Low-Cost Country Sourcing (LCCS)
Low-Cost Country Sourcing (LCCS) is a multinational sourcing practice that has dominated the corporate landscape over the last few decades. Using international companies with lower wages to manufacture industrial resources is an excellent way to cut operating costs. The shift to low-cost country procurement was primarily motivated by the fact that manufacturing goods in Western countries are prohibitively costly. East Asia, Latin America, and Eastern Europe are the most popular areas for low-cost procurement. In today's market world, efficient cost transfer to low-cost countries is a critical strategic trait. It is especially important for businesses with low-profit margins. This paper will review the concept of low- cost country sourcing in terms of why companies migrate their manufacturing functions to low- cost countries and the effect it has on a business establishment as a whole.
Risk Mitigation and Cost Reduction
Risk mitigation in terms of cost reduction is usually the primary reasons why firms opt to migrate their manufacturing function to low- cost countries. Low- cost country sourcing involves different types of products. The products referred to could be raw materials, supplementary materials, semi- manufactured products, components, finished products, investment goods and capital equipment, services, or maintenance, repair, and operational supply. The complexity of the products also vary, and a firm will only choose a source of supply if it is sure that it will achieve the manufacturing goal. Products that entail special technology that is hard to find are usually limited to suppliers who can deliver. Outsourcing any product to a low- cost country could lead to significant savings in costs. Cost reduction after the transfer of production to China from Western Europe, for example, is as follows: Textiles and apparel, 15- 20 percent; Housewares and Kitchenware, 15- 20 percent; Electronics, 15- 20 percent, and Injection molded plastics, 12- 20 percent. This is an illustration of the essence of low- cost country sourcing when it comes to reducing costs. In the modern business environment, this could be the potential difference between accruing profits or losses. An example of low- cost country sourcing is Tommy Hilfiger Group and Li & Fung case study. In 2007, the Li & Fung bought Tommy Hilfiger Group's global sourcing operations. Li & Fung is a specialist operator that also manages similar operations for multinational corporations such as Walmart and Liz Claiborne. Since Li & Fung operates at high levels of scale, the essence of the migration is to realize substantial cost savings. In the case of Tommy Hilfiger, the company stands to make savings of 15- 20 percent of the production of clothing and apparel.
Factors Impacting Low-Cost Country Sourcing
The rationale for low- cost country sourcing is not solely based on wages and compensation. First of all, the choice of a low- cost country depends on whether or not the type of material a company is looking for can be found there and whether the right competence can be found. For example, when outsourcing for mechanical products, a country such as Brazil could be a good alternative. An organization must also put into consideration other factors that could affect the migration into a low- cost country. Such factors include real ancillary costs, volatility of local currency, logistics, and regulations- both social and environmental. The pressure from consumers to implement green initiatives in every location is a major factor when moving to any foreign location. A company cannot avoid the price of such initiatives. Factors such as the commitment of suppliers, in the long run, is also as important as the other factors since it gets rid of uncertainties. The benefits that accrue to low- cost country sourcing have always been the main attraction to the approach. The commonly cited benefits include the following: "cost deflation, creation of alternate supply bases, reducing dependency on suppliers, category development in view of operational supply bases, help to identify sourcing areas to contribute to set- up a proactive approach to any client, and help in establishing engagement models."
Changing Landscape of Low-Cost Country Sourcing
Despite the benefits associated with low- cost country sourcing, changes in the business environment are changing the approach to LCCS. The low cost of labor in low- cost countries is usually cited as a major reason behind the migration of manufacturing functions. However, wages are on the rise in many low- cost countries. Generational change and the growth of the economies of the countries regarded as low cost has changed the paradigm. China is regarded as the most important low- cost country. However, wages are rising at a rate of 30- 70 percent per year. In India, the situation is similar with wage inflation at approximately 11 percent per year. This will obviously increase the cost of production in such countries. As such, a re- evaluation of the low- cost country sourcing approach is necessary for all involved companies. Companies are already coming up with new strategies to ensure that they sustain the cost advantages in the changing business environment. One tactic is developing distinct capabilities with the low-cost countries. This is achieved by working with competitive suppliers who will maintain the market advantage in spite of changes in the macroeconomic conditions. The aforementioned association of Li & Fung and the Tommy Hilfiger Group is an example of this since the former's economies of scale will make it possible to retain the competitive advantage. Companies are also looking for alternate locations to China. A common trend in today's business environment is the migration to low- cost countries such as Vietnam, Cambodia, and Eastern European countries such as Romania. This is in reaction to the consistently rising cost of production in China. The adoption of a green, sustainable strategy is also a common trend in today's low- cost country sourcing. As such, global sourcing is evolving to become more of best cost rather than low cost.
The Future of Low-Cost Country Sourcing
Low- cost country sourcing is an illustration of efforts by organizations around the world to operate as efficiently. In industries where profit margins are characteristically small, LSSC is imperative since it gives a market advantage. The evolution of LSSC is, personally, an illustration of the changing world. China was the definite bet when it came to choosing a low- cost country. However, decades of a rapidly growing economy have been accompanied by an increase in wages and a consequent increase in living standards. The search for alternative outsourcing locations is evident with companies such as Samsung Electronics switching to Vietnam. Low- cost country sourcing is still relevant and beneficial to businesses, however, the approach has to change if a firm is to reap any tangible benefits.
Bibliography
Dutzler, Harald, Phillips, Dave, Mansson, Anna, Parthasarathy, Sriram. Best- cost country sourcing. Strategy &. 2011.
Kusaba, Keiko, Roger Moser, and Alexandre Medeiros Rodrigues. “LOW‐COST COUNTRY SOURCING COMPETENCE: A CONCEPTUAL FRAMEWORK AND EMPIRICAL ANALYSIS.” Journal of Supply Chain Management 47, no. 4 (2011): 73-93.
Lockstrom, Martin. Low- Cost Country Sourcing. Springer Science. 2007.
