Low Cost Country Sourcing - Part 1

Nine tips for low-cost country sourcing
Wayne Forrest -- Purchasing, 9/1/2005
U.S. companies in greater numbers have heard—and are heeding—the siren's call to source products and parts overseas to reduce overall costs and compete more aggressively at home. A recent study by the Boston-based Aberdeen Group found that CPOs rate low-cost country sourcing (LCCS) a top priority over the next three years, and that companies plan to double their spending with offshore suppliers by 2008. The report also found that purchases from low-cost countries have average cost savings of 10-35% compared to U.S. and Western Europe suppliers. Those numbers alone will gain the interest of U.S. manufacturers, which are always looking to make the most of every penny spent.
While the LCCS road looks smooth on the surface and the cost benefits are enticing, there are potholes the size of moon craters for companies that do not properly prepare for all the potential hazards along the way. With that in mind, here are some tips from industry experts on how to successfully implement an LCCS strategy.
TIP 1: Calculate all the costs by getting everyone involved
Time and time again, companies do not take into account all the expenses incurred in LCCS and fail to consider the needs of the entire business and its various units.
"You don't want procurement to just go out and save money by getting the cheapest supplies," says Chris Sawchuk, practice leader for procurement and supply chain at The Hackett Group in Atlanta. "Procurement organizations pursuing LCCS need to understand what is happening from an overall business standpoint."
Sawchuk recommends creating a cross-functional team that includes procurement, engineering, supply chain and finance people who can coordinate the most efficient and productive LCCS plan. By doing so, a company can best anticipate actual savings and set realistic goals and expectations.
Preliminary results from a Hackett Group study on successful global sourcing show that companies save approximately 19% on parts price savings alone. Add expenses, such as shipping costs, duties, tariffs, IPO operations, inventory and other charges, and the savings dwindles to less than 17%—an important 2% difference when plotting financial targets and presenting results to the CFO.