Low Cost Country Sourcing 2007
Back in March, EyeForProcurement released its 2007 Sourcing in Low-Cost Countries Report that surveryed 185 procurement professionals from manufacturers, retailers, and 3PLs across Asia, North America, and Europe. The report found that 41% of respondents have been Low-Cost Country Sourcing for more than five years and 57% for over three years, which is good, but that 54% of respondents gave lower labour costs as a primary reason while 43% gave lower material costs as a primary reason, which is bad.
The rate of wage inflation in many countries commonly considered Low Cost Countries, including China and India, is rising rapidly, and over 10% in some of these countries, and material costs are going up across the board, especially in some of these "low-cost" countries which are scrambling to build up their infrastructure and offerings on the global market. Just see Tim Minahan's recent post that notes that Inflation Woes to Get Worse. As far as I'm concerned, only the 27% that gave shorter distances to final customer's markets and maybe some of the 21% that gave other get what low-cost country sourcing should be about.
The major countries and regions were, as expected, China (which is utilized by 76% of respondents), other countries in Asia (which are utilized by 53% of respondents), and India (which is utilized by 33% of respondents).
It was nice to see that 36% of respondents indicated that logistics cost was a major element of total cost, almost as many respondents that indicated materials cost was a major cost element (42%) and close to the number of respondents that indicated labour cost was a major cost element (48%).
It was also nice to see that three of the four largest obstacles listed were trade regulations, customs & tariffs, increasing complexity of transport & logistics operations, and government regulations, clearly indicating that global sourcing to "low cost" countries is complex.
For those interested in Low Cost Country Sourcing, I'd like to remind you that EyeForProcurements 2nd Low Cost Country Sourcing Conference takes place August 29-30, 2007 in Chicago. Early bird registration, which is accompanied by a $400 discount, expires this Friday, June 15, so if you're interested, and not registered yet, I'd recommend you do so quickly. (There's a good chance The Doctor will be there, but, given that it's in Chicago, I'd say you can almost count on The Prophet [of Spend Matters] being in attendance.)
I agree in part. Low cost countries are not always the right decision, otherwise the US, Germany and Japan wouldn't be exporting anything.
However, the relative importance of some of the reasons for "long distance" sourcing are going to vary by industry and by the product purchased. There isn't a universal right or wrong answer.
Inflation, for example, is less important to an industry with 1 year product life cycles than to an industry with slower product turnover.
Physical nearness to the customer is also less important to buyers of high value-per-kg products because air freight can distribute products nearly everywhere with delivery time differences measured in hours or perhaps a couple of days in extreme cases.
Let's run some numbers regarding shipping laptops. They weigh about 3 kg. Air freight costs usually run somewhere between $2-5 per kg. Assuming they can be packed tightly enough that dimensional weight doesn't apply, that's $6-$15 shipping costs on a product that has a value in transit of what, $300? Or a sales price of $500-$2,000? Not trivial but not going to vary much by geographic location either.
For "dense" product like this, the ability to respond rapidly to demand changes is much more a function of supplier selection (i.e. sourcing) than distance to the customer.