The New Wave in Low-cost Country Sourcing

Here is a framework for maximizing the potential benefits of LCCS agricultural sourcing


Figure 1: Low-cost Country Sourcing Success Strategies (Aberdeen Research, June 2005)

Benefits of Agricultural Sourcing through LCCS

There is no denying the benefits of LCCS agricultural input sourcing. For CPG companies based out of North America and Europe, an LCCS operation will necessarily have the following important benefits:

Figure 2: Advantages of low-cost country sourcing of agricultural inputs (Infosys Research, 2007)

Figure 3: Low-cost Country Sourcing Success Strategies (Aberdeen Research, June 2005)

While LCCS sourcing of agricultural raw material inputs is at a nascent stage now, given the significant benefits the process offers it is bound to catch up. A recent study (3) by the Boston-based Aberdeen Group found that CPOs rate low-cost country sourcing as a top priority over the next three years, and that companies plan to double their spending with offshore suppliers by 2008. The report (4) also found that purchases from low-cost countries have average cost savings of 10-35 percent compared to U.S. and Western Europe suppliers.

Sourcing of agricultural inputs from low-cost countries is not without its pitfalls. Supply disruption risk, vendor maturity and control factors are the foremost concerns of organizations implementing LCCS agricultural sourcing. The buyer has precious little control over supply as it comes from a distant source country. Factors like shifts in supply or demand drivers in the source country for the targeted agricultural input, changes in government agricultural policy, modifications in the legal or tax framework, or changes in the crop pattern in the source country can wreck a well-planned LCCS operation. Supply continuity is thus greatly subject to factors well beyond the buyer's control.

An important risk is of the quality of the agricultural input material being sourced. The issue arises mainly from the nature of the agricultural market. In comparison to manufacturing industries where quality parameters can be laid down in explicit detail (with toleration range), detailing of specifications to a minute level of detail is not possible in agricultural purchase. Local knowledge and decisions based on experience play an important role in determining quality of an agricultural produce. Thus the process of quality assurance is to a large extent subjective and therefore prone to disputes.

There are, therefore two undisputable facts. While LCCS agricultural procurement has immense potential benefits, it also has a plethora of pitfalls along the way. In order to gain sustainable benefits out of this exercise, a framework for low-cost country sourcing of agricultural inputs is required. A comprehensive framework for agricultural sourcing through LCCS will detail the minimum steps and activities that an organization must undertake in order to gain maximum mileage out of this initiative. However, there is one catch — LCCS of agricultural raw materials is very different from sourcing of machine parts and manufactured items from low-cost countries. The proposed model, thus, must take care of the particular nuances in sourcing of agricultural items and the inherent market dynamics.

Framework for Sourcing of Agricultural Inputs from Low-cost Countries

The proposed model delineates a check list of the minimum number of activities that organizations must undertake so as to derive maximum and sustainable benefit out of this exercise. Much like a regular purchasing activity, the model has also been divided into three distinct sections: Figure 4: Model for Low-cost Country Sourcing of Agricultural Inputs (Infosys Research, 2007)

Pre-sourcing Planning Phase

Selection of the agricultural input to be sourced is the first critical step to a successful LCCS operation. Initially, at least, LCCS should only be attempted for those agricultural inputs that have a relatively constant internal demand. There are several compelling reasons for this. For extracting cost benefits out of an LCCS operation, two most vital conditions must exist: internal demand should be constant at least in the short run and supply situation for the targeted agricultural input, in the source country, should be fairly constant. Cost benefits arising out of economies of scale can only be extracted when these two vital conditions co-exist.

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