Guest Column: Low-cost Country Sourcing's Long-term Impact

Economists are predicting that the global economic crisis will continue through much of 2009. That was recently reinforced by the report from the Institute for Supply Management that its key manufacturing index had fallen at the end of 2008 to a level not seen in 28 years.

That is just the latest example of how today's economy is forcing many companies to take increasingly more drastic measures to positively impact the bottom line. The problem with that approach? So far, most of these drastic steps have been reactive, such as plant closures and layoffs. While that enables companies to achieve short-term gains of little significance, there have been very few long-term benefits so far.

That's why the procurement departments of leading Global 1000 companies are once again emphasizing the long-term impact of low-cost country (LCC) sourcing. With the present economic conditions not expected to get better any time soon, there are only so many plants they can close and so many workers they can lay off before they have to take a more strategic look at how they are sourcing their business needs.

So, sourcing managers face a dilemma: They must secure the same quality products for their manufacturing base at much lower prices. That's why suppliers in countries such as China and India, and those in Eastern Europe, are so critical today to the health of so many companies in developed nations. These LCC nations possess a huge supplier base that caters to a wide range of products and services for Global 1000 companies across all vertical markets.

With favorable currency conversion rates, these LCC locations have become huge offshore sourcing destinations. They offer high-quality product at much lower costs — including significantly lower labor costs — that have an impact on the total sourcing cost. And that may be the difference for businesses in developed nations looking to keep their doors open as the global economy continues to struggle in 2009.

The 30 Percent Rule

It is challenging in a global economy for sourcing managers to identify the best supply chain partners in many of these LCC locations. To do so, they must have reliable market intelligence data that are critical to ensure sourcing opportunities are in the company's best interest.

To achieve that, here are seven best practices I recommend for any Global 1000 company that is developing and implementing an LCC sourcing strategy:

  • A reliable market intelligence system is needed to help identify the opportunities.
  • Evaluate the cost-benefit ratio by taking into consideration the value of the item to be sourced, currency conversion rates, logistics support and other critical factors.
  • Conduct a complete supplier validation exercise. This should include onsite visits, capabilities analysis and financial health assessments, just to start.
  • Appoint a local resource to monitor supplier performance at all times. This person can also help implement your best practices to attain the desired quality levels and test the consignment prior to shipment.
  • Diversify the sourcing basket by splitting sourcing partners among multiple locations. This risk management approach helps companies avoid or seriously mitigate the effect of adverse conditions in any one location, such as weather disasters, terrorist attacks or government unrest.
  • Keep some critical sourcing in-shore as a safe bet against any untoward developments in LCC locations.
  • Constantly evaluate your current suppliers as compared to other LCC prospects in order to make the most of future sourcing opportunities.

The Automated Advantage

  • Analyze the opportunity
  • Define the requirements
  • Conduct supply market analysis
  • Clearly define your sourcing strategy
  • Conduct reverse auctions and RFPs (requests for proposal)
  • Conduct supplier selection and award the contract
  • Implement the contract
  • Review and analysis

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