On Strategy: Low-Cost-Country Sourcing
In-house resistance can undermine sourcing from low-cost countries. Here is some advice from our experts on how to clear this hurdle.
Low-cost-country (LCC) sourcing initiatives have become crucial to the survival of many global companies. Yet, as our experience shows, when they go wrong, it is most likely due to in-house resistance. In addition to commercial considerations, some fundamental ethical and political value judgments also come into play here. Are such initiatives economically responsible? Aren’t we digging our own grave by harming home suppliers? Can these “developing countries” possibly produce at global quality levels? The unfamiliarity with these low cost countries also make them appear a daunting prospect.
The success of these initiatives comes from having the right management attitude. Management must grasp how decisively the people within their own company can influence the outcome of the initiative and take their reservations seriously. On the basis of our experience, we have identified five factors that, in most companies, are central to the success of LCC sourcing initiatives.
Choose the right product groups
The success of the initiative stands or falls by the choice of product groups to be sourced. By making the right choice, management shows its people that it knows the true strength of the company’s products and that it is working to consolidate these strengths.
- Analyze data to adequately plan and calculate total costs
It is critical to consider the total landed cost of LCC sourcing in order to make a like-for-like comparison before making a decision. Scoring models can be used to make it easier to understand and document the situation. Furthermore, it is important not to keep quiet about negative consequences. Rather, they provide an opportunity for management to demonstrate that it has thought through the initiative, has planned it carefully, and has considered all the possible costs and consequences. For example, logistics costs, quality, and inventory need to be considered for the total cost analysis.
- Invest adequate resources, including top management
A company needs, above all, its good and experienced people for the success of an LCC sourcing initiative. Freeing up staff for these tasks demands money and energy. Also, top management must find the time needed, so the initiative automatically can acquire higher priority, receive more support and, consequently, have a stronger roll-out. Top management can also smooth over any cross-functional tensions that may arise.
- Set up a cross-functional team
In addition to personnel from Purchasing, it is also important to bring in people from Product Development, Quality, Logistics, and Production for the LCC iniative. Moreover, a team member with experience in the country concerned should be part of the team, as that person can immediately deal with any reservations team members may have and generate greater trust in the initiative. Staff who are skeptical but amenable to rational arguments should be involved at an early stage.
- Use a transparent process
The initiative is most likely to be successful if management shows very clearly how individuals and functions must interact and depend on each other. In one case, a company went so far as to organize roadshows with presentations and brochures. It introduced the individuals and the team behind the initiative, clearly set out the objectives, tasks and the project plan, and shared the initial success stories. And the effort paid off by significantly boosting staff motivation. A policy of open information counters unfounded fears and enables the well-founded fears to be dealt with rationally.
Every organization can successfully carry out an LCC sourcing initiative. However, every company has just one chance to make the initiative work. If it fails, the subject will have to be dropped for a long time, if not forever. So companies must plan the initiative all the more carefully and avoid the most difficult hurdle, namely internal resistance, from the outset.
Companies must also be clear that the tasks associated with the initiative are more demanding than classic purchasing and procurement issues. It is not just about finding and evaluating suppliers and conducting negotiations. It also involves project management, change management and internal marketing. At the same time, a company must find the right way of dealing with the intricacies of new supplier countries. Companies must decide how they will build up the expertise they need—in-house or through external providers. They must make a conscious effort to make up for their lack of experience. How, then, can we sum up all these success factors? That’s easy: “Do it right or not at all!”