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OM in the News: The Cost of Cheap Labor

November 18, 2016

“When companies consider making changes in their supply chains, the mantra of question everything can’t be overstated—even when the topic becomes cheap labor for consumer product manufacturing,” writes Material Handling & Logistics (Nov. 8, 2016). The article suggests that: 

  1. The source of the raw ingredient and its impact on cost is critical. A majority of a finished good product cost is often thought to be in labor and manufacturing overhead. But cost is largely tied to the ability to find local production of the raw materials and components. If a firm has to import “raws” and components, it is likely going to lose the economic edge that cheaper labor might otherwise provide. Focusing on raw material sourcing as the most important aspect of a supply chain shifts the firm away from chasing cheap labor. Companies are better off centering their manufacturing plant around material supply and proximity to their customer base.
  2. Understand customer preferences. Consumer demand for goods produced in certain countries is increasing. The value of the country of origin varies, of course, by the product category. “Made in the USA” carries premium positioning globally for nutrition products. For beauty and skin care, sourcing from the U.S., Korea, Japan or France carries a premium influence. For home care or durable goods, such as TVs, there is far less emphasis on the country of origin.
  3. Labor is just one of the non-material costs. Free trade agreements allow for significant savings when a company meets certain local sourcing minimums. Also, depending on the variability of the demand, shorter lead times and more supply chain agility (the ability to accommodate surge in demand) can make a big difference in sales.

In the end, simply chasing low labor costs is seldom the best way for a company to think about its supply chain. Consumer preferences, material supply and other considerations such as free trade and demand variability are more important.

Classroom discussion questions:

  1. Why are raw materials such an important part of sourcing?
  2. When might low labor costs be the most important factor in the supply chain?

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