What are the risks of e-procurement in a third world county? Part II of II.

October 3rd, 2011

Today’s post is by Lauren Finnessy; Account Manager at SafeSourcing.

This author wonders if the use of e-procurement practices could potentially help build an economy in a third world county, what are the risks to using e-procurement that could be challenging the process?  Since e-procurement is quickly becoming a standard business practice in developed countries to realize cost savings, improve efficiency, and control the bottom line what is stopping these companies from sourcing through third world countries?  This author believes that if there were not risks associated with this relationship that more countries would be taking advantage of a larger supplier network. 

Some of the risks that are preventing e-procurement in third world countries are:
   1. Some third world countries do not have enforced regulations that prevent the use of child labor.
   2. Many third world countries do not have any regulations in place for pollution control.
   3. By sourcing with a company in a third world country, a host company may increase the cost of their paid warranty claims.
   4. There may be a language barrier between the sourcing partners.
   5. Bribery and corruption can be in issue in come cultures and may be more prevalent in a third world country where the standard of living is lower and the split between economic levels is more drastic.

It is a risk for a company in a developed country to source items from a company based in a third world country that is found to use child labor or bonded labor.  This would have a considerable negative impact for the host company when their supply chain is analyzed and could potential ruin relationships with current or future business partners.

Within the United States and many other developed countries there are government regulated environmental restrictions.  The compliance with many of the regulations is what can attribute to a company’s carbon footprint.  Many third world countries do not require any kind of regulations on a business to take care of the environment.  By sourcing with a company in a third world country it could negatively affect the company’s carbon footprint as well as generate negative publicity from many of the environmental watch agencies.

Another growing concern for sourcing with a company in a third world county is the issue concerning warranty of the product you are selling or distributing to your customers.  Even though you may receive a large cost savings from the products you’re sourcing, the quality of the product may not be comparable and could cause issues with the overall quality of the product you are producing for your customers.  This could negatively affect the amount of warranty claims you will have to pay.

A language barrier could present an issue for the e-procurement process.  Many times companies in a third world country could be doing business in a second, or even third, language.  To avoid issues with this a host company needs to clearly outline objectives and terms and have a clear knowledge that the sourcing company understands them.

Corruption throughout a supply chain could affect the wages being paid to workers.  In order to overcome this challenge in a sourcing relationship, the purchasing company can require as part of the conditions of the sourcing relationship that the supplier sign a code of ethics that ensures that the workers are compensated for their efforts.

If a company from a developed country is interested in sourcing products or services from a company in a third world country there may be risks, but with the proper knowledge and steps in place to overcome them the benefits can outweigh the risks.  By including a company from a third world country in your supply chain you could be contributing to the global economy with a more positive impact.

We look forward to and appreciate your comments.

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