Low-cost country sourcing

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Low-cost country sourcing (LCCS) is a method used in business administration to achieve savings .

Procurement in low-wage countries

The procurement in low-wage countries is a branch of the global supply . An important goal of global procurement is the use of comparative cost advantages in order to avoid cost pressure and achieve long-term competitive advantages . Within global procurement, procurement in low-wage countries therefore has a special position, as high cost savings can often be achieved there. In practice, the term low-cost country sourcing is often used for this.

A country with a lower price and wage level than the home country of the purchasing organization is referred to as a low-wage country; thus low-wage country is always a relative term. From the point of view of the developed industrialized nations , the high-wage countries , however, it refers to countries that currently have extremely low labor costs , a lower level of education and less economic strength - but with a very fast growing economy. This includes, for example, emerging Asian nations, countries from Latin America and Africa and some Eastern European countries. These countries are often referred to with the terms BRIC countries (Brazil, Russia, India, China), RDE (rapidly developing economies) (BCG 2006) or N-11 (next eleven).

Goals and opportunities

Global procurement, and especially procurement in low-wage countries, are motivated by several strategic goals: economic, sales, technology and flexibility goals.

Economic goals and opportunities

The economic goals and opportunities include, in particular, cost reductions resulting from the lower costs of the individual production factors , the factor costs. If the company also produces locally in the vicinity, these activities can save transport costs. The exploitation of tax advantages and subsidy and promotional measures can also provide an incentive. A global supplier base also puts pressure on existing suppliers to submit attractive offers.

Sales targets

Procurement can also contribute to sales targets: on the one hand, as preparatory sales marketing and as a market presence to qualify a local supplier base that would be required for potential local production. On the other hand, avoiding high import duties, e.g. with local content requirements, is an important motivation for local procurement in many countries (e.g. China, Russia). Often, cost reductions must also be achieved in order to be able to offer competitively in the local markets.

Technological goals

Technological goals are access to global knowledge, infrastructure, new technologies and manufacturing processes as well as global resources. This is intended to take advantage of opportunities in technical innovations at an early stage or shorten development times. Procurement markets such as Taiwan or Korea are an example of this.

Flexibility and risk avoidance

Flexibility and risk avoidance goals play a role especially in local production in these countries: This can reduce deadline, exchange rate and transport risks. Often, geographical diversification is also intended to spread procurement risks, such as insolvency or production failure risks, and thus improve availability and security of supply. The expansion of the supplier base also creates alternatives to existing suppliers. This results in flexibility and scope for action as well as a reduction in supplier dependency.

Problems

General challenges

However, the great opportunities of procurement in low-wage countries are also offset by numerous challenges. In total, the following eight challenges and barriers can be classified:

  • insufficient competence of the suppliers
  • lack of infrastructure
  • different culture, language and market conditions
  • Coordination effort, piracy and legal barriers
  • political and social risks
  • Currency and Payment Risks
  • and internal resistance to procurement in low-wage countries
  • Resistance of one's own customers to have their services provided in low-wage countries

Supply chain risks

A distinction can be made between supply chain -exogenous procurement market-specific risks (environmental risks) and supply-chain-endogenous risks (supply risks). There are also risks that are exogenous to the supply chain and not specific to the procurement market. These exogenous environmental risks include natural hazards (e.g. natural disasters ) or risks that can occur in low cost country sourcing, but cannot be assigned to a specific procurement country, such as B. the risk of piracy in the Horn of Africa off the coast of Somalia in shipping. Supply chain-exogenous procurement market-specific risks result from the characteristics and conditions of the global procurement market of the low-cost country. These environmental risks can be divided into political, legal, economic, technological and socio-cultural risks. For the implementation of cross-company supply chain risk management , a consistent orientation towards the flow of goods, information, legal and financial resources inherent in the supply chain is necessary in order to avoid disruptions and interruptions in the supply chain flows. Accordingly, the supply chain flows provide a framework to systematize the possible supply chain risks in a supplier-buyer relationship. In this respect, supply chain endogenous supply chain risks can be subsumed into delivery risks, information risks, financial risks and legal risks .

Supplier structure

Establishing a new supplier is a critical and difficult process within procurement activities in low-wage countries that involves great risks. It is often associated with a supplier development with high upstream investments , usually in several stages and over a longer period of time, until the procurement object can be procured in series. In view of this strategic importance, the selection of suppliers is of great importance and is considered a decisive factor for the success of such a company.

Trends in procurement in low-wage countries

The following topics are currently gaining in importance:

Design for Low-Cost Country Sourcing: One influencing factor for avoiding incompatible procurement objects for procurement in low-wage countries is the adaptation of the product design to the location-specific production conditions of the local suppliers (Weiler 2010; Lanza and Weiler 2010). This is intended to specifically exploit the advantages of global production. A site-specific product design should consciously enable the use of comparative cost advantages of global locations (e.g. wage, energy, machine hourly costs) and thus the realization of considerable savings potential. Furthermore, the ability and flexibility of delivery should be increased through a corresponding design, the quality should be increased by adapting the complexity of the component to the capabilities of the suppliers and product piracy and high coordination costs, e.g. through targeted modularization, should be avoided.

Design of the procurement organization : Another aspect is the design and development of the procurement organization in order to adapt it to the high demands of procurement activities in low-wage countries.

Allocation of the procurement objects to procurement markets: Which procurement objects can be successfully obtained from which procurement markets is difficult to answer and requires an objective allocation or selection. This assignment can be made through a systematic comparison between the capabilities of the procurement market or suppliers, the requirements of the procurement object and the capabilities of the own company.

Individual evidence

  1. ↑ Wilfried Krokowski, Basics of Global Sourcing , 2007
  2. ↑ Jim Hemerling / David Lee, Sourcing from China - Lessons from the Leaders , 2007
  3. ↑ Martin Lockström, Low-Cost Country Sourcing , 2007
  4. ^ Goldman Sachs 2005
  5. ^ Goldman Sachs 2007
  6. ↑ Hamlet 2010
  7. ↑ Rosenwald 1998; Arnold 2002
  8. ↑ Wildemann 2006
  9. ↑ Bogaschewsky 2005
  10. ↑ Petersen 2004
  11. ↑ Kaluza and Trefz 1997
  12. ↑ Wildemann 2006
  13. ↑ cf. Gruschwitz 1993; Bichler and Krohn 2001; Harland 2003; Kerkhoff 2005; Biedermann 2006; Oehmen 2007; Oehmen, Alard and Bremen 2007; Canbolat 2008; Hamlet 2010
  14. ↑ Köhler 2011

Literature and Sources

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  • D. Biedermann: Global Risks. In: Journal of Commerce. 7 (2006), No. 3, pp. 34-38.
  • The Boston Consulting Group: The new global Challengers: How 100 Top Companies from Rapidly Developing Economies are changing the World. 2006.
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  • YB Canbolat, G. Gupta, S. Matera, K. Chelst: Analyzing risk in sourcing design and manufacture of components and sub-systems to emerging markets. In: International Journal of Production Research. 46 (2008), No. 18, pp. 5145-5164.
  • Goldman Sachs : Global Economics Paper: How Solid are the BRICs? Number 134, 2005.
  • Goldman Sachs: Global Economics Paper: The N-11: More Than an Acronym. Number 153, 2007.
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