The New Wave in Low-cost Country Sourcing

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


If the LCCS exercise is implemented as along-term initiative, CPG buyers must try out their entire arsenal of sourcing methodologies from hedging to backward integration mechanisms in order to gain maximum cost benefit over an extended period of time. In this scenario, the sourcing specialists have the required time and experience to understand, analyze the source markets in detail and determine which of the strategies best fits. However, if an indent-based buying approach is taken in speculative LCCS, then a mismatch between demand and supply would invariably follow.

For procurement intelligence in speculative LCCS agricultural sourcing it is much better that an external agency be hired for the job. The agency will have the advantage of knowing the local conditions, the vicissitudes of local supply and demand, and will be able to leverage existing connections with the vendor base. In the short period of time that speculative LCCS offers, it is neither possible nor desirable for the internal sourcing specialists' of the CPG organization to attempt this.

If a CPG major is initiating a LCCS agro sourcing project for the long term, the exact opposite stands true. In this case, it will be much better for the internal sourcing people to know the local market conditions. The sooner internal buyers get acclimatized to the working conditions of the market, the faster can this initiative start yielding positive ROI. In the initial stages of an LCCS initiative it is proposed that technical analysis of the targeted set of agricultural commodities be done by experts (from the source country), leaving the internal sourcing specialists to focus on the fundamental aspects. This will ensure that the division of labor yields optimum results.

Technology aspects, or the lack thereof, are extremely crucial to consider while implementing an LCCS agricultural sourcing program. In either a short-term LCCS strategy or a drawn out LCCS process, the intention is always to reduce the value chain as much as possible, since as the agricultural product goes up through the value chain it absorbs overhead from all the delivery intermediaries like, processors, wholesalers and retailers. This assumes greater importance in speculative LCCS for three basic reasons. In a speculative LCCS the intention is always to realize cost gains in the quickest time possible, the exposure to the market conditions is low and finally the base on which the variable costs are averaged out is small. Prompted by these factors, an organization implementing a one-off LCCS exercise will approach the primary market in order to profitably source.

Only if the organization is intent on implementing LCCS agricultural sourcing as a long-term strategic initiative should advanced technological solutions like optimization engines, online auction, supplier collaboration solutions, risk mitigation and portfolio procurement software can be used. The costs arising from these initiatives will be averaged out over the large procurement base. Most importantly, it will establish robust sourcing systems and mutually beneficial policies that are essential for a long-term LCCS agricultural sourcing program to succeed.

Evaluation and Monitoring Phase

More often than not, companies pursuing LCCS have found contract management, inward and outward logistics, delivery assurance, quality assurance and delivery assurance as stumbling blocks to their success. Additionally, cultural issues and the makeup of the vendor base (smaller and typically unorganized) often play a major part in determining whether or not an LCCS operation will succeed. Thus, a certain amount of apprehension is quite natural. However, it is the job of the CPG to allay these apprehensions.

One of the most important steps to confident LCCS is the formulation and implementation of clear, concise contracts. Contracts must be comprehensible, transparent, and should include clauses that delineate possible ways out in case of supply disruptions. However, the intent should always be to win the trust and faith of the vendor base and be seen as fair partner to trade. An important factor here is "a single meaning of quality." Continuous training on quality parameters will enable the vendors to appreciate the importance of having a single meaning of quality between two trading partners.

A long-term LCCS sourcing program demands that organizations constantly invest in developing the supplier base and amalgamate them into the current supply chain framework. After the end of a buying season, what was learned from the market on contract compliance, purchase variances against market and budget can potentially form a good basis for the next year's purchase strategy.

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