Supply Excellence — LCCS: Focus on Who, What, Where and How

LCCS: Focus on Who, What, Where and How

July 24th, 2008 · by Haiying Xie · No Comments · LCCS and trade, best practices, outsourcing, sourcing, supply management

In his novel Anna Karenina, Russian writer Tolstory said, “happy families have the same reasons why they are happy, unhappy families however all have different causes.” The same sentiment can be applied to those companies who have implemented Low-Cost Country Sourcing (LCCS) strategies, but received completely different results.

There are many successful stories of LCCS, and yet, there are many more unsuccessful stories. Indeed we regularly hear complaints of how troublesome it is to buy from LCC regions and how unworthy it is in comparison with the required efforts. In recent years, when wages, prices and transport costs are rising in historically low-cost Asian countries and shipping capacity is tight, many are starting to question the benefits of LCCS.

There is no doubt that production input costs do differ across regions. Labor, land, overhead, raw materials, energy, employee benefits costs vary…and therein lies the opportunity. The question is What, Where, Who and How do you capture the difference? Successful companies are those who are able to answer those questions. Unsuccessful companies can fail if any one of these four questions is not answered correctly.

Of these four questions, the most difficult to answer is How.

I call the first 3 questions (What, Where and Who) “external causes.” One can study the market or simply do some due diligence on your competitors; what they are buying in the LCC, from where and from whom.

But in order to answer the “internal issue” of How and drive a successful LCCS program, a company must focus on the following:

Does the C-Level support of LCCS initiatives? Purchasing alone cannot make LCCS successful. It will inevitably touch other functions, such as development, quality, logistics and production. Skeptical or resistant attitudes from these functions could greatly hamper the successful implementation of LCCS strategy. Top level management support and attention can solve potential conflicts among different functions and help buyers avoid wasting time and energy in solving internal conflicts.
Is the company prepared to invest for long-term benefits? LCCS is a strategy for long-term benefits, not a low-hanging fruit. It is necessary to have good, experienced people focusing on this LCCS initiative. Freeing up these people’s capacity or traveling to meet suppliers regularly requires additional investment. Failure often happens when organizations pile LCCS tasks (with too little incentives) onto already overloaded people.
Are processes in place to work with LCCS suppliers? Working with a LCC supplier is not as simple as receiving goods/services from a supplier at a lower price. It requires considerable preparation and cultivation early in the relationship. And then there are the longer transport times, need for increased warehouse capacity, well calculated additional inventory costs, and adjusted production schedules to consider.
Is the company culturally prepared to work with LCC suppliers? Do the sourcing and procurement staff have the language skills and cultural awareness to work with the LCC country? Does the staff have any perceived ethical issues about working with LCC suppliers instead of local companies? Any small misunderstandings could potentially lead to huge mistakes in the process.

Companies must understand that implementing LCCS strategy is much more demanding than traditional purchasing. It is not just about finding and evaluating a new supplier, conducting negotiations and counting the savings. It requires change management and internal marketing to a receptive audience. Internal resistance can be hard to detect and describe, but it is lethal to the success of LCCS initiatives. In fact, when a company has a hard time identifying why and how their LCCS initiative failed, internal resistance is often the root cause.

Haiying Xie is a Senior Category Manager in Ariba’s Global Sourcing Organization. Based in Germany, Haiying works with companies throughout EMEA.

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