Best Cost Country Sourcing
BrainNet recently released a mini white-paper on Best Cost Country Sourcing The Evolution of Low Cost Country Sourcing that had an interesting take on Low Cost Country Sourcing. According to the author, cheap labor is better suited to cheap products and cheap services and not necessarily an advantage for the premium products that industrial countries are known for. Personally, as I succinctly stated in a comment over on Supply Excellence, I believe the answer is Home Cost Country Sourcing. Finding a way to to get the best value from a total value management perspective (where total cost of ownership is taken into account alongside quality value metrics such as on-time delivery, reliability, etc.) while sourcing from suppliers in your own country. But I digress.
I particularly agree with the seventh and ninth paragraphs (the third paragraph on the second page and the second paragraph on the third page):
Decision makers often decide too easily that new markets such as India and China are going to be the ultimate attractive sales markets and that a local production plant is the best approach to capture the labor cost advantage there quickly. buying power is still limited in these regions but will definitely increase over time, so it is a "no brainer" that everyone can agree to quickly. The CPO is happy too because every product produced and sold is declared as low cost country volume. In other words, nothing has changed fundamentally in the organization but the so-called shifted purchasing volume has increased. Curiously, even the raw material and components may be sourced from high cost countries and assembled abroad. The right terminology for this approach would be "High Cost Country Sourcing" instead of "Low Cost Country Sourcing".
It all started with the buzz words "Low Cost Country Sourcing". This wording, put politely, misses the point by a long shot. Criteria such as quality, logistic risks, intellectual property risks among others, have to be considered and evaluated thoroughly to assure that these measures are successful. Establishing innovations on the supplier side as a competitive advantage and managing your new suppliers actively are only two from many important success factors.
In other words, LCCS alone is not the answer, not a quick fix, and not a saving grace to a flailing company. In order for a company to be assured of value in their global sourcing initiatives, they at least need to progress upward to a BCCS initiative, understand the advantages and disadvantages of each of their options, and understand that such initiatives will take considerable time and effort. It's not just the flick of a switch.
You wrote
"Finding a way to to get the best value from a total value management perspective (where total cost of ownership is taken into account alongside quality value metrics such as on-time delivery, reliability, etc.) while sourcing from suppliers in your own country."
I take exception to the conclusion that the suppliers should be in the buyers country. All you have to do is replace the word "country" with "city", "county", "state" or even "continent" to see one problem with that approach. Why not get the best suppliers in the world?
Another problem is that if your company sells outside of its home country, you create an insidious currency risk when you only source in your own country. It's the same risk you would have sourcing from another country (the supplier's currency might strengthen) plus the fact that your accounting systems won't show it happening. The first warning will be overseas sales or margins dropping. You would have kind of the inverse of this problem if you have overseas competitors when your currency strengthens. The competitors could drop their prices or increase their margins.
Of course, when sourcing anywhere you have to consider risks. But people can go overboard on that. When I was at HP one of my roles was to increase purchases from outside the home countries of our manufacturing operations. I had some frustrations because at HP (like most other companies) there was a strong tendency to keep to the existing supply base even if it had problems just because of fear of the unknown.
Many of our operations had "landed cost models" that tried to put risk into cost. For example, a landed cost would be developed that said "we plan to ship by ocean but, ahhh, one-third will have to come by air because of schedule changes." That one-third was one of several judgment calls, and by the time the cost was developed, almost invariably the current supplier turned out cheapest.
I solved that one by separating risk from cost. We developed a model that would calculate (for example) how much would have to ship by air before the lowest cost appearing supplier was no longer lowest cost. In some cases we found that more than 100% would have to go by air.
I guess my concern about this entry is that it compares LCCS done badly to domestic sourcing done well. Sure, there are risks and complexities crossing borders but it's not brain surgery.
Dick:
You missed my point (which I purposely did not make clear because I wanted people to think about it) and you implied a definition of home I do not use with respect to sourcing.
With respect to home, I mean "source where you sell". Sell in China, consider sourcing in China. Sell in the US, consider sourcing in the US. Sell in 7 regions, source in 7 regions.
The reason I'm saying best cost is not enough is what happens if:
( a) the supplier you're sourcing from is on a country that goes on
the denied list and you can no longer use that supplier
( b) the supplier you're sourcing from is from a country that suddenly
triples export tariffs on the commodity you're buying
( c) the supplier you're sourcing from is in a country that suddenly
erupts in a civil war
Well, if you were single supplying from that country, you're screwed. I'm not saying you should source 100% locally, just that you should have a viable local source and do some sourcing locally and that the real winner will be a company that manages to do at least some sourcing in it's home country (or region, if the neighboring countries are strong allies and / or have very open trading agreements and that is not expected to change in the near future, such as Canada and the U.S. "free" trade or the European Union) and do so at the best cost from a best supplier.
This also implies the ability to develop good suppliers to best in class. I think it egomaniacal for a company to think it will always be able to find and use the best supplier in the world without at least some (continual) supplier development.
You can disagree, but as far as I am concerned, the only way to manage certain types of risk that you can not plan for or prevent against is to have "local" sources of supply that you can use should your "best cost country suppliers" in a remote part of the world suddenly be unavailable to you.
Well, using that definition of "home country" would invalidate my currency-risk objection. However, I still think supply management should source in the best countries for the product they are buying.
Usually trade stats (dataweb.usitc.gov for the US) show only a handful (5-10)of countries are either large exporters to a country or are rapidly growing. What if those countries aren't where you sell? Ignore them? I don't think so.
Those risks you name don't happen catastrophically without warning. China's new steel export tariffs are around 10%. That might render a sourcing decision suboptimal but not catastrophic. It will take some time for the suppliers to decide how much of the increase to attempt to pass on. Also, competitors might react by raising their prioes.
I agree completely though that there should be sources for a product family in more than one region. It doesn't have to be a "home country" however it's defined.
Actually, in my home country (the US) the biggest catastrophic risks are natural: earthquake, tornado, hurricane, floods. Certainly backup plans should be in place for those eventualities. Who has them?
Supplier development? There's another treatise. Some industries believe in it (autos) and others (computers) don't. The reasons for that are complex but probably have to do with the expectations of performance from the supplier and the degree of flexibility needed from the suppliers.
If you need high flexibility you need to be a small portion of your supplier's output. That means if you develop the supplier you don't get a sustainable competitive advantage because your competitors will quickly move to the same supplier. We learned that quickly years ago when IBM would develop suppliers who would call us and invite us to check them out.
By the way, thank you for providing this blog/forum where thought-provoking discussions can take place. I hope it's OK to debate the host...
Regards
Ok.
How about:
(d) It's two weeks before Christmas and the US confirms a terrorist threat that in one of the U.S. ports there is a bomb set to go off if someone opens a certain container. The US immediately shuts down all ports. Meanwhile, you're hottest selling item is projected to sell out in less than a week if you don't get more product out fast. You prepared for this, and had your supplier build double what you asked for in the first shipment expecting to eventually sell that many units. Air freight? Good luck - everyone else is trying to do this as well, there's not enough capacity, and you didn't book ahead. If you had a local supplier supplying some of your volume, you could immediately ship the portion of inventory that was in their warehouses and have them ramp up production to meet demand (since overtime is more cost effective than losing millions in sales). But if all your suppliers are halfway around the world, you're out of luck.
I'm not saying your points aren't valid - they are - but some risks and disadvantages can only be countered by doing some "home" country sourcing and making sure that you work with these suppliers to make them competitive with best-in-class.
If the best suppliers are not in the regions you are selling in, then you certainly can't ignore them - and the best decision would be to use them for the majority of your buy - however, I'm still going to recommend that a small portion, say around 20%, should come from regions that are close to "home". It's good risk management and gives you flexibility in the face of unexpected demand spikes that you may not otherwise be able to handle.
It might be true that most of the catastrophic risks don't happen without warning, but some, including the natural disasters you point out, terrorism activity, and political uprisings sometimes do - and in the latter cases, you're going to have a much better read on the situation if it's close to home.
And yes it's okay to debate the host, as long as you know the host will respond if the host doesn't agree.
Let's leave the terrorist action that only affects foreign commerce scare to the pros in Washington. However, something with the same effect happened about 5 years ago when Chinese beetles started eating the trees in Chicago. Suddenly all pallets from China had to be made of treated wood, including those in transit.
This was what Laurel and Hardy called "another fine mess."
In either case, double sourcing will only be a solution in rare circumstances. Could you justify double tooling for example for something that has maybe a 10th of a percent chance of happening? Could a supplier who presumably is more expensive take up the slack suddenly? Maybe on commodity products with no tooling and a large UNUSED capacity at a local supplier, but how often does this happen?
Usually the solution is additional safety stock rather than expecting to vastly increase another supplier's production instantly. Of course the cost of the safety stock has to be included in the estimated landed cost of the product.
As far as terrorism activity, other than Iraq, Syria, and a few other countries, what countries are most likely to be the victim? It's the developed countries who were part of the "coalition of the willing."
And as far as civil unrest, it doesn't happen overnight either. Exports are usually the last to be affected. My personal benchmark is the Intel Jerusalem wafer fab that produced something like 98 percent of the 80286 processor chips in the world while the infitada was going on. There was never a significant shutdown.
Sorry I just can't see advising internal customers to pay significantly extra for even 20% of the supply just because something might happen and if it does maybe the smaller supplier could quintuple its shipments quickly. I'd go with the safety stock solution.
Who said anything about paying significantly extra? I said that I believed the answer is "finding a way to to get the best value from a total value management perspective ... while sourcing from suppliers in your own country".