What is Low-Cost Country Sourcing (LCC)?
Low-cost country sourcing is a process in which countries procure supplies from other countries where costs are comparatively lower than their own markets. This helps to reduce capital investments and improves profitability.
So how does one go about sourcing from an LCC? Here are Three top tips for sourcing strategy.
- Calculate all relevantCost
The tariff levels and tax structure for exporting from low-cost countries should be calculated to see if there is an actual net gain for the company procuring the items. It is essential to understand all related costs as, in many cases, there is no tangible benefit.
The overall Cost of sourcing items from LCC also includes the transportation cost. While ship transport is economical compared to air or road, analysis needs to be done to compare domestic sourcing with Low Cost Country Sourcing.
It is crucial to note that even after obtaining a lower tariff and transportation cost advantage, there could be a risk of longer lead time on EOQ or the inventory level in the consumption country. This may create a zero-sum game environment. Therefore, the sourcing company should minimize inventory holding, shortage, and order costs for ideal orders.
- Conduct Due Diligence
Identifying and negotiating with suppliers from various countries is a must; they carry the risk of pricing and quality and can lead to substantial losses if no due diligence is done. Sourcing companies run the risk of having to accept the lower quality product at the product receipt point or invest in resources to do inspections before taking delivery. These costs can affect the gains made from low-cost sourcing.
The sourcing companies from another country should comply with legal norms and adhere to regulatory and industry standards. If taken care of, all these factors save the procurement company from future challenges a potential scams.
Research Political stability in the LCCS region is a pre-requisite for conducting due diligence. Political unrest and instability can play havoc with supply chains. All the advantages of low-cost sourcing are negated if the imports are stuck due to political reasons.
- Long-term contract negotiation
Companies who engage in JIT or Just in Time management of supply chains run the risk of delay when sourcing materials from LCC. Production stoppages due to delays in the supply chain cost more than the savings made when procuring the raw materials from LCC. Maintaining continuity in supply is crucial as Cost and quality.
Companies must enter into long-term contracts that guarantee supplies for an agreed period and enable better supplier relationships. Procurement managers must evaluate several procurement layers and monitor suppliers from low-cost sourcing. The cost-benefit analysis during evaluation and auditing versus domestic sourcing helps to provide Mro Procurement Outsourcing to stakeholders.
Conclusion
Low-cost country sourcing benefits simple components and cheap consumer goods where minor errors are overlooked. The gains from sourcing from Low-cost countries also depend on the education and skill level of workers in the sourcing company. It will determine if insufficient resources do not negate gains fromLow-cost country sourcing.
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