adr international Procurement consultants

LCCS - Assessing the likely contenders

There are proven benefits in sourcing goods and services from countries in the developing world, but how do you decide which will prove successful? Simon Aldred examines some of the factors

Sourcing from the developing world is now regarded as an essential tool for procurement leaders and several regions are now regarded as effective sources for a range of goods and services. When a new sourcing destination presents itself, however, it may be difficult to decide if it will work. There is some best practice for determining which regions are likely to fulfil expectations.

This will quickly indicate whether a country in the Far East, South America, Eastern Europe or Africa, for example, may prove a good bet for reliable, cost-effective sourcing.

As with any strategic sourcing process, one of the the first steps is to understand the profile of the goods or services you need to purchase. This will allow you to understand their strategic importance to the business (therefore informing your risk model), key service imperatives (informing the demands you will place on the supply chain) and the key cost drivers (informing your sourcing strategy)

It is also important to consider which regions are already geared up to produce the goods or services you require. Sourcing from a country with no history in the categories you are sourcing may offer extremely low labour costs, but is likely to present a range of problems due to lack of experience and poorly-developed understanding of your business needs..

It is also essential to map the value chain. Raw materials, for example, must be in ready supply to the levels of quality required and at the right price  --  hence the need to understand cost drivers.

A good supplier market analysis will also involve assessing the infrastructure in your list of low-cost destinations. This should ideally include robust road/rail/port links, stable telecommunications and a reliable energy network. Further, as general indicators of the social conditions in which your supplier operates, it may also be advisable to consider, for example, provision of healthcare, education and transport to the general population.

Political stability is essential for sustainable and problem-free sourcing into the future. Frequent changes of government create uncertainty and are bad for business. So is a general lack of government interest in developing low-cost capability.

Similarly, currency stability is important. Some years ago the US dollar was much stronger against sterling than it is now, so people trading with China in US dollars, for example, have seen big increases in costs without even factoring in increasing rates.

Once potential suppliers have been identified, it is obviously essential to verify their environmental and ethical credentials. Your initial supply market analysis will provide some useful background to this research, but some regions are more highly-regarded than others when it comes to good social and legal systems which can reduce the likelihood of unacceptable working conditions or environmental practices.

In all these areas, some initial desk research can be carried out quickly and cost-effectively using available public sources of information. Networking with colleagues in other organisations, benchmarking research and category studies are likely to provide good background information. For more detailed and up-to-date knowledge of supplier markets and assessment of individual suppliers, specialist advice will pay dividends.

Once all the facts and figures have been collected and analysed, nothing can beat a trip to the sourcing destination and potential suppliers to gain a feel for the environment you are buying into. A low-cost country sourcing strategy can be a high-risk investment. You need to take all necessary steps to make sure it pays off.

Simon Aldred is Head of Sourcing, ADR International

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