Originally posted on on the e-Sourcing Forum [WayBackMachine] on Tuesday, 16 October 2007

Low Cost Country Sourcing, often abbreviated LCCS, defined as a procurement or sourcing strategy in which a company sources materials from countries with lower labor and production costs in order to cut operating costs, is not a new subject. In fact, it’s a rather hot topic today. Googling “low cost country sourcing” (without the quotes) generates a whopping 1.9M hits. However, given the dizzying array of information, it’s hard to know where to start.

However, before you start, the first thing you should do is familiarize yourself with the challenges you will need to overcome in order to have a successful project. LCCS comes with a number of challenges that include product quality, supplier quality, resource quality, logistics, reliable delivery, supply assurance, supplier bankruptcy, and the inherent complexity of remote supplier management. Furthermore, the reality is that even today, many large global organizations are not fully prepared to embark on ambitious LCCS projects.

First time LCCS projects, especially those that are poorly planned, are often wrought with budget overruns caused by underestimated transportation costs, additional inventory costs due to uncertain lead times and long order cycle times, bad data, and fluctuating demands. Furthermore, there is a significant variation in supplier capability and sophistication in developing markets, in specific verticals in a specific developing market, and even within individual operations and factories. In China, a factory might have state of the art production equipment recently bought from a U.S. supplier (as a result of the weakening US dollar) but that same factory might not even have the capability to ship a standard palette.

This gives us our first step to success – before selecting a supplier, it’s important to meet with the supplier and conduct on-site visits and assessments. But it’s even more important to do good research on the supplier in a pre-qualification process to make sure the supplier has a decent chance of living up to the requirements, or the organization might end up wasting a lot of time and money. Use third party information services such as those provided by Austin Tetra and Open Ratings, do reference checks, collect detailed information on operations and capabilities through eSourcing tools from the suppliers themselves, and have introductory calls and video-conferences before investing in the remote meetings and site visits required by a full qualification.

The next step to success is to take a total cost of ownership approach when evaluating a potential low cost country supplier – not just a total landed cost approach. This includes increased inventory carrying costs, duties, import and export taxes, and additional financing costs. Furthermore, this calculation must be updated regularly throughout the process, as it can often increase as one progresses further into a project. If the point is reached where the estimated savings are not worth the increased risk, the project should be dropped, at least with respect to the categories one was considering outsourcing.

The final step to success that is going to be mentioned in this blog entry is to hire top-notch external expertise with experience, and this is especially important for small and medium sized organizations which likely lack some of the skills necessary to succeed in a low cost country sourcing effort. It’s true that the right consultant might not come cheap, but the value such a consultant can provide the organization will pay for the consultant many times over once a successful LCCS operation is in place.

For more insights on Low Cost Country Sourcing, check out the “Low Cost Country Sourcing: A Blogger’s Perspective” wiki-paper over on the e-Sourcing Wiki [WayBackMachine] which includes an interview with Carl Greppin (Transpac Access) and blogger insights on the challenges, destinations, and required steps to success.