Low Cost Country (LCC) Sourcing In A Tough Economy

There is no denying that we are in a recession. Most industries are bracing for the worst, re-adjusting the sales figure during mid-quarter, to limit the damage of a potential stock price plunge during the quarter financial reports. To add salt to the wounds, they are also facing a monumental task of controlling raw material price, while minimizing the impact to the consumers, already beaten down by high inflation, stagnant job growth, and a gloomy economic outlook. Overseas, China Bao Steel recently agreed to an 85% increase from its steel supplier. This has sent a shockwave signal to the auto and construction industry. Further, Dow Chemical has jacked up the price of its products by as much as 20% effective June 1, 2008. Price increase to the consumer is imminent.

This, however, is the PERFECT time for companies to implement long term, Low Cost Country (LCC) sourcing strategy.

1. Hungry supplier -- In a down economy, Sales department is facing an uphill battle to improving the company’s bottom line by generating more sales. Unfortunately, the general business environment nowadays has put a strangle hold on improving the sales number. This, however, is true to MANY suppliers, who are hungry for new business, and will go the extra mile to win new businesses.
2. Significant impact to bottom line -- For a company that has a revenue stream made up mostly by selling physical products, the cost of goods sold (COGS) is generally in the 20% to 40% range, industry dependent. With COGS being the largest contributing factor to the SG&A, any savings realized from the strategic sourcing department will have a significant impact to the company’s bottom line. In the above example, a meager 10% saving will translate into 2% to 4% of improvement on the Income statement! This is usually a fairly easy sell to the CEO or general manager. 
3. Allowing the company to gain insight and develop new sales channel in other emerging markets -- Globalization is a fact of life. No company can survive without a long term, global strategy. Sourcing from LCC may allow the company to take the first step to achieve those objectives. 
4. Improved supplier base means improved quality -- LCC is no longer the synonym for low tech, cheap toys, poor quality, and any bad reps that are associated with LCC. The suppliers at many LCC, especially China, are transforming into world-class suppliers. (see other blog: The China Supplier Transformation And The Effect on Sourcing From China) 
5. Low risk supplemental sourcing strategy -- If sole sourcing from LCC is deemed too risky, a company can start with dual sourcing from LCC suppliers, while maintaining the commitment with the current suppliers. Though the financial benefits may not be as significant, dual sourcing from a LCC will induce minimal risk to the current process. This will allow time for the company to evaluate and learn. Savings information may be acquired and extrapolated to determine the viability of LCC sourcing. 

Tough economy may be a godsend for companies trying to establish its presence for global procurement. Wise sourcing professionals shall use this golden opportunity to push for global sourcing structure.

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