Supply Excellence — LCCS: It’s A Lot Closer Than You Think

LCCS: It’s A Lot Closer Than You Think

March 29th, 2007 · by Tim Minahan · No Comments · LCCS and trade, automotive sector, sourcing, supply management, supply market dynamics, supply risk

When I posted my 2007 predictions for the supply management discipline earlier this year, one projection caused considerable backlash: “You will rethink your low-cost country sourcing strategy.”

I argued that the risks, lead-times, and hidden costs of emerging market hotspots — particularly India and China — would make these faraway regions less attractive as sourcing destinations. Recent reports of rising wages, currency instability, and infrastructure issues, only buoy this argument.

I claimed that these factors would prompt smart supply management organizations to retool their global sourcing approaches to better reflect total costs — especially landed costs — and to better align with their company’s global manufacturing, sales, and customer support strategies. And pointed to General Motors, Toyota, and Honda, as examples companies are rethinking their LCCS strategies.

Supply managers and ardent free traders raged at the idea. Even yesterday’s post prompted a call from supply management exec saying, “Risks or not, the cost basis I can get in China and India is still too good to pass up.” Maybe so. But some of the world’s leading companies beg to differ.

In fact, findings from a new study from A.T. Kearney, strongly suggest that near-shore destinations — particularly Argentina, Brazil, Chile, Costa Rica, and Mexico — could could unseat traditional offshore regions, such as India and the Philippines. Already manufacturing hotspots, Latin American regions are becoming attractive centers for outsourcing services.

According to the report, Destination Latin America: A Near-Shore Alternative, companies, such as GM, Procter & Gamble, American Express, and Unilever, are shifting to supply sources and service centers closer to Latin America. And top business process outsourcing (BPO) vendors, such as TCS, Infosys, and IBM, are setting up shop in the region.

What’s the attraction? The report, which is an offshoot of the A.T. Kearney Global Services Location Index (GSLI), finds that “Latin America has what many U.S. and some European companeis want: low-cost Spanish-language capability and a growing, relatively low-cost, skilled bilingual workforce. In addition, Latin America time zones and cultures are closely aligned with those of the United States.”

Beyond time, language, and cultural affinities with the U.S. and Western Europe, A.T. Kearney states that oustourcing services in Latin America — from IT maintenance, software development and operations, to full BPO — are highly competitive on a skills and cost basis versus those offered in traditional offshore regions. A.T. Kearney reports that Latin America offers an average BPO savings of 20% to 40% compared to the U.S. and Western Europe. That’s better than average services cost savings available in Eastern Europe (15% to 25%) and only slightly lower than BPO savings available in India (35% to 50%).

A.T. Kearney argues that high turnover and wage creep in India and other Asian countries will only improve the arbitrage advantages in Latin America over time: “One of the major challenges that India, the Phillipines, and other Asian locations face is retaining personnel, especially in the overnight shifts that are so crucial to supporting customers in the United States.” The report cites annual attrition rates in Asian call-center hubs ranging from 20% to 100%, while turnover at BPO centers in these regions range 10% - 30%. By comparison, attrition rates in Latin America range from 10% - 25% for call centers and only 5% for captive and shared service centers.

According to A.T. Kearney’s research, Argentina is the most attractive region from a cost and skills basis, however, it lags in political and economic stability compared to other Latin American countries, such as Costa Rica, Chile, Mexico, and Brazil. The report includes detailed capabilities and risk assessments for each country in the region as well as some valuable case studies of multinationals sourcing (and outsourcing) from Latin America today.

The report is a must-read if you are just starting an LCCS or outsourcing initiative or if your existing global sourcing approach has stalled. It also provides convincing evidence that it may be time to rethink your LCCS strategy.

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