U.S. Sourcing from Low-Cost Countries: A Comparative Analysis of Supplier Performance

Article excerpt

INTRODUCTION

Increasingly, U.S. firms are turning to suppliers of products and services located in low-cost countries (LCCs), (1) also commonly referred to as less-developed countries, emerging countries and developing countries. The lower labor costs in LCCs, especially China, offer an attractive alternative to the higher cost suppliers from more developed economies. For example, the labor cost in China, an Asian LCC, is only 5 percent of that in Japan, a neighboring Asian developed country (Jiang and Prater 2002). Given the labor cost advantage offered by China, it is not surprising that, as shown in Figure 1, Asia, (2) predominantly Eastern and Southeastern Asia, was an LCC supply region from which U.S.-based firms sourced the most during the time period 1998-2004, followed by the Western Hemisphere, predominantly Central and South America (International Trade Administration 2005a). Europe, predominantly Eastern Europe, ranks third in terms of U.S. import dollar values during the same time period.

The annual growth rate of trade between the United States and each of these three regions during the time period 1998-2004 is presented in Figure 2 (International Trade Administration 2005a). Figure 2 shows that U.S. imports from European LCCs, albeit relatively small in terms of dollar values, began to outpace those from both Asia and the Western Hemisphere in the two consecutive years, 2003 and 2004. U.S. import values from Asian and Western Hemisphere LCCs increased by approximately 25 percent and 14 percent, respectively, between 2002 and 2004. U.S. imports from European LCCs increased by approximately 48 percent during the same time period--an upward trend that cannot be ignored, growing at a rate approximately two times faster than U.S. imports from Asian LCCs and more than three times faster than those from Western Hemisphere LCCs.

At the national level--among all developed countries and LCCs worldwide--the top three nations of import into the United States are Canada, a country with a developed economy, followed by two LCCs: China and Mexico (International Trade Administration 2005b). While trade with Mexico rose quickly following the enactment of the North American Free Trade Agreement (NAFTA) on December 1, 1994, U.S. trade with Mexico has slowed in recent years. Trade with China, on the other hand, is on the rise. Figure 3 illustrates a history of imports from Mexico and China into the United States during the time period 1998-2004 (International Trade Administration 2005b). Figure 3 shows that imports from Mexico into the United States during these 7 years rose by approximately 65 percent compared with an approximate 176 percent increase in imports from China during the same time period--a multiple of more than two and a half times. More recently, a growing number of U.S. firms have begun broadening the reach of their import activities, trading with suppliers in countries they had conducted little or no business with previously, such as Hungary, Poland, Romania, Bulgaria and the Russian Federation. These Eastern European LCCs serve as manufacturing alternatives to China, the top Asian LCC. Their appeal is likely to prove particularly strong within the European market (La Londe 2004; Keeling 2005; Teague 2005; Carbone 2006a, b) as they have some important advantages, including those of geographic proximity (Carbone 2006b) and closer cultural similarities (Keeling 2005).

The U.S. import statistics examined thus far suggest that the trend of U.S. firms toward sourcing from LCCs continues upward. Given the growing impact of LCC suppliers on sourcing strategy, the current work examines the comparative performance of LCC suppliers located in the top three U.S. trading regions, listed here in descending order of dollar values of U.S. imports: (1) Asia, (2) the Western Hemisphere and (3) Europe. This research focuses on evaluating 14 operational indicators of international sourcing and supply chain performance. …