Five Pro Tips for Low-Cost Country Sourcing

Low-cost country sourcing (LCCS) 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 profitability, improve supply chain management, significantly reduce costs, and propel speed-to-market. Increasing development, urbanization, high competition, globalization, and increasing volatile raw materials prices have led to a need for cost-reduction strategies and low-cost country sourcing.

Emerging markets 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. The procurement strategy helps companies improve business-related decisions and aspects, raise production volumes, reduce the need for risk management strategies, and increase profitability. Proper low-cost country sourcing is a complex, time-consuming, and effective process that requires significant planning, strategy, and efficient execution. Therefore, companies must implement critical strategies and necessary steps throughout the process.

How to Improve Low-cost Country Sourcing Process?

1. No 1

   Calculate all Relevant Costs

2. No 2

   Conduct Due Diligence

3. No 3

   Negotiate Long-Term Contracts

4. No 4

   Prepare an Exit Strategy

5. No 5

   Conduct Continuous Performance Evaluation

1. Calculate all Relevant Costs: 

Although the overall expense of procurement from low-cost countries can be significantly lower, companies must account for all potential costs in the process. During sourcing from low-cost countries, it is essential to consider several factors such as 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 ensuring that it is the best option concerning other costs is imperative.

2. 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 substantial contracts. Wherein, chief procurement officers or responsible third parties should conduct on-site due diligence. Ensuring that the work ethics, environment, quality, efficiency, costs, and systems meet the company’s standards is also imperative to develop a strong, dependable, and sustainable partnership. Additionally, companies must confirm regulatory compliance, legal standards, and industry standards are being met. This saves the company from future challenges, significant risks, ineffective partnerships, losses caused by legal issues, and potential scams.

In most circumstances, the materials sourced from low-cost countries are the simpler parts of a product or cheaper goods. However, it is still important to have a quality check which requires inspections and research, to ensure that the company does not lose money down the line.

3. Negotiate Long-Term Contracts: 

Shortages, over-ordering, delays, and other challenges with supplies can cause significant losses for a company. Therefore, companies often enter long-term contracts that guarantee supplies for a predetermined period and enable stronger supplier relationships. More extended contracts can also help companies better understand their global supply chain needs and minimize the possibility of shortages. However, in low-cost country sourcing, companies often enter 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 no shortages, delays, or other sourcing risks.

4. Prepare an Exit Strategy: 

LCCS 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 consider 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 conducted.

5. Conduct Continuous Performance Evaluation:

 Although reducing costs and increasing savings is a significant target for procurement officers, maintaining the product quality, speed-to-market, customer satisfaction, and efficiency are equally important. When entering 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 the product or service. Reducing costs can only be effective 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 crucial 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

About the Client

The client is an American pharmaceutical major. The company employs over 50,000 individuals.

Challenges Faced by the Client

Changing socio-political environments, sudden cost spike, and rising supply chain expenses have caused significant challenges for the company and made efficient procurement, production, and sourcing increasingly difficult. The American pharmaceutical company was struggling to reduce costs after entering short-term contracts with active pharmaceutical ingredient (API) suppliers in the APAC region and failing to meet the FDA’s standards.

Solutions Offered by SpendEdge

To identify the issues with their sourcing strategies and mitigate the challenges impacting their supply chain management, the company partnered with SpendEdge and leveraged our expertise in low-cost country sourcing. SpendEdge’s low-cost country sourcing analysis solutions helped the firm gain a stronger foothold and achieve a superior competitive advantage. Our experts highlighted various challenges within the pharma company’s strategies and suggested data-driven recommendations to improve their cost-reduction efforts. With expert insights, the company entered improved contracts for longer terms, identified the challenges within its supply chain, increased focus on other significant cost-reduction business efforts, developed sustainable supplier relationships in low-cost geographic locations, and significantly improved its gross profit.