The New Wave in Low-cost Country Sourcing

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


Extending this logic a little further, LCCS agricultural sourcing should not be attempted for commodities that have "narrow" characteristics in the source markets, at least not in the initial stages. As stated above, majority of the target markets for LCCS agricultural sourcing lie in Southeast Asian countries. Vital decisions regarding crop patterns and cycles in these countries are controlled by a large, unorganized and disparate farmer base. For these cash-starved farmers, the decision of which crop to grow depends largely on quick returns. For a western CPG company that is unaccustomed to the vagaries of these markets, such drastic changes can greatly hamper their plans for LCCS agricultural sourcing.

Commodity profiling of the targeted agricultural input in the low-cost country is a next essential step. Important computations like historical market price analysis, historical and predicted crop acreage, and crop yield analysis are done in this step, giving a clearer picture of potential gains and the risks involved.

For seasoned buyers, Commodity profiling will inevitably lead to the construction of commodity indexes through which they can simulate multiple business scenarios to arrive at a decision on which commodities to source. A pictorial representation of the commodity sourcing attractiveness matrix is shown here: Figure 5: Commodity Sourcing Attractiveness Matirx (Infosys Research, June 2007).

The axis is modified according to the sourcing prerogatives of the organization. For example instead of business risk, ROI and price pattern could be one set of parameters. Each commodity or a set of commodities are assigned scores on this matrix, and on the basis of the scores the most favorable commodities are chosen. An important issue that must be considered here is the state and direction of the agricultural policy. For example, most of the Southeast Asian countries are heavily centralized in their operations. Governmental intervention is quite high as far as agricultural policy is concerned. In India, open-market sales of almost all agricultural produce are still controlled by some sort of governmental levy that stipulates how much and when produce can be sold in the open market. Careful attention to such nuances will enable the CPG to be prepared for any unexpected change in the supply scenario.

Implementation Phase

Generally, CPG companies, based in North America or Europe initiate a LCCS program for two completely divergent reasons. First it could be a speculative move by the CPG to gain short-terms cost savings for an agricultural commodity with a temporary bull run on the open market prices. In this case, both the time and intensity of the exposure to the local markets of the source country are limited. LCCS agricultural sourcing is simply deployed as a one-off measure designed to give quick, short-term gains.

Second LCCS agricultural sourcing is also being implemented by some CPG organizations as a long-term move — a strategic shift in their sourcing policies. The emphasis is on creating an international purchasing office with adequate systems and policies that will gradually spin off into an independent profit centre.

In either case there are some minimum activities that should be done. The following table delineates both the approach and the steps: Figure 6: Implementation Phase — Activities and Benefits (Infosys Research, 2007).

In speculative LCCS agricultural sourcing, from an overall sourcing framework point of view, it is much better that the scope and direction of the activity is controlled by the sourcing specialists of the CPG. Important benefits include a higher degree of control as well as a lower fixed cost (as opposed to setting up an international purchasing office). Internal sourcing specialists also get exposed to the low-cost country market and are able to learn from and leverage their experiences in subsequent attempts.

In cases of LCCS being implemented as a strategic and long-term initiative by the CPG, it is recommended that an international purchasing office be established. Although setting up an IPO will necessarily entail fixed costs and capital costs, these additional charges will be mitigated by the sustained savings that LCCS will bring. The CPG will also eventually be able to leverage its in-house bank of knowledge and trained personnel to scale up its operations.

A distinct division on sourcing methodologies should be made while implementing an LCCS program. In speculative buying, the focus is on getting the price right and ensuring physicality of the agricultural produce at the destination point. The basic intent is to ensure quick savings and realize the cost savings by ensuring physicality at the end destination. Contracts should have a small time horizon with every effort being made to reduce lead times. It is strongly suggested that CPG global players hedge their bets, at least initially when they are learning the ropes. This hedging can initially be done by holding higher inventory.

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