What is low cost country sourcing?
Increasing development, urbanization, and growth have led to a dire need for low-cost country sourcing and an overall formulation of cost-reduction strategies. Low-cost country sourcing is a strategy that involves procuring necessary resources, supplies, raw materials, products, and services from countries with lower costs, labor charges, and production expenses. This process falls under the global sourcing category, and companies utilize it to help increase savings, improve supply chain functionality, significantly reduce costs, and propel speed-to-market. Many countries in the APAC region, including China, India, and Indonesia, are considered low-cost countries and highly demanded locations for organizations and businesses in other geographical areas. This procurement strategy helps companies improve business-related decisions and aspects, raise production volumes, reduce the need for risk management strategies, and increase profitability. Conducting proper low-cost country sourcing is a complex, time-consuming, and effective process that requires significant planning, strategizing, and efficient execution. Therefore, companies must ensure they implement certain strategies and necessary steps throughout the process.
How to improve low cost country sourcing process?
Calculate all Relevant Costs: Although the overall expense of procurement from low-cost countries can be significantly lower than local suppliers, companies must ensure they account for all potential costs through the process. Low-cost country sourcing includes the costs of tariff, tax, transportation, and legal compliance requirements. While calculating expected costs, procurement officers must also evaluate and understand customs processes in the exporting and importing countries and ensure they comply to reduce the chance of unexpected or unnecessary fines, overage expenses, and challenges. Companies should also conduct a cost-benefit analysis regarding their transportation methods and choose the most economical, viable, and efficient option. For bulk orders, companies often prefer shipping, but it is imperative to ensure that it is the best option concerning other costs.
Conduct Due Diligence: Identifying and negotiating with suppliers from different countries has high risks and can lead to significant losses if companies fail to conduct due diligence. Simple website research or digital meetings cannot suffice for major contracts, and chief procurement officers or responsible third parties should conduct on-site due diligence. Ensuring the work ethics, environment, quality, efficiency, costs, and systems meet the company’s standards is also imperative to developing a strong, reliable, and sustainable partnership. Additionally, companies must confirm regulatory compliance, legal standards, and industry standards are being met. This saves the company from future challenges, major risks, ineffective partnerships, losses caused by legal issues, and potential scams.
Negotiate Long-Term Contracts: Shortages, over-ordering, delays, and other challenges with supplies can cause significant losses for a company. Therefore, companies often enter into long-term contracts that guarantee supplies for a predetermined period and enable stronger supplier relationships. Longer contracts can also help companies gain an improved understanding of their supply chain needs and minimize the possibility of shortages. In low-cost country sourcing, companies often enter into shorter contracts to identify cheaper options, which can be a significant error if the company fails to account for their critical needs, travel time, and contract negotiation processes. Maintaining supply continuity is more important than costs, and companies must ensure that there are no shortages, delays, or other manageable risks.
Prepare an Exit Strategy: Low-cost country sourcing often leads to longer lead times and a significant difference in development, cost savings, and supplier assessment. When interacting with suppliers in a different geographical area, companies must keep in mind the possibility of change or novel challenges. Constantly evaluating supplier performance and understanding the reasons for delivery issues is crucial; however, simultaneously, businesses must prepare an exit strategy in case of unexpected obstacles. Political upheavals, legal challenges, currency value changes, or significant price hikes are potential challenges that would require the termination of the contract. An exit plan should ensure that all legal requirements are met, intellectual property is protected, and the appropriate steps to phase out production are carried out.
Continuously Evaluate Performance: Although reducing costs and increasing savings is a significant target for procurement officers, maintaining the quality of product, speed-to-market, customer satisfaction, and efficiency are equally important. When entering into a contract in low-cost country sourcing, companies must ensure they oversee the supplier’s performance and stay informed regarding any changes or fluctuations in the quality of product or service being delivered. Reducing costs can only be an effective change if the company maintains or improves a previously established standard. Therefore, constantly evaluating suppliers’ performance in terms of delivery times, contract compliance, pricing, and quality, is a crucial constant step for companies to partake in.
In the Post-COVID Era, it is essential to optimize cost saving opportunities and follow these important low cost country sourcing best practices to stay ahead from competition and align your business objectives with procurement goals. Request a FREE proposal today and create a successful journey for your business.
Success Story
Changing socio-political environments, sudden spikes in costs, and rising supply chain expenses have caused significant challenges for companies and made efficient procurement, production, and sourcing increasingly difficult. An American pharmaceutical company was struggling to reduce costs after entering into short-term contracts with active pharmaceutical ingredient (API) suppliers in the APAC region and failing to meet the FDA’s standards. To identify the issues with their sourcing strategies and mitigate the challenges impacting their supply chain, the company chose to partner with SpendEdge and leverage our expertise on low-cost country sourcing. Our experts highlighted various challenges within the pharma company’s strategies and suggested data-driven recommendations to improve their cost-reduction efforts. With the expert insights, the company entered into improved contracts for longer terms, identified the challenges within their supply chain, increased focus on other major cost-reduction business efforts, developed sustainable supplier relationships in low-cost geographic locations, and significantly improved their savings.
