Low cost country sourcing: not a static game anymore

author

By: Beroe Inc. --

05 January, 2017

Listen to this article



Low cost country sourcing: not a static game anymore
BLOG

Low cost country sourcing

Low-cost country sourcing or low-cost sourcing in simple terms is a way for businesses to lower costs across their supply chains. It falls under procurement and is sometimes dubbed as procurement low-cost country sourcing. When done right, low-cost country sourcing can prove to be beneficial to businesses. According to low cost country sourcing analysis, LCCS initiatives can increase cost savings by as much as 30%. The following are some benefits of low-cost country sourcing:

Saving on labor and production costs

LCSS enables saving on labor and production costs which can help add on overall cost savings. A study found that in some sourcing regions, labor costs were over 90% lesser than in developed regions. This points to the huge gap in labor costs and the potential saving that it brings. As most costs in low-cost sourcing regions are low such as overhead costs and infrastructure costs, the overall production costs will be low too.

Increased production volumes

Due to the lower costs of production, a higher volume of production can take place with low cost country sourcing. This is one of the most prominent low cost country sourcing advantages. Businesses can produce much more than usual and this can speed up production. This is particularly beneficial for those businesses whose significantly high production can impact their business directly. 

Wider supplier availability

There are limited options when sourcing domestically especially when there is a scarcity of those particular goods. When you implement an LCCS strategy, you get to choose from a wide range of suppliers in different countries where there is an excess of what you need and that too at a much lower cost. The option to choose a supplier based on requirements enables sourcing managers to pick what is best from the ones available with minimal risks involved.

Better focus on business

One of the low cost country sourcing advantages is it enables better focus on business as long as a robust LCCS strategy is in place. Competitive pressure is increasing by the day and businesses must remain competitive. LCCS allows for businesses to do that as it helps significantly reduce costs and increase profits when implemented smartly. Globalization has made it easier for LCCS to take place but businesses must still be mindful of how they implement their sourcing strategies.

Risks to Consider

Businesses can assume that it is the best low-cost country sourcing when they choose LCCS because it can help them get ahead of their competition. However, that is not always true especially when companies choose LCCS without much thought and careful planning. While the benefits of low cost country sourcing are many, there are many low cost country sourcing risks that companies must be aware of as well. Here are some of the risks businesses must consider before choosing LCCS. These are some of the problems that are most popular. 

Production problems

Businesses can experience production-related problems when they opt for LCCS. For example, they may end up with products that are defective or aren’t of the desired quality. They may experience other production issues that can hamper the product quality thereby reversing the benefits of LCCS. This can impact a business in two major ways; it can cost the business money and it can damage the brand reputation. These can have major repercussions in the short term and long term. This can give the competition an edge thereby causing increased trouble for the company.

Additional costs

The reason for choosing LCCS is to save on costs; specifically labor and production. However, things can go wrong and the costs can increase rather than decrease when choosing this strategy. For instance, in procurement low cost country sourcing, a solid plan must be made before the strategy is executed. If not, the company will land in financial trouble sooner than later. The total cost of ownership can be more than expected as this depends on a range of monetary factors including transportation costs, exchange rates, and so on. This is particularly true for some countries more than others.

Unforeseen trouble

The risk of LCCS cannot always be predicted just like other business strategies. This makes it complex to implement. It makes it a high risk endeavour too. For example, there can be changes in regulations of the country and the import duties can increase. These types of problems can crop up anytime causing problems in the strategy and for the company. Effective monitoring of the strategy and the thorough constant analysis of the country is crucial for the success of LCCS. Moreover, working on the problems are mandatory for the success of LCCS and getting all the benefits. 

No More “Static”

With the above points made, it’s important to note that low cost country sourcing is no longer a static game. Instead, procurement leaders need to redefine their sourcing strategies based on parameters such as business value, global dynamics and total cost of ownership. Volatile commodity prices, natural calamities, changing geo-political scenarios, rising consumer activism and lack of legal infrastructure to safeguard product designs all have a role to play in deciding if there is value in adopting a specific low cost sourcing strategy. Even where there are obvious savings, sourcing managers must consider the impact of their decisions on a brand’s public perception as well.

Here are some of the major factors associated with low cost country sourcing:

Industrial Robots

China, once considered a low-cost country with skilled labor, is slowly transforming into a sophisticated manufacturing hub.  According to the Industrial Robots Global Study, China is set to overtake the European Union and North America by 2017 in terms of the number of industrial robots operating in its manufacturing facilities. Levi Strauss, the well-known brand of jeans has replaced manual labor at its manufacturing plant in Zhongshan with robotic technologies such as lasers to scrub the jeans instead of sandpaper to give the product its iconic American look. The automation of shop floors has become a new source of cost-cutting for these companies as they try to reduce wage costs. As technology becomes more affordable, this strategy can be economical and substantially more profitable.

These initiatives are an indication that China’s industrial ecosystem is moving up the value chain. And this will require procurement managers to be aware of the product cost-break up. What if suppliers build in labor cost when they predominantly use robots? And what would be the cost of electricity and other utilities? Merely looking at the headline cost is not enough -- procurement managers should dig deep to identify further cost savings opportunities.

Product safety

Product safety has a significant impact on sourcing costs and lead-tainted toys are an example of the risks in the global supply chain. Toy manufacturing OEMs have been forced to invest in more stringent quality controls to ensure product safety, which in turn has pushed up manufacturing costs. A few companies have attempted to pass on this additional expense to consumers – however, this may not always work when consumers decide to shift their purchasing pattern in case of an economic downswing. This is an indication that low-cost or best-cost country sourcing strategy goes beyond the primary objective of just cost savings. One has to consider and plan for potential supply chain impacts, and subsequently conduct a thorough cost-benefit analysis.

Geopolitical impact

In today’s world of geo-political volatility, sourcing managers must factor the impact of global political dynamics into their sourcing strategies. Epidemics like Ebola in Africa, the Zika virus as well as political unrest in Thailand and Hong Kong are some examples of events that can have a major impact on the supply chain. More recently, Turkey, a low cost sourcing hub for big pharmaceutical companies witnessed a failed coup attempt. According to research and consulting firm, Global Data, Turkey's pharmaceutical market is set to rise from $5 billion in 2015 to $5.53 billion by 2020. Events like the recent failed coup have highlighted the need for procurement teams to take into account potential geopolitical events that can disrupt a carefully designed supply chain.

Cost

The whole point of opting for low cost country sourcing is to cut down costs but in some cases, it can add to business costs when not done right. Sourcing managers need to keep in mind the project cost of monitoring their suppliers which is a must whether sourcing from one region or more. An evaluation must be done to ensure the cost savings are significant enough to choose low cost country sourcing compared to domestic sourcing. Additionally, sourcing managers must ensure the quality of products meets their expectations. Oftentimes, they must do away with lower quality products which is the reason behind the lower costs. However, if the lower quality of products means more inspection then these costs can add-on and strip away the benefits of low-cost country sourcing services.

The future of low-cost sourcing

Today’s geopolitical-economic scenario can be a great opportunity for the sourcing leaders to leverage new and unexplored territories in terms of market access and cost reductions.

Articulating well-defined objectives with milestones and timelines is necessary for a successful low cost country sourcing strategy. This should be followed by top management commitment to these objectives and their integration with an organization’s strategy.

The next step is to initiate the new LCCS implementation starting with category selection that has high savings potential and minimal sourcing risk and understanding the players in the target region to assess the resource needs. This analysis enables procurement teams to identify the appropriate supplier pool in the target region and evaluate their capabilities. The last step involves engaging and partnering with the suppliers in multiple stages to resolve pain points during the negotiation phase and ensure a seamless integration with them.

Devising LCCS strategies clearly is not a one-time activity. In light of the factors elucidated above, procurement organizations must constantly evaluate their supplier pools so that unforeseen events can be handled well. It is difficult to predict the risks associated with low cost country sourcing due to a variety of factors that include foreign exchange fluctuations, insecure supply chains, cultural differences and risks related to product safety, etc. These factors can impact the gains anticipated from outsourcing within the current low cost geographic regions.

The future of sourcing will not be restricted to one low-cost region, but a diversified ecosystem that comprises best-fit suppliers across the global supply chain. While this can complicate matters in certain cases, it is the best approach that is most likely to work and stand in times of uncertainty. Low-cost country sourcing never promised to be the magical solution to procurement but it can prove to be an effective strategy when sourcing managers are willing to monitor and devise their strategies after careful low cost country sourcing analysis. Speaking to low cost country sourcing consultants can help but ultimately a comprehensive strategy is the only foolproof way to leverage opportunities and lower risks posed by LCCS.

 

Beroe Live - #FreeTheIntel




x

Join us on Oct 6 for a webinar on Managing Inflation and Supply Shortages