Low Cost Country Sourcing Vital, but Pitfalls Remain

As enterprises plan to double offshore-supplier spend; many are ill-prepared to succeed, AberdeenGroup reports

Boston, MA  July 20, 2005  Low cost country sourcing may be vital to maintaining competitiveness, but many execution pitfalls remain and few enterprises have developed a comprehensive strategy or the necessary resources for LCCS, according to a new report from supply chain consultancy AberdeenGroup.

As supply management executives continue to feel cost-cutting pressures, they're finding relief by sourcing from countries where labor, material, manufacturing and operating costs are significantly lower than in more developed nations, according to a new research report, "Low Cost Country Sourcing Success Stories," just released by AberdeenGroup.

Aberdeen's research suggests that establishing a sound low cost country sourcing (LCCS) program is now a matter of survival for companies in many industries. As a result, enterprises plan to double their spending with offshore suppliers by 2008. However, Aberdeen's research confirms that many execution challenges  and pitfalls  remain.

The shift to such sources is affecting supply chains throughout the globe, with manufacturers like General Motors and Toyota pushing suppliers to match pricing from low-cost nations such as China and India, among others. Significant findings from Aberdeen's research study reveal:

• Cost savings is the prime reason enterprises engage in LCCS. Total costs for goods purchased from low-cost countries are 10 percent to 35 percent lower, on average, than costs in the United States or Western Europe.



• Enterprises source an average of 21 percent of their total spend from suppliers in low-cost countries, and they plan to increase that to 39 percent in three years.



• LCCS comes with significant supply challenges and risks. Longer supply chains, trade regulations, tariffs, cultural issues, poorly developed infrastructures and immature suppliers remain high risk factors.



• Most enterprises interested in LCCS have not developed well-thought-out strategies, and most are ill-equipped to undertake such an ambitious effort.

"Businesses and other enterprises simply cannot afford to ignore the cost savings of low-cost country sourcing," says Kevin Fitzgerald, vice president of supply management research at Aberdeen and lead author of the report. "But supply management executives must become fully aware of the risks of LCCS, and plan accordingly."

The report is available at http://www.aberdeen.com/summary/report/benchmark/RA_LCCS_KF.asp.

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Additional Articles of Interest

 Imminent terrorist attacks or no, your competitive advantage demands that you secure your company's supply chain. Read more in "Supply Chain Security: Is Your Company Complacent or Engaged?," in the February/March 2005 issue of Supply & Demand Chain Executive.

 For a look at how Tyco Fire & Security is tackling trade compliance issues in its global supply chain, see "Turning Global Trade Compliance Into a Competitive Advantage," in the August/September 2004 issue of Supply & Demand Chain Executive.

 For more information on the challenges and opportunities presented by increasingly global supply chains, see the special in-depth report in the August/September 2004 issue of Supply & Demand Chain Executive, which includes the following articles:

• Making Global Supply Chains Work  Supply and demand chain practitioners take on the challenges and opportunities of world marketplace.


• The Hidden Costs of a Global Supply & Demand Chain - Veteran industry observers warn of potential hidden costs of offshoring.


• Mastering the Complexity Challenge in the Global Supply Chain - While many companies are acting globally, they are still thinking locally.


• Ensuring Security of Supply in the Lean Supply Chain - Balancing the demands of security with the requirements of today's lean supply chains


• The World Is Enough - Making the global high-tech supply chain more accessible.

 For more information on the global supply chain, with a focus on security issues, see "Building the Secure Supply Chain," the Net Best Thing article in the June/July 2003 issue of iSource Business (now Supply & Demand Chain Executive) magazine.

• More research from AberdeenGroup.

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