Executive Briefings

Understand the Potential, Perils and Pitfalls of Sourcing from Low-Cost Countries

Analyst Insight: Sourcing from low-cost countries to achieve lower costs is not new for most global businesses; however, the daily struggles in  management of the buyer-supplier relationship can be a costly investment.

-Mickey North Rizza, research director at Gartner

Low-cost country sourcing (LCCS) can prove disastrous to revenue and earnings if the differences in cultures and their nuances aren't navigated carefully.  So, while LCCS has become an enabler to increased profit margins for most global large-volume businesses, it can come with a high price tag if all parameters in the cost equation are not understood.  The cost components are critical in the cost equation; however, the relationship management of each supplier is just as critical to achieving success and can be a costly component to the equation if not done right.   As an example, a Japanese retailer launched a pen program only to find out that the minimum order quantities (MOQ) referred to per-color amounts and not the overall count of pens. Because the basic definition of MOQ to pen count vs. per color was not understood, this retailer had to cancel the program, and then was stuck with the excess inventory.

Of the many companies we researched, 85 percent understand there is typically a culture and language barrier; however, we found that the most basic foundations of cultural differences were severely tested.  It starts with the assumption that LCCS is solely a procurement initiative vs. a strategic company objective.  Without engagement of the entire leadership team, LCCS suppliers stand little chance of being engaged across engineering, merchandising, quality, supply chain, finance and distribution functions.  To ensure success it is critical that LCCS strategies, plans and execution are well understood and supported by the company leadership team and the various supporting functions in the supplier relationships across the organization.  Without this base line support, LCCS activities may be doomed for failure.

"Copy, Copy, Copy" - in large volumes - is a China Mantra, and it's advisable to remember this can create difficulties in the new-product introduction process.  A commercial A&D company found that when it introduced new products locally in low pilot volumes of 15 to 20 items, the products were made and tested as they had anticipated.  The design and manufacturing engineers could tweak and fine-tune the items for low- to medium-volume production on the local machines.  But, once these items were shifted to China, the items could not be replicated in mass volume.  The answer was to move new-product introduction prototypes to China on the front end vs. shifting the product on the back end.  This brought both the design and manufacturing engineers together on the front end, reduced costly transfer mistakes, and reduced the time to market.

Because most Westerners do not speak most LCCS languages, many companies hire bilingual individuals to assist in the translation of information.  And while speaking the other language is great, written communication is usually a challenge in both directions. Often, both parties think they are communicating, but nothing is clear for either.

One company offered this advice: "Be as toneless as possible and there is less to worry about.  If you express sarcasm, it can be taken literally.  Many times an off-handed remark utilized to illustrate a point with an extreme example can create confusion.  Convey and speak slowly and take out tone where possible."

In addition, remember that every culture has its holidays.  In one case, a major U.S. retailer missed the holiday selling season for a key product line when an extension of the Chinese New Year delayed shipping product out of the plant.

The Outlook

Going forward in 2011, removing the risks, extra costs and perils in LCCS will continue to be critical to a successful low-cost sourcing strategy.   The right organizational emphasis at all levels, specific focus on the supplier relationship, and a foolproof plan and execution can make all the difference in the world.

Analyst Insight: Sourcing from low-cost countries to achieve lower costs is not new for most global businesses; however, the daily struggles in  management of the buyer-supplier relationship can be a costly investment.

-Mickey North Rizza, research director at Gartner

Low-cost country sourcing (LCCS) can prove disastrous to revenue and earnings if the differences in cultures and their nuances aren't navigated carefully.  So, while LCCS has become an enabler to increased profit margins for most global large-volume businesses, it can come with a high price tag if all parameters in the cost equation are not understood.  The cost components are critical in the cost equation; however, the relationship management of each supplier is just as critical to achieving success and can be a costly component to the equation if not done right.   As an example, a Japanese retailer launched a pen program only to find out that the minimum order quantities (MOQ) referred to per-color amounts and not the overall count of pens. Because the basic definition of MOQ to pen count vs. per color was not understood, this retailer had to cancel the program, and then was stuck with the excess inventory.

Of the many companies we researched, 85 percent understand there is typically a culture and language barrier; however, we found that the most basic foundations of cultural differences were severely tested.  It starts with the assumption that LCCS is solely a procurement initiative vs. a strategic company objective.  Without engagement of the entire leadership team, LCCS suppliers stand little chance of being engaged across engineering, merchandising, quality, supply chain, finance and distribution functions.  To ensure success it is critical that LCCS strategies, plans and execution are well understood and supported by the company leadership team and the various supporting functions in the supplier relationships across the organization.  Without this base line support, LCCS activities may be doomed for failure.

"Copy, Copy, Copy" - in large volumes - is a China Mantra, and it's advisable to remember this can create difficulties in the new-product introduction process.  A commercial A&D company found that when it introduced new products locally in low pilot volumes of 15 to 20 items, the products were made and tested as they had anticipated.  The design and manufacturing engineers could tweak and fine-tune the items for low- to medium-volume production on the local machines.  But, once these items were shifted to China, the items could not be replicated in mass volume.  The answer was to move new-product introduction prototypes to China on the front end vs. shifting the product on the back end.  This brought both the design and manufacturing engineers together on the front end, reduced costly transfer mistakes, and reduced the time to market.

Because most Westerners do not speak most LCCS languages, many companies hire bilingual individuals to assist in the translation of information.  And while speaking the other language is great, written communication is usually a challenge in both directions. Often, both parties think they are communicating, but nothing is clear for either.

One company offered this advice: "Be as toneless as possible and there is less to worry about.  If you express sarcasm, it can be taken literally.  Many times an off-handed remark utilized to illustrate a point with an extreme example can create confusion.  Convey and speak slowly and take out tone where possible."

In addition, remember that every culture has its holidays.  In one case, a major U.S. retailer missed the holiday selling season for a key product line when an extension of the Chinese New Year delayed shipping product out of the plant.

The Outlook

Going forward in 2011, removing the risks, extra costs and perils in LCCS will continue to be critical to a successful low-cost sourcing strategy.   The right organizational emphasis at all levels, specific focus on the supplier relationship, and a foolproof plan and execution can make all the difference in the world.