Low cost country sourcing: not a static game anymore

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By: Beroe Inc. --

05 January, 2017

Low cost country sourcing: not a static game anymore
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Low cost country sourcing

Low cost country sourcing (LCCS) 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 eco-system 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 significant impact on sourcing costs and lead-tainted toys are an example of the risks in 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 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 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.

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 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 is clearly is not a one-time activity. In light of the factors elucidated above, procurement organization 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.

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