Risks involved in Low Cost Country Sourcing

Low Cost Country Sourcing (LCCS) is a procurement strategy for organizations looking to reduce cost while benefiting from Low Labor Cost and Low Production Cost at various countries around the globe. With highly advanced communication and transportation system now organizations can manufacture any part or subassembly at multiple locations and assemble them at the best possible alternative thus manufacturing the product. LCCS concept followed this simple theory. Organizations look out for location which gave them best total cost (broadly include manufacturing cost and shipping cost).

Common LCCS countries are China, India, Thailand, Malaysia, Ukraine, Romania, Mexico, and Brazil. These are typical developing countries benefiting from huge human resource or geographic location.

Why Organizations follow LCCS strategy:

· Low Labor Cost
· Low Production Cost
· Low Material Cost
· Pressure from customers to reduce price
· To be competitive in market
· To enter emerging markets


Risks involved in LCCS:

There are many papers published on how much cost savings organizations are doing by adopting LCCS approach. But LCCS strategy has many risks involved also:

1. Planning and Start up: Before an organization decide to pursue LCCS strategy a lot of due diligence is required in terms of identifying sourcing strategies and tactics, demand and spend analysis, market due diligence and financial business case.

2. Managing long distance and complex supply chain: Sourcing one part from China and one from India and assembling them in US is not easy task. Managing such a supply chain is challenging task not only logistically but on quality and cost front. It looks very good on paper but very difficult to implement and manage.

3. Supplier Knowledge: 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. 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.

4. Quality: Most people say quality is directly proportional to cost and when you source from low cost country this is your prime problem. Organizations while doing LCCS have to make sure required infrastructure and processes are in place to counter this problem.

5. Infrastructure: The basic requirement to meet deadline is infrastructure and to be always competitive you need latest technology. Most low cost countries lack it. You could have cheapest cost to manufacture but if material cannot be delivered on port for shipment on time it is useless. China has understood this point and has worked in great deal at it but still most countries need to work on it.

6. Human Resource: Poor quality staff, lack of experience and high attrition is the most common issues faced by organizations while doing LCCS. People are backbone of any organizations and if they are inexperienced and unskilled it directly affect the quality of product and efficiency of the organization.

7. Government Policies: Each emerging market has its expertise and government policies regarding special waiver in taxes are very important factors. Although such policies are good in short term but are seen to be unsustainable in future. Even Chinese suppliers are feeling the competition now as special packages like waiver of VAT has been taken back by government.

8. Communications: Whole world doesn’t speak English. Go to China you will find people barely speak in English but better when you communicate through email. In India excellent in communication but speak with different accent. In Mexico they are more comfortable in Spanish then English. These are typical example of problem faced while communicating in some low cost countries.

9. Culture: Culture defines how aggressive people are towards task completion and conflict resolution.