Low-Cost Country Sourcing

Introduction

Low- Cost Country Sourcing (LCCS) is a global sourcing strategy that has dominated the world of business past couple of decades. Using foreign firms with relatively lower wages to produce manufacturing resources is a great way to reduce operational expenses. The switch to low- cost country sourcing was largely driven by the fact that it is very expensive to manufacture products in Western countries. The most common locations for low- cost sourcing are East Asia, Latin America, and Eastern Europe. Efficient cost migration to low-cost countries is an essential competitive trait in today’s business environment.

            Risk mitigation in terms of cost reduction is usually the primary reasons why firms opt to migrate their manufacturing function to low- cost countries. Low- cost country sourcing involves different types of products. The products referred to could be raw materials, supplementary materials, semi- manufactured products, components, finished products, investment goods and capital equipment, services, or maintenance, repair, and operational supply. Outsourcing any product to a low- cost country could lead to significant savings in costs. Cost reduction after the transfer of production to China from Western Europe, for example, is as follows: Textiles and apparel, 15- 20 percent; Housewares and Kitchenware, 15- 20 percent; Electronics, 15- 20 percent, and Injection molded plastics, 12- 20 percent. This is an illustration of the essence of low- cost country sourcing when it comes to reducing costs. In the modern business environment, this could be the potential difference between accruing profits or losses.

The rationale for low- cost country sourcing is not solely based on wages and compensation. The choice of a low- cost country depends on whether or not the type of material a company is looking for can be found there and whether the right competence can be found. For example, when outsourcing for mechanical products, a country such as Brazil could be a good alternative. A company must also put into consideration other factors that could affect the migration into a low- cost country. Such factors include real ancillary costs, volatility of local currency, logistics, and regulations- both social and environmental. The pressure from consumers to implement green initiatives in every location is a major factor when moving to any foreign location. A company cannot avoid the price of such initiatives. Factors such as the commitment of suppliers, in the long run, is also as important as the other factors since it gets rid of uncertainties. The benefits that accrue to low- cost country sourcing have always been the main attraction to the approach. The commonly cited benefits include the following: “cost deflation, the creation of alternate supply bases, reducing dependency on suppliers, category development in view of operational supply bases, help to identify sourcing areas to contribute to set- up to a proactive approach to any client, and help in establishing engagement models.”

One of the most prominent examples of low- cost country sourcing is Apple Inc.’s association with Foxconn. The evolution of Apple’s choice of the locations of manufacturing plants over the years is an illustration of what drives companies to outsource functions to low- cost countries. In 1980, Apple constructed two manufacturing plants in Ireland and Texas, followed by a plant in California in 1983. At the time, a large proportion of Apple computers sold in the US were made domestically. Financial difficulties in the late nineties forced the company to begin altering its supply chain. By the year 2004, the company had closed all local manufacturing facilities and shifted to outsourcing. The company’s major manufacturing operations were moved to China with production outsourced to Foxconn. Foxconn is the largest electronics contractor in the world in addition to being the largest private employer in China. The Foxconn plants are involved in production operations for Apple are located in different countries: one plant in Brazil, two plants in Taiwan, and nineteen in China. With Foxconn operating at large economies of scale, Apple is guaranteed to save on manufacturing costs from the association. Besides cost, the workforce in China is comparatively more productive than that in the United States. This is a factor that could influence a company’s actions regarding low-cost country sourcing. The abundance of semi- skilled workers in China also played a major role in influencing Apple’s decision to contract Foxconn. A low- cost sourcing model such as the Apple example illustrates how the approach could be used by companies to increase efficiency and eventually profitability. The contractor in the low- cost country will minimize extra costs associated with domestic manufacturing. A company can, therefore, invest more in aspects such as product promotion or research and development.

Tommy Hilfiger Group and Li & Fung case study is another example of low- cost country sourcing. In 2007, the Li & Fung bought Tommy Hilfiger Group’s global sourcing operations. Li & Fung is a specialist operator that also manages similar operations for multinational corporations such as Walmart and Liz Claiborne. Since Li & Fung operates at high levels of scale, the essence of the migration is to realize substantial cost savings. In the case of Tommy Hilfiger, the company stands to make savings of 15- 20 percent of the production of clothing and apparel. Nike, the largest sportswear company in the world, also employs low- cost country sourcing. The company does not own any manufacturing facilities. Instead, it exclusively uses contractors mainly in China, Vietnam, and Indonesia. Nike was one of the first American companies to adopt low- cost country outsourcing. The rationale behind the company’s actions was to cut manufacturing costs.

Despite the benefits associated with low- cost country sourcing, changes in the business environment are changing the approach to LCCS. The low cost of labor in low- cost countries is usually cited as a major reason behind the migration of manufacturing functions. However, wages are on the rise in many low- cost countries. As such, a re- evaluation of the low- cost country sourcing approach is necessary for all involved companies. Companies are already coming up with new strategies to ensure that they sustain the cost advantages in the changing business environment. One tactic is developing distinct capabilities with the low-cost countries. This is achieved by working with competitive suppliers who will maintain the market advantage in spite of changes in the macroeconomic conditions. The aforementioned association of Apple and Foxconn and is an example of this since the former’s economies of scale will make it possible to retain the competitive advantage. Companies are also looking for alternate locations to China. A common trend in today’s business environment is the migration to low- cost countries such as Vietnam, Cambodia, and Eastern European countries such as Romania. This is in reaction to the consistently rising cost of production in China.