Has Low-Cost Country Sourcing Lost its Appeal?

Spend Matters welcomes another guest post from Teja Kappagantula of GEP.

Is low-cost country sourcing (LCCS) no longer attractive? Are companies with low-cost country sourcing as part of their procurement strategy finding that the intangible costs outweigh the benefits? Atrocious working conditions, little to no concept of QHSE (Quality, health, safety, environment), rising inflation and energy costs, poor IP protection, and other factors are making low-cost country sourcing a challenging aspect of the sourcing strategy, if not unsustainable.

Recent media headlines on the Foxconn suicides, Bangladesh factory fire, and double-digit inflation have renewed the debate on the sustainability of the low-cost countries as legitimate sources of goods and services.

In light of these recent developments, the key considerations for low-cost country sourcing have changed:

Redefine the target low-cost countries: Low cost need not mean emerging markets. Though not imminent, emerging markets are slowly losing the obscene cost advantage that they used to hold due to rising energy costs and general inflation. Having an open mind with regards to the target sources to be evaluated is critical to the success of the strategy.

Evaluate the supplier development costs: Evaluating the supplier development, time, and opportunity costs associated is easier said than done. However, it is essential to take into account these costs to identify the right low cost sources. Costs associated with qualifying the suppliers include the time and efforts of the internal resources.

Consider a long-term strategy: LCCS doesn’t work well as a short-term sourcing strategy for cost reduction. In addition to helping reduce costs, LCCS should also provide sustainable sources of consistently high-quality goods and services. Consider partnering with the suppliers on a long-term basis to fully realize the benefits of LCCS. Partnering with the suppliers with potential for strong cross linkages of the overall value chain has helped the pharma and agrochemical companies taste tremendous success with LCCS.

Consider domestic sourcing before evaluating LCCS: With the proliferation of the shale gas mining and usage, the US is experiencing a significant drop in energy costs, making domestic sourcing much more attractive. Quite a few businesses (high tech, chemical, etc) are evaluating, some already implementing, the re-shoring of supply in the US to benefit in the long run from the low energy prices.

Now is the time for companies to re-evaluate their respective low-cost country sourcing strategies, and it is worth taking into account the abovementioned thoughts for the success of your company’s sourcing strategy.

For more interesting thinking on procurement, visit the GEP Knowledge Portal

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