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Low cost equals high risk

August 16, 2012

There are many ways in which the fixation on cost reduction has heightened business risk. Unfortunately we lack the economic analysis to tell us whether the price paid for pursuing low cost exceeds the benefits achieved.

There have been several recent reports that illustrate this point. An article on the BBC website draws our attention to the scale of risk of natural disasters faced by Asian nations. This comes on the back of a report published this week that highlighted the relative inability of Asian nations to cope with the results of those disasters. Taken in combination, they underscore the severe issues faced by the supply chains and outsourced service centers of many corporations.

Specifically, emerging economies face a dramatic upsurge in urbanization and do not have the resources to build supporting infrastructure. In consequence, when disaster strikes, its ramifications are far more severe. As a result, companies that depend on these countries for supply of goods or services face large and often unpredictable levels of risk. In particular, the duration of lost supply is likely to far exceed that which would apply in a more developed economy.

Another example of the ‘low cost’ impact relates to the extent of competition. In a growing number of industries, it has forced supplier consolidation and a lack of investment or supply flexibility. This is becoming apparent in a growing number of sectors – oil and gas, mining, defense and (most recently) automotive. It has placed many customer organizations into a position where they are competing for supplier attention – and again, the cost impacts are rarely assessed.


One Comment
  1. Tim, Outsourcing and Offshoring are only driven in part by the cost of the purchase. One of the major drivers is tax management. In the U.S. the corporate income tax rate is 35% but few companies pay it. Change the tax laws, lower the tax rates and make it so companies can’t avoid paying taxes by using off-shore tax havens and you’ll see fewer companies chasing the low cost higher risk model. You might be interested in my blog post

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