On risk and cost in global sourcing

On risk and cost in global sourcing

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Article ID: iaor20113789
Volume: 131
Issue: 1
Start Page Number: 333
End Page Number: 341
Publication Date: May 2011
Journal: International Journal of Production Economics
Authors: , ,
Keywords: economics
Abstract:

The benefits of global sourcing as part of a firm’s purchasing strategy have been widely discussed in the academic literature, yet so there are few models that provide a comprehensive risk and cost assessment to guide managerial decision‐making. In particular, few models capture the dynamic nature of many cost drivers, such as transportation and energy cost, labour cost inflation, or carbon offset costs, in their calculations. In this paper, we define three basic cost elements in global sourcing: static, dynamic and hidden cost, and use this framework to assess the costs and risks inherent in global sourcing scenarios from three different points of view: conceptually, analytically and empirically. We highlight the key learning points from each perspective and propose a total cost model of how to make informed global sourcing decisions, which we test by applying it to three exploratory case studies of global sourcing arrangements.

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