I've often found low cost country sourcing (LCCS) -- also often referred to as global sourcing -- to be an over-hyped topic. In many cases, conference presentations on the subject continue to recycle the same facts and figures, quoting the same forecasts showing that x company will source y percentage of its total volume from Z region, up from 1/2 Y its totally volume in the previous year. Let's face it. Reporting which only goes that far gets tired after a while. But I happened to really enjoy the LCCS panel at Aberdeen's CPO Summit. Kevin Fitzgerald (an Aberdeen analyst), who is far more knowledgeable about the subject that he would let on, introduced the panel of experts to share their own experiences.
First to present was Kelly Lipski, a Procurement Consultant at Alcoa. Lipski's presentation focused on Alcoa's LCCS transformation from 2004 to today. In 2004, Alcoa sourced approximately 10% of its total volume from low cost regions, but this was mostly for "local supply" in regional markets. But in the next 12 months, things would change. Alcoa's global low cost country sourcing operations (based in Shanghai, Monterrey, Pocosde caldas (Brazil), and Hungary) would soon see a significant increase in activity. In 2005, Alcoa expects to source over $1 billion from low cost regions in 2005, with import volume (i.e., volume destined for the US and Western Europe), increasing by $160 million over the previous year. One of the key lessons learned from LCCS that Lipski cited was the critical nature of calculating total cost of ownership (not just unit price) early in the sourcing process, while updating it continuously throughout (including after implementation).
The second of the panelists was Russ Davis, Senior Director of Corporate Sourcing at Tyco, a firm that is well down the road to sourcing a significant percentage of its volume from low cost regions. Tyco views LCCS as important to improving its bottom line as curtailing the lavish parties thrown by its executives (that was a joke, though certainly LCCS can more than make up for the costs of a few million dollar parties in Manhattan penthouses). But onto the serious points: in 2005, Tyco will increase their LCCS volume to $3 billion, up from $2.1 billion in 2004. Tyco is focusing significant effort on purchasing from Central Europe. In doing this, Martinez cited the range of cultural, legal, tax / tariff issues that companies face in sourcing from the many different countries in the region.
The third and final panelist was Colin Walker of Woodward (a $1 billion A&D and industrial manufacturer). In my opinion, Walker's presentation, which focused exclusively on China, was the most informative and pointed of the three. He went into great depth in explaining the different types of relationships one could structure as well as the characteristics of the available supply base (which range from local China enterprises (both state and privately held) through to WOFEs (wholly owned foreign enterprises), which tend to have better systems and processes in place -- as well as the highest prices on a unit bases, but not always on a total cost basis). Incidentally, according to Walker, the first group tends to operate at a 2 Sigma quality level, whereas JVs, WOFEs, and "plug and play" partners usually operate at 3 Sigma and above.
Perhaps the most insightful part of Walker’s presentation was a case study where he pictorially illustrated the improved quality levels of a part that he was able to obtain 50% more cost effectively (on a total cost basis) from China. Previously, Woodward had sourced the part from a domestic supplier, and had significant quality issues (poor surface finish, inconsistent chemical composition, etc.) But Woodward found a new supplier in China who was not only able to supply the part at a 40% unit price savings, but could also drastically improve quality levels. Now that’s a story that should make domestic suppliers think more seriously about China as both a low cost (and potentially higher quality) region to source from.