The idea of global and low cost country sourcing is nothing new for procurement professionals. Has its widespread popularity and use diminished its ongoing appeal. What can procurement practitioners apply differently to reinvigorate the impact of access to global markets?
One of the hottest topics within procurement in the late 1990’s was low cost country sourcing.
In 2018, most companies still outsource to low cost countries either directly, or indirectly through their tier one providers.
Basic economics dictates that when more business is procured within a particular area, suppliers will soon be unable to deliver at the same cost, quality or in the same time as they were able to when the demand from the region was significantly lower.
As a result of this, buyers need to explore other options to maintain the same level of benefit from global sourcing options as they have enjoyed in the past.
Best cost country sourcing is a dynamic target
Historically the focus for global sourcing was on lowest cost. Driving cost out of the supply chain wasn’t just good sourcing practice – it was essential for competitive advantage in many industries. Labour rate differentials between developed buying countries and low cost countries have been highly significant.
However, many of those countries previously utilised as low cost have dramatically narrowed the labour rate gap to those where the buying organisations are based.
This is somewhat due to the capacity utilisation of suppliers in those countries increasing dramatically, especially within service industries. This inevitably leads to a drop off in quality as suppliers attempt to offer services at historical prices.
A fresh approach
In 2018 a different approach to global sourcing will yield superior results. Low cost country sourcing alone will not provide the lasting benefit to the buying organisation that it once did.
A new dimension should be considered: High Capacity Country Sourcing.
To enjoy lasting benefits and maintain current production and/or service levels, buyers need to source in countries where relevant capacity is an abundant resource. Capacity to deliver at the right quality, at the right time at the right cost level.
Focus should be applied to sourcing with suppliers who are agile enough to accept more business if the economy booms or scale back while remaining viable if a slow down occurs.
Global sourcing should still provide a cost advantage when compared with local sourcing in many industries, but shifting the focus from countries where the current rate for labour is low to those where the current and future capacity is high will keep procurement professionals one step ahead of their peers.