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
- 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
- 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
- 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.
- 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.
- 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
- 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.
- 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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