I've been disappointed with how quiet Ariba has been on the low cost country sourcing (LCCS) front for the past couple of years, relative to the company's actual capabilities (which thanks to FreeMarkets, I feel are some of the best in the market). For the longest time, the best thought leadership Ariba had in the area was a FreeMarkets whitepaper on the subject from 2003. Clearly, this has been a case where they've needed to invest in additional marketing. But perhaps things are changing. It's good to see David Morgenstern, Ariba's Managing Director for LCCS Programs, getting on the pulpit. He needs to do more of it. In addition to an expanded LCCS road-show in Asia, South America, and Central Europe, his team is finally starting to generate some new thought leadership in the area. For example, David's recent article in Supply and Demand Chain Executive on supply base localization hits the mark.
The bylined article argues that when it comes to LCCS, "there is one area of cost reduction, however, that has yet to be fully realized: ensuring that the supply base of a relocated manufacturing operation has been optimally localized." Why does localization matter? It matters for three reasons. According to David, "first, a non-localized international inbound supply chain (be it Wisconsin to Mexico, Wisconsin to Shanghai, or France to Slovakia) creates a lead time and inventory cost burden on new manufacturing facilities. Second, as quality gaps for most components have all but disappeared in low-cost regions, a local supply base can deliver most components and inputs at a significant cost advantage over competitors in higher-cost regions. And third, a local supply base can grow from simply supplying the new facility in the low-cost region to supplying facilities on a global basis under preferred terms and conditions."
Later in the article, David says something that all experienced LCCS professionals have come to realize: namely, that China is not always the answer. Here, David's analysis hits the mark as well: "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."
It's great to see David and the rest of the Ariba organization start to pound the LCCS table. Ariba needs to be more of a visionary in the area, and they clearly stand to benefit from taking a thought leadership role in the market. Let's hope this is only a start.