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Managing risk - and turning crisis to advantage: a report by the Boston Consulting Group

Even before the world’s economy plunged into recession, many companies had already begun to reexamine their low-cost country (LCC) sourcing strategies in Asia in light of currency fluctuations and rising labor and transportation costs. Now—in the face of widespread factory closings and dramatic swings in currency valuations—those reassessments have become not only more urgent but also more complex, and their conclusions will vary according to the circumstances of each company. Although some companies are cutting back on their LCC sourcing, others are taking advantage of the crisis to expand their sourcing in Asia—which is what we believe more companies should be doing.

The global downturn has both created some challenges and opened up the possibility of more effective LCC sourcing for companies that are able to take advantage of new opportunities. For example, as consumers and businesses in the West trade down, countries with production costs that are 20 to 30 percent lower than those in Western markets have become even more attractive to suppliers. Although labor rates in LCCs have risen over the past few years, they are still only a fraction of labor costs in the West, and the increases are being offset by rising productivity and falling exchange rates (especially against the dollar) in many Asian countries.

Effective and efficient sourcing from LCCs is by no means a given, however. Success will depend on how well companies understand the challenges and prepare for uncertain outcomes. Conditions that have been considered stable will inevitably change. The economic crisis and declining demand for many products will lead to the collapse of numerous suppliers, in both high- and low-cost countries. To prevent a disruption in supply, it is crucial that companies assess the risks in their supply base as well as their options for alternative sources. This step is especially important for industries served by suppliers that are concentrated in a single country. If such suppliers are forced out of business because of the downturn, buyers in these industries could have difficulty finding alternatives.

In this report we examine the likely impact of the global economic crises on the future of LCC sourcing in Asia, and we explain how companies can turn this crisis to advantage while limiting their exposure to risk.

Read the full report