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back to index backLATINtalk July,  2005


The practice of low-cost country sourcing (LCCS) is accelerating

Here's an in-depth look at this cost-saving trend


Lured by low material, manufacturing and labor costs, and advanced by desires to penetrate emerging markets, enterprises are aggressively adopting low-cost country sourcing (LCCS) strategies. Recent macroeconomic trends such as globalization, outsourcing and pressures to reduce costs have accelerated this trend. In fact, today, it's not a matter of if your company will source globally, but how best to do so.

The attraction to sourcing to LCCS is obvious: Materials and products from countries, such as China, Singapore and Malaysia, can be manufactured at prices 30 to 50 percent less than in the United States. Related Aberdeen research finds that, even after logistics and tariff costs are factored in, companies are still reporting 10 to 35 percent total cost advantages from low-cost country suppliers. Considering these factors, it is not surprising that use of foreign suppliers will double in the next few years, with offshore sources accounting for 27 percent of the typical company's supply base by 2008. Not surprisingly, more than 86 percent of manufacturers list LCCS as a top initiative for the next three years. Having applied strategic sourcing within domestic regions, most manufacturers are now looking to offshore sources for their next wave of savings.

Cost savings may be the primary driver for LCCS initiatives, but procurement executives also view LCCS as a key lever to delivering value to the enterprise.

Many LCCS Initiatives Are Driven From the Top

Several procurement executives indicated that company executives who were influenced by peers, rivals and board members touting LCCS' benefits actually initiated LCCS efforts.

Alcoa is one example of a company where LCCS is being driven from the top. "Our CEO wants us to be an industry leader in LCCS," says one procurement executive at the world-leading producer of aluminum products, a $23.5 billion company. "There is also a growing awareness in our organization that we have already achieved some of the easy, early savings from leveraging, and we need to be looking into new ways to save money. LCCS is an appealing opportunity."

Alcoa sources raw materials and packaging from multiple low-cost countries, especially China. The company set up international purchasing offices (IPOs) in Shanghai, Mexico, Brazil and Hungary to assess and manage local suppliers and to support its global sourcing organization and business units. Sourcing managers within Alcoa business units function as resident LCCS experts.

Many View LCCS as a Method to Cut Inventory Costs, Reach New Markets

Rising energy and transportation costs have accelerated interest in LCCS. A growing number of enterprises view LCCS as a way to reduce logistics and inventory costs and to help their companies penetrate new markets.

Schneider Electric North America (SENA), with businesses around electrical distribution and automation and control, re-sourced over 60 percent of its spend in an effort to capitalize on low-cost country sources and eliminate supply chain-related costs (e.g., logistics, inventory, etc.) by adopting sources closer to manufacturing sites and end markets.

SENA established international sourcing teams comprised of procurement, engineering, manufacturing, sales, marketing and human resources. Each team is focused on costing and sourcing specific commodities within low-cost markets. The division set up IPOs in countries, such as China, to assess, develop and manage local supply and to advise the international sourcing teams.

The strategy lowered supply costs and helped increase sales to emerging markets, such as China. SENA's global sourcing team is now chartered to lead its corporate parent's initiative to transition $1 billion of spending to supply in China, Southeast Asia and India. The company expects the move to yield $250 million cost savings annually.

Procurement Executives are Aware of Risk Management

Procurement executives were acutely aware of the challenges and risks associated with LCCS, ranging from basic language, culture and time-zone differences to intellectual property protection, currency fluctuations, geopolitical unrest and supplier on-boarding. Enterprises were organizing cross-functional teams and leveraging technology and external information and service support to address these issues.

Chief strategies procurement executives are employing for LCCS include:

* Accessing supplier intelligence services. Nearly 70 percent of procurement executives plan to rely on external information sources and service providers to provide intelligence required to identify and assess supplier capabilities, constraints and financial viability capabilities of LCCS suppliers.

* Automating sourcing and procurement processes. All respondents viewed adoption of sourcing and procurement automation as a major enabling component of their LCCS strategies. This finding echoes Aberdeen's e-sourcing index (ESI) research, which finds e-sourcing users reporting that these tools have increased and improved negotiations with offshore suppliers. Considering this fact, it is not surprising that more than 80 percent of respondents from small and mid-size firms view automation as key to their LCCS plans. Limited resources of smaller firms will mandate increased reliance on automation and outside services.

* Accessing third-party intelligence on tariffs, trade rules and landed costs. Material and manufacturing savings can quickly be undone if a company does not fully understand the transportation, handling and tariff costs associated with moving the acquired product to its manufacturing site or end market. Ingersoll-Rand estimates that transportation, duties, taxes and other cross-border logistics costs range from 13 to 24 percent of the basic price of imported materials and parts. Calculating such "total landed costs" requires understanding constantly shifting harmonized system (HS) code; tariffs; transportation, drayage and handling costs; and cross-border regulations. Enterprises will look to third-party information services for assistance in ensuring accurate landed cost calculations. This intelligence is also key to supply chain network and postponement strategies.

* Establishing an international purchasing office in-country or in-region where LCCS suppliers are located. Larger enterprises and manufacturer's were more inclined to set up their own IPOs. These firms have the spend volumes to justify such an investment. Larger firms were also more likely to hire regional supply market experts on staff. By comparison, more than half of mid-size firms either use or plan to use external service providers for in-country support for LCCS supplier assessment and management.

Key Takeaways

* LCCS becomes standard operating procedure for most enterprises.

* Cost savings is a major motivator, but C-level attention and market expansion make LCCS a clear contributor to enterprise value.

* LCCS strategies will rely heavily on external sources for supplier, market and tariff intelligence. Automation and IPOs are also core to LCCS strategies.


Source: Supply & Demand Chain Executive
 - GAI

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