Low-Cost Country Sourcing
Low- cost country sourcing ( LCCS ) is a method to achieve economic savings.
- 3.1 General challenges
- 3.2 Supply Chain Risks
Sourcing in low cost countries
The procurement in low-wage countries is a branch of global sourcing. An important goal of global sourcing is the exploitation of comparative advantage so as to avoid the cost pressures and to achieve long -term competitive advantages. Within the global procurement sourcing in low-wage countries is therefore a special case, since there are often high cost savings can be realized. In practice, the concept of low-cost country sourcing formula is used frequently.
As a low-wage country a country is called, which has a lower price and wage level compared to the home country of the purchasing organization; Thus, low-wage country is always a relative term. From the perspective of developed industrial nations, the high -wage countries are countries, however, are referred to that currently have extremely low labor costs, lower educational level and lower economic strength - but this at a very fast growing economy. This includes, for example, emerging Asian nations, countries from Latin America and Africa as well as some Eastern European countries. These countries are often referred to with the terms BRIC countries ( Brazil, Russia, India, China), RDE ( proceed rapidly developing economies ) (BCG 2006) or N-11 (Next eleven ).
Goals and opportunities
The global sourcing and especially procurement in low-wage countries are motivated by several strategic objectives: economic, sales, technology and flexibility goals.
Economic objectives and opportunities
One of the business objectives and opportunities include, in particular cost reductions, effects arising from the existing lower local costs of individual production factors, the factor costs. In addition, the company produces locally in the vicinity, transportation costs can be saved with these activities. Further, also taking advantage of tax benefits and subsidies and support measures provide an incentive. Through a global supplier base also pressure on existing suppliers exerted to present attractive offers.
Sales targets
For sales targets procurement can also contribute: first as a preparatory paragraph as marketing and market presence to qualify a local supplier base that would be required for a potential production site. For another example, at local content requirements, in many countries (eg China, Russia) is to avoid high import duties, an important motivation for local procurement. Often, cost reductions must be achieved in order to offer ever compete in the local markets.
Technological objectives
Technological goals are access to global knowledge, infrastructure, new technologies and manufacturing processes as well as global resources. This should opportunities for technical innovation used early or development time to be shortened. Procurement markets such as Taiwan and Korea are an example.
Flexibility and risk avoidance
Flexibility and risk prevention targets in particular, play in a local production in these countries a role: futures, exchange and transport risks can be reduced. Often intended by the geographical diversification also a scattering of procurement risks, such as bankruptcy or loss of production risks can be achieved, thus improving the availability and security of supply. The enlargement of the supplier base also creates alternatives to existing suppliers. This results in flexibility and scope for action and a reduction in dependence on suppliers.
Problems
General challenges
The great opportunities offered sourcing in low wage countries are, however, also face numerous challenges. In total, allow the following eight challenges and barriers to classify:
- Lack of competence of the supplier
- Lack of infrastructure
- Different culture, language and market conditions
- Coordination efforts, piracy and legal barriers
- Political and social risks
- Currency and payment risks
- And internal resistance to the procurement in low-wage countries
Supply Chain Risks
Distinction can be made between supply -chain exogenous procurement market-specific risks ( environmental risks) and supply -chain endogenous risks ( supply risk). In addition, supply -chain exogenous non- procurement market-specific risks. These exogenous environmental risks include natural hazards (eg natural disasters) or risks that may occur in the low cost country sourcing, but are attributed to any specific sourcing country, such as the risk of piracy in the Horn of Africa off the Somali coast during ship transport. Supply -chain exogenous procurement market specific risks arising from the characteristics and circumstances of the global procurement market of low cost Countrys. These risks can be divided into political, legal, economic, technological and socio-cultural risks. For the implementation of an enterprise -wide supply chain risk management a continuous focus on the supply chain immanent goods, information, legal and financial cash flows is needed to avoid disruptions and interruptions in the supply chain flows. Accordingly, the supply chain flows provide a framework to systematize the possible in a supplier -customer relationship supply chain risks. In this respect, supply-chain - endogenous supply chain risks can be subsumed in supply risks, information risks, financial risks and legal risks.
Supplier structure
The construction of a new supplier is within the procurement activities to low-wage countries is a critical and difficult process that brings great risks. He is often associated with a supplier development with high upstream investments, usually in several stages and over a longer period until the procurement object can be obtained in series. Given this strategic importance is the selection of suppliers to a large value and is regarded as a crucial factor for the success of such an undertaking.
Trends in procurement in low-wage countries
Gaining importance in purchasing the following topics:
Design for Low- Cost Country Sourcing: A factor to avoid incompatible procurement items for procurement in low-wage countries, the adjustment of product structure on the site-specific production conditions of its suppliers (Weiler 2010; Lanza and Weiler 2010). This should be exploited specifically the benefits of global production. A site specific product design to deliberately allow the use of comparative cost advantages of global locations (eg labor, energy, machine hours cost ) and thus the realization of substantial savings. In addition to by an appropriate design deliverability and flexibility are increased, the quality can be increased by adjusting the complexity of the component to the capabilities of the suppliers and product piracy and high coordination costs, for example, be avoided by a goal-oriented modularization.
Design of the procurement organization: Another aspect is the design and development of the procurement organization, to adapt it to the high standards of procurement activities to low -wage countries.
Allocation of procurement objects to procurement markets: Which procurement objects can be successfully retrieved from which procurement markets is difficult to answer and requires an objective assignment or selection. This assignment can be done by a systematic comparison of the abilities of the procurement market or supplier, the requirements of the procurement object and the skills of their own company.