w w w . s c e m a g a z i n e . c o m - Supply Chain Europe

LCCS
loW-cost country sourcing:
the past, the present
and the Future?
For decades, low-cost country sourcing (LCCS) has been one of the most popular sourcing strategies.
Employing suppliers that operate on leaner budgets than those found domestically has been an obvious
choice for organizations wishing to reduce operational expenses and make greater returns on investment.
In the UK, there doesn’t seem to be an industry that hasn’t benefited in some way: from labour-intensive
manufactured products made using Chinese labour to call centres staffed with low-cost English-speaking
workers in India and IT work performed by low-cost programmers in both India and Eastern Europe.
However, according to a recent IDG report by Simon Ellis, LCCS
should be thought of as a shortsighted strategy for the longterm.
Ellis suggests that the focus shouldn’t be on LCCS, but
on Profitable Proximity Sourcing (PPS), which encourages organizations
to look at “balancing cost and service, with greenness or sustainability
increasingly playing a role in the decision making process.” Examining
the supply chain in this way certainly shows that the initial savings
associated with LCCS — without considering whether there may be a
more cost-effective and ethical alternative in the long-term — can blind
organizations. But this fails to take into account the developments and
innovations that the countries that provide LCCS are undertaking, and
that still make them excellent options for organizations in the West.
Problems with Production: Who’s to Blame?
This is not to say that there aren’t problems with sourcing from LCCS
suppliers, and there are instances when problems arise, particularly in
terms of the quality control of materials. For example, in August 2007,
Mattel’s Fisher-Price division announced that it was recalling 1.5 million
suppliers from low-cost countries are
evolving and should not be discounted
when it comes to the global sourcing
of higher-calibre products.
preschool toys because lead paint was used in production by one of
the company’s suppliers in China. But rather than damning the supplier,
the question arises as to whether adequate checks were put in place
by Mattel to ensure that its high production standards were met. And as
Mattel found out, it, not the factories, became legally vulnerable when this
came to light, and the scandal damaged its brand significantly.
Following the Mattel scandal, President Bush went on to raise product
safety issues when he met with the Chinese President, Hu Jin Tao, at the
Asia-Pacific economic summit. Other countries also discussed the need
for stronger safety standards, implying that the problem was rife in all lowcost
countries. The US administration was swift to assure that it believes
countries such as China understand the concerns of the US and other
Western countries, yet some outside experts questioned whether they
42
really do understand the extent of US consumer worries and whether
they actually adhere to the standards required. This type of high-profile
scandal is extremely damaging to low-cost countries, even though in
this case it was the responsibility of Mattel to stipulate what processes
should be used and to regulate their suppliers. When selecting
suppliers in low-cost countries, Western organizations can be guilty of
perceiving Asian suppliers as having low standards, therefore opting
to source from Eastern European countries. In fact, US imports from
European low-cost countries have begun to outpace those from both
Asia and the Western Hemisphere in the noughties (Journal of Supply
Chain Management, September 2007).
LCCS = Low Standards?
However, this perception of low process standards in Asian low-cost
countries is undeserved. Countries such as China are becoming
evermore competitive as training schemes for labourers are now
producing more highly skilled workers and factories that operate to EU
and US standards, and all still at lower costs than Eastern European
production can deliver. Even tasks such as high-tech laboratory work,
which were previously perceived as being too technical for these
countries, are increasingly being catered for. At the end of September
2008, Huawei, a Chinese firm specializing in telecoms solutions, had
more than 96,000 employees, of whom 44% were dedicated to research
and development. This is just one example of a supplier from a low-cost
country competing on an international level and driving innovation within
its industry, but there are many others out there.
Overcoming the Challenges of LCCS
So, it is clear that suppliers from low-cost countries are evolving and that
they should not be discounted when it comes to the global sourcing of
higher-calibre products. But this is not to say that it is an easy process for
organizations to assign suppliers within these countries. Indeed, a 2007
report from AMR Research points out that low-cost country sourcing
readiness includes “understanding and dealing with the additional risk
of cultural differences, currency, time zones, connectivity, distance,
logistics constraints, language and political instability. Doing low-cost
country sourcing right involves more than just looking at costs … and
companies must revisit the strategy regularly.” As such, many mediumto-large
sized organizations can struggle to get their sourcing right if
they decide to tackle all of these issues themselves. One way to avoid
these obstacles is to work with a consultancy that specializes in working
www.scemagazine.com May/June 2009