Friday Rant: LCCS from China Is Dead. Is Labor Arbitrage Procurement BPO Next? (Part 1)

- September 21, 2012 7:09 AM
Categories: Friday Rant, Jason Busch, Outsourcing, Sourcing |

Earlier this week, MetalMiner editor (and my better half) Lisa Reisman, gave a speech to roughly fifty manufacturers exploring economic and metal price outlooks. She gives the same (updated) talk every year to this group in Western Michigan, so she’s gotten to know the faces and stories of folks over the years. Going back to not too long ago, global and low cost country sourcing, specifically, was the talk of the day. As one example she relayed, it was worth it for manufacturers to hold 10 weeks of inventory (versus two, when buying from local suppliers) to purchase finished, semi-finished and base materials metals products from China, even factoring in the cost of hiring multiple resources to manage the added logistics, paperwork, supplier visits and quality development initiatives required.

Flash forward only a few years and the savings delta is all but completely eroded. Lisa heard this from multiple sources after her speech this week. China can even be more expensive, factoring in logistics costs, than local suppliers. Even when Chinese suppliers are selling products below the cost of production (based on government subsidies and incentives) and then dumping these products abroad, LCCS is often not worth it. Overall, thanks to rising logistics and raw materials costs, the China price and hassle has made domestic sourcing that much more attractive.

It took about a decade for the China sourcing and LCCS craze to run its export course in the metals industry (when serving the local Chinese market, of course, it can make sense to purchase locally). For a variety of reasons which we’ll explore in Part 2 of this post, we believe there is a more than likely chance that the next bubble that is going to pop in the coming five years is India-based procurement BPO (and potentially BPO in general in cases where labor arbitrage remains either the overt or hidden rationale for the decision).

Now, this is not to say that firms like Genpact, Infosys, Wipro and others have not already attempted to change their core procurement BPO value proposition from one of reduced labor costs to greater expertise, process knowledge and consistency and solution-based platforms. They have, at least in part (reality can be different from marketing, however). But in cases where these evolving propositions are essentially masquerading in front of lower-cost labor as the primary driver, we would bet against continued growth compared with the rates of Western BPOs (even those with shared services operations in India and other lower cost regions). In Part 2 of this rant next week, we will explore our reasons for this educated bet, and why there’s a good chance labor arbitrage-driven procurement BPO models will run a similar course to export driven China LCCS initiatives sooner than you might think.

- Jason Busch

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