Managing the transition to low cost country sourcing

Top 4 Concerns of Low Cost Country Sourcing

Global sourcing, and specifically low cost country sourcing (LCCS) is a hot topic. The prime motivation for LCCS is cost savings. Total costs for goods purchased from low-cost countries are 10% - 30% lower than in first-world economies so it is becoming vital for business survival.

However, LCCS opportunities come with new supply challenges and risks. The top concerns of multinationals that spend 20% or more of their total spend with low cost countries are:

Complexity of managing remotely

  • Political instability in countries with low cost materials and labor can play havoc with your supply chain. There is an increased risk of terrorist attacks or government unrest. Natural disasters such as volcano eruptions and floods are also a concern.
  • Cultural and infrastructure challenges. China, the leading low cost country sourcing partner has many issues, language and culture are significant constraints, as well as its distance from markets and its multiple time zones. Vietnam has fewer issues of that type and India has English as a commonly spoken second language.
  • There is a project cost of having directly or indirectly to monitor suppliers. Management time and costs need to be factored into the overall costs. It is necessary to have either a local agent, use another global company or use your own in-country employees.

Product quality

  • Product specifications and standards - especially when it comes to technical and industrial components and equipment - are not always easily comparable and require clarification and prototyping in low cost country sourcing.
  • Managing consistent product quality from a distance requires an on-site presence. This is to monitor supplier performance, implement your best practices, attain the desired quality levels and test consignments prior to shipment.
  • Regular visits and on-site inspections are an important cultural aspect, especially in dealing with Chinese suppliers.

The resources of the supplier

  • Many low cost country sourcing partners are immature suppliers. Before embarking on a supply contract there must be an analysis of the capabilities and a financial health assessment as well as a physical inspection of premises.
  • New relationships with suppliers in low cost country sourcing are often less responsive to emails and may be less direct regarding their true circumstances. It is crucial to see how they actually operate. Often long-time partners share information with international clients if they know them personally.

Logistics

  • Moving goods around the world can be very complex. The full logistics cost is never apparent from a desk calculation. Do a complete analysis of costs taking into account trade regulations and tariffs. Delays in shipping time and legal complications can add more hidden costs.

Companies are increasingly looking for new ways of reducing costs and increasing shareholder value. Low cost country sourcing has proved to be an effective means to realize cost-saving targets if managed well.