Daily Archives: January 3, 2010

Cross-Cultural Risk Factors in Offshore Outsourcing

SourcingMag.com recently ran a decent article on Cross-Cultural Risk Factors in Offshore Outsourcing that overviewed three risk factors that can have a serious impact on the success of an offshore outsourcing relationship that are worth a review.

  1. Corporate Culture Differences
    There’s a chance the client’s corporate culture and the vendor’s corporate culture could be at opposite poles. One could be bureaucratic and the other entrepreneurial; one could make decisions top-down and the other on consensus; one could encourage employees to step-up while the other beats them down; etc. A lack of alignment will present serious obstacles in interactions and have significant bottom-line impacts for both organizations.
  2. National Culture Differences
    Cultural conditioning runs deep, especially in countries like China where the roots of their culture stretches back millenniums. Your people could be autonomous while the vendor’s people are group-oriented. Your people could be absolutist in their ethics and conduct and your vendor’s could be situational. You could want results while they want to save face. If you don’t understand these risks, you won’t be ready for the inevitable pitfalls you will encounter.
  3. Cross-Cultural Competencies of Key Players
    A wide range of players is involved in your organization and that of your supplier. Some will work from their domestic base of operations while others will travel or go on expatriate assignments. But all will be neck deep in the challenge of trying to achieve business objectives in a culturally diverse global environment. In addition to the technical, managerial, leadership and interpersonal skills required for their jobs, the people occupying these roles need to have cross-cultural competence if they are to be successful and not put their company at risk.

Thus, before you enter into any outsourcing agreement, you should perform a cross-cultural due diligence. For more on how to carry one out, see the Cross-Cultural Risk Factors in Offshore Outsourcing article. For more on the types of cultural differences you may encounter in China, Germany, India, Japan, Korea, Mexico, and Thailand, see the SI series on Overcoming Cultural Differences in International Trade.

Overcoming Cultural Differences in Trade with …

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Supply Chain Risks: Barriers to Manufacturing in Emerging and Developing Markets

Recently, The Center for Supply Chain Research at the Penn State SMEAL College of Business published a report on Supply Chain Risks: Barriers to Manufacturing in Emerging and Developing Markets that reiterated what we’ve known for a while; that 73% of U.S. companies with revenue exceeding $1 Billion experienced supply chain disruptions in the past five years, that 70,000 companies went bankrupt in China in 2008, and that the average American company operating procurement in Asia found that the average company lost 8.2 Million over a three year time span due to illegal bribes and kickbacks.

It also told us that the five main categories of risk are trade, political, geophysical, economic indicator, and operational — and that all of these risks are prominent in emerging and developing markets, which we already knew. It also re-iterated the common mitigation strategies of:

  • Building Mitigation into the System via
    • Better Network Design
    • Supplier Financing
    • Multiple Manufacturing Locations
    • Monitoring of Public Source Risk Data
    • Contingency Plans
  • Use Technology Solutions such as
    • Scenario Planning
    • Visibility and RFID
    • Early Warning & Event Monitoring
  • Contract Outside Risk Experts

However, in addition to providing a detailed risk analysis of Africa, Asia and the Middle East, China, Latin America, and Eastern Europe, with risk scores for almost 40 individual countries that you should definitely review if you are sourcing from, or planning to source from, any of these areas, it made two very good points that I rarely see in discussions of risk and mitigation.

1. Rank your Risk on probability and significance of the loss.

Face it, unless a low probability risk is associated with a very significant loss, it’s not worth addressing if there are higher probability risks that are more likely to happen.

2. Dollarize the Risk.

Not only will associated hard dollar losses bring about the severity of relative risks, but if you know a risk is pretty much guaranteed to happen in a certain time-frame (for example, a hurricane or earthquake has a 95% probability of affecting your operations in a given 25 year period), you can amortize the cost associated with the impending loss and build a business case for investing in contingency planning and more expensive mitigations that, while costly up front, are guaranteed to significantly reduce your losses over the long term. And, while this is a topic for another post, if you dollarize the risks, the mitigation costs, and the expected loss reductions from the mitigations, you can optimize the application of your limited risk management budget.

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