 2010 was 0.1% (Finnish Customs).

3. It should be noted that the variable measuring sourcing form Asia may include such countries as Japan, South Korea, and Australia, which cannot be labelled as LCCs. The shares of these countries of the total value of Finnish imports in 2010 were 0.8%, 0.7%, and 0.5%, respectively. In comparison, the share of China of the total value of Finnish imports in 2010 was 3.8%. (Finnish Customs).