Low cost country sourcing; high cost country sourcing; near-shore sourcing; home-shoring; off-shoring…keep ’em coming. The manufacturing and distribution industries are just starting to get interesting. It can be tough to keep up. But, you only need keep up with the best concepts out there. And “best cost country sourcing” is one of them. Merging the “best” of risk and return?
Michael Lamoureux of Sourcing Innovation recently wrote a post entitled Best Cost Country Sourcing. His post was based on BrainNet’s white paper, “Best Cost Country Sourcing”, which I have yet to find a working link to. But fear not. Michael has summarized some of the concepts and made noteworthy commentary:
Taken from the white paper:
…cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for.
It all started with the buzz words “Low Cost Country Sourcing”. This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.
I agree. Generally speaking, you get what you pay for. But you have to take it on a case-by-case basis and think of it in terms of your overall competitive strategy. If time to market is too important, or you need components that are very high quality and technologically sophisticated, or exposure of your IP could sink your whole company, countries further along the development path with higher costs might end up saving you money in the long run.
Two basic concepts found throughout business, risk and return, are critical to the supply chain and sourcing. The problem is, it’s much more fun to speculate about substantial returns and savings, than try to quantify, measure, and assess risk. Thus, risk, and potential sources of risk and their effect on return, often fall off the radar. Perhaps someone should coin the term “riskturn”. Wait…I just did. It follows the whole celebrity gossip magazine promotion of co-identity: two things fused together which we dream will never be broken up again. People-Magazine-reading 14-year-old girls and desperate housewives have their Brad Pitt and Angelina, “Brangelina”, or Ben Affleck and Jennifer Lopez, “Bennifer”. Now CEO’s and sourcing managers will always remember “riskturn” and know that risk and return are a couple made in heaven.
Back to sourcing … Michael astutely notes:
In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It’s not just the flick of a switch.
In my case, Michael is preaching to the gospel. It’s right on and it’s worth promoting this kind of information more. ChinaLawBlog did a post eloquently entitled China Defeats Vietnam in Sourcing Smackdown which covered a post I did Offshore Sourcing: An Ever-Shifting Landscape, Part II. In my post, I talked about the fact that many fashion apparel manufacturers that moved production to Vietnam to avoid the risky/costly quota situation with China, then had to gather up their threads and needles again and head back to China and other countries when the US government announced that they would be monitoring Vietnam’s fashion industry for possible anti-dumping actions. In the comments section of ChinaLawBlog’s post, he noted that huge multinational corporations which fall into $5 million mistakes in trying to source the lowest costs or be the first to enter developing markets is not a strategy for all to follow. His point being, a smaller company making a $500,000 mistake might be up the Mekong Delta without a paddle, because they just don’t have the deep pockets to absorb those kinds of mistakes from a financial perspective like MNCs do.
Chasing lower costs undoubtedly disrupted supply chains, and perhaps order fulfillment, for these companies when they had to deal with a more unpredictable trade relationship between Vietnam and the U.S. For smaller companies, disruptors like this could be devastating. Best Cost Country Sourcing for smaller companies would involve hedging risk by looking for lower overall costs (rather than lowest hard costs) in a country where things like economics, trade, supply, materials, and other things are more predictable. I believe China retains this position over many other countries for smaller businesses looking to source consumer goods. At the very least, it’s certainly a good place to start for many. In many cases, maybe the best…?
P.S. I expect the comments to start rolling in from Mr. Locke any minute now …