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Purchasing Magazine:
Re-Print from February 19, 2004; vol 133, no. 3

Tread carefully into low-cost countries

By: Arvid Pedersen

 

The reasons for sourcing in low cost countries may seem obvious, but the question is far more complex than a simple pursuit of lower costs. While customer demands, shareholder profit expectations, deflationary pricing, and global competition drives most companies to consider sourcing materials in low cost countries, the complexity of actually accomplishing an effective international sourcing strategy deserves a complete strategic evaluation.

Before discussing the primary objective of lower cost, it's prudent to step back to an evaluation of broader company goals, objectives, and business culture. Assuming the company has a cross-functional, integrated set of goals and objectives, the first step is to understand the impact of foreign sourcing with regard to future product lifecycle and evolution, manufacturing strategy, technical competence, technology differentiators, and marketing plan. If the company has developed foreign markets for a product, is there a plan to develop local manufacturing capability within the same market? Will local manufacturing enhance the company's sales position? Are there significant import duty or transportation costs that affect the market pricing of the product?

The supply chain strategy should support, or at least be in concert with manufacturing and marketing plans for each product. Elements of the strategy are as follows:

• Technology roadmap. Are there technology differentiators that distinguish the company's product from its competition? Does the product have short or long lifecycles? Are there frequent technology advances? Does the product have proprietary technologies that must be protected? Does the company manufacture product at various generations of technological advances? Are current product bills of materials stable, or is there a high rate of engineering changes throughout the product lifecycle?
• Market development plan. Are there current international markets for your product, or plans to develop or expand these markets? If so, would you be competing with local manufacturers of similar products? What are the cost differentiators between local producers and your product exported to that country? Evaluate the differentiators today and what would be expected in two, five, and ten years. What are the potential market gains to be had by expanding into new markets? At what price points?
• Manufacturing strategy. Are you running at full capacity? If not, how much excess capacity do you currently have? If you have excess capacity, what would be the costs associated with reducing it? Are there any market enhancement opportunities by expanding production capabilities internationally? Are there customer country-of-origin requests or marketing benefits in developing sources of supply or manufacturing capability offshore?
• Product strategy. Will the current generation of products continue in production for a period of time? What are the expected demand volume changes expected as new products are introduced? Are there limited suppliers of key components for the next generation of product? Are current product components sole sourced to proprietary manufacturers? How long is the current product life cycle predicted? Will spare parts and overhaul capabilities be required for an extended period of time?
• Financial plan. Has standard cost been developed for the entire bill of materials? Are cost reduction goals established for each product? Are their clear, concise cost reduction goals established for the entire spend? Are there shared or specific goals for product/nonproduct, as well as cost negotiation, cost engineering, and low cost country sourcing?
• Supply management strategy. This is developed in concert with the various strategies, goals, and objectives described above. Detailed parts sourcing strategies for parts families or commodities need to be developed, describing the current situation, end-of-period objective, and discrete steps required to achieve the desired end state. Integrated with this commodity strategy is the low-cost-country sourcing plan with staffing, budget, timeline, and actions required to accomplish the plan. This commodity strategy also needs to include global forecasts for raw material supply and demand, foreign exchange rates, and labor rates.

The final commodity strategy captures various cross-functional elements that define the product, manufacturing, and marketing plans. As such, the commodity strategy must mirror company goals and objectives at the discrete part number level, and will be modified and adjusted as the company reacts to changes in the marketplace. Market environments will continually call for modification of commodity strategies.

As the global marketplace continues to expand beyond traditional borders and product development life cycles become shorter and shorter, reaction to market trends will become increasingly important. Developing a commodity strategy process that encompasses many functional global objectives at a part-family level becomes a distinct advantage over less agile competition. Integration of the commodity strategy into the technology roadmap and product strategy is the basis of evolution from a simple low-cost country sourcing plan to a more holistic global value-based sourcing plan.

©2003 Supply Management International LLC, P.O. Box 42, South Glastonbury, CT 06073