Supply Base Localization: A Different Look at Low-cost Country Sourcing

Capturing the sourcing savings in a low-cost manufacturing strategy means weighing the risks and understanding total cost


For companies that choose not to localize at launch, cost savings can still be generated while minimizing re-sourcing risk. For example, a leading global manufacturer of ATMs that had recently expanded its manufacturing footprint to China chose to localize its supply base for custom components that did not make economic sense to import from incumbent suppliers outside of China based on a total-cost-of-ownership analysis. Leveraging the technology, commodity expertise and low-cost-country sourcing services of Ariba to support its internal teams, the company identified and pre-qualified potential Chinese vendors, negotiated based on a comprehensive request for quote (RFQ) document and provided on-the-ground support for critical supplier transition and first article acceptance. As a result of the project, the company not only reduced the purchase price of the components, but also improved other total cost factors by significantly reducing lead times. This company is now looking at other opportunities throughout its global supply chain to ensure that it has optimized the usage of local suppliers whenever applicable.

Successful localization can be achieved post-launch by: 1) identifying the highest potential categories to localize through a total-cost-of-ownership analysis, 2) staffing a local team or utilizing a third party to find and negotiate with new suppliers, and 3) providing strong engineering support (often from the head office) to ensure smooth part transition with new local suppliers.

When China Is Not the Answer

While the argument for supply base localization is clear, the same total cost scrutiny is causing a review in many companies of their import sourcing strategy from low-cost countries, particularly China. An emerging trend among manufacturers shows an increase in re-sourcing components that had been sourced to Asian suppliers over the last few years, shifting instead to suppliers closer to home. What's causing this unsettling and disruptive activity? As sourcing teams (and their counterparts in finance) are getting a better handle on true total cost of ownership, a number of commodities are revealing themselves to be more costly when sourced from Asia versus from supply bases closer to home, such as Mexico for North America or Eastern Europe for Western Europe manufacturing bases. For example, analysis shows that with an average supply chain pattern, where non-material costs equal 25 percent of total costs (including all logistics and working capital costs), a Chinese source must be 22 percent lower in cost than a Mexico source to justify the move, often driving a Mexico sourcing strategy. According to a senior global sourcing executive at a tier-one automotive company, China is often not the best case and may not stand up to total cost scrutiny. And even when the savings are marginally higher from China, a China sourcing strategy may not be worth the risk if nearer regional options exist.

Offshore manufacturing and low-cost country sourcing have certainly revolutionized the manufacturing sector. As total cost analysis is being applied more frequently across the corporate spend base, it is revealing that a near-shore sourcing strategy often outweighs an Asia-only strategy for import sourcing, and that a supply base localization strategy for offshore manufacturing assets can generate significant savings, justifying the re-sourcing efforts. Companies that want to gain further competitive advantage in the global marketplace must not only embrace these concepts but arm their teams with the technology, expertise and services needed to identify these opportunities for savings and drive them to the bottom line.

About the Author: David Morgenstern is managing director of Low-Cost Country Sourcing for Ariba Inc.

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