Seven Tips on Managing Low Cost Country Sourcing

Low cost country sourcing or LCCS is the process in which supplies are moved from a low cost country by a business located in some other country where the costs are comparatively higher. This minimizes the capital investment and maximizes profits, all other costs being equal.

For example, when a firm located in the United States gets its raw materials from a Central American company instead of a costlier US company, then the US firm would be said to be doing low cost country sourcing.

There are 7 critical tips to ensuring low cost country sourcing is truly low cost.

  1. Understand the tariff and tax structures involved.
    Low cost countries may or may not prove to be a net gain depending on the level of export taxation in the source country and tariff levels in the importing country.
  2. Do a real transportation cost analysis.
    While ship transport is a fairly economical method, the overall cost analysis of low cost country sourcing and domestic sourcing is critical to the overall cost equation.
  3. Consider the EOQ delta based on potentially longer lead time.
    Even if tariffs and transportation cost do not negate the advantage of low cost country sourcing, the effect of longer lead times on Economic Ordering Quantity or the need to increase the level of Safety Stock in the consumption country may create a zero-sum gain environment.
  4. Determine the importance of quality control to business outcomes.
    Frequently, companies find they must accept a lower quality product or invest in significant inspection resources at the point of product receipt. This can overwhelm the savings provided by a low cost point of origin.
  5. Calculate potential cost if supplier fails to meet Level of Service timeline.
    For companies engaging in Just In Time (JIT) methods of supply chain management, low cost country sourcing of critical components is generally not an option. Stopped production lines generally cost more than low cost country sourcing can save.
  6. Research risk of political instability in the region.
    Political unrest, both internal and external, can halt supply lines. From the pirates in Somalia to airport closures due to terrorist threats in the EU, political instability in countries with low cost materials and labor can play havoc with your supply chain.
  7. Project cost of having directly or indirectly monitor suppliers.
    Procurement managers need to honestly evaluate the layers of monitoring, mentorship, and auditing needed on their low cost country sourcing versus domestic sourcing.

As a general rule, this form of sourcing is used for simple components or cheap consumer goods. If the stitching is poor on textiles, it is less critical than even a minor error on a printed circuit.

Education and skill level of the workers will dictate the type of products and services sourced from lower wage or weak currency countries.

 

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