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Sourcing in Low Cost Countries
Combined Master Thesis Submitted in partial fulfillment of the requirements of the degree of: MSc in Supply Chain Management and Purchasing
Dr. Negar ARMAGHAN
January, 2010 ‘The content of the paper is strictly confidential, no publication or distribution to anyone other than the designated reviewer and supervisor is allowed without the author’s written authorisation’
I wish to express my gratitude and appreciation to the following people for their support, guidance, and inspiration which has been the driving force and the source of motivation for the successful completion of this thesis. I would like to extend our special thanks to Justin SABIN, Previous Program Director, ESC Lille. I’m indebted to Dr. Negar ARMAGHAN, our Program Director and my guide, for willingly accepting to supervise my work. I thank her for her availability, her advice and the improvements she has contributed to this thesis. I would also like to thank the individual respondents, respective organizations and focus group participants who gave their time and input to this study. Last but not the least, my deepest gratitude goes to my family for their unflagging love and support throughout my whole life; providing me such a chance to come all over here in Europe and study in ESC Lille.
This dissertation was simply impossible without them.
Table of contents
Acknowledgement ………………………………………………………… Abstract ……………………………………………………………...…… . 1. Introduction …………………………………………………………...... 2. Definition…………………………………………………….................. 2.1 Low Cost Country……………………………………………… 2.2 Sourcing………………………………………………………... 2.3 Outsourcing……………………………………………………. 2.4 Types of Products to Source…………………………………… 3. Theoretical Framework ………………………………………………… 3.1 Overview of Sourcing Strategy………………………………… 3.1.1 Sourcing Functions…………………………………… 3.1.2 Different Type of Sourcing Strategy…………………. 3.2 Supplier Relationship Management……………………………. 3.2.1 An Overview of Supplier Relationship………………. 3.2.2 Type of Supplier Relationship……………………….. 3.3 Risk Facing Importers…………………………………………….. 3.4 Country Risk Analysis……………………………………………. 4. Research Method …………………………………………………………. 4.1 Qualitative Approach……………………………………………... 4.2 Quantitative Approach……………………………………………. 4.3 Comparison between Qualitative and Quantitative approach…….. 4.4 Research approach ……………………………………………….. 5. Research Analysis ………………………………………………………… 5. 1 Introduction of Global Supplier …………………………………………. 5.1.1 Global supplier introduction process overview ………………… 5.1.2 New supplier ……………………………………………………. 5.1.3 Supplier selection process……………………………………….. 5.2 Survey …………………………………………………………………….. 5.2.1 Overview of Survey …………………………………………….. 5.3 Discussion………………………………………………………………….. 2 7 8-11 12-17 12-14 14-15 15-16 16-17 18-34 18-19 19-20 20-25 25-26 26-27 27-29 30-32 32-34 35-37 35 35 36 36-37 38-58 38-39 39 40 40-47 47-48 48 57-58 3
3.2.3 Relationship in Sourcing and Supplier Selection Strategy... 29-30
5.2.2 Synthesis of Survey………………………………………………. 48-57
9.. Abbreviations………………………………………………………………. Appendix ……………………………………………………………… ….. Bibliography ……………………………………………………………….6. 59-60 61-63 64-67 68 List of Figures 4 . Conclusion ………………………………………………………………… 7. 8.
56 Figure 31: Measure of supplier performance level……………………………….Figure 1: Monthly labor review in different country…………………………. 55 Figure 29: Major risk…………………………………………………………….. 53 Figure 26: Value of product /services sourced from LCC………………………. Figure 7: Hybrid sourcing……………………………………………………… 13 18 21 22 23 24 25 Figure 8: Different level of supplier relationship……………………………….. Figure 2: Sourcing related process……………………………………………. 51 Figure 23: Different low cost countries………………………………………….. 49 Figure 20: Location of respondents……………………………………………… 49 Figure 21: When respondents begins sourcing in LCC…………………………... 40 Figure 12: Flow of supply process……………………………………………… 41 Figure 13: Global requirement process…………………………………………. Figure 3: Single sourcing……………………………………………………… Figure 4: Sole sourcing………………………………………………………. 45 Figure 17: Implementation process……………………………………………… 46 Figure 18: Ongoing supply chain process………………………………………. 42 Figure 14: Supplier selection process…………………………………………… 43 Figure 15: Process of global supply agreement…………………………………. 28 Figure 9: Different steps of sourcing strategy process…………………………. 53 Figure 27: Major element of total cost…………………………………………… 54 Figure 28: Obstacles during the LCC……………………………………………... 55 Figure 30: Risk mitigation strategy………………………………………………. Figure 6: Multiple sourcing……………………………………………………. 44 Figure 16: Supply planning process……………………………………………... 29 Figure 10: Different type of risk in sourcing…………………………………… 34 Figure 11: Supplier introduction process……………………………………….. 57 5 ... 50 Figure 22: Primary reasons for sourcing…………………………………………. 51 Figure 24: The product/services resourced from LCC…………………………… 52 Figure 25: Percentage of product sourced from LCC…………………………….. 47 Figure 19: The industry sector of respondents………………………………….. Figure 5: Single group sourcing……………………………………………….
.27 Table 3: Difference between Quantitative and Qualitative method…………….List of Table Table 1 Model from the Procurement Strategy Council……………………….36 6 .12 Table 2: Difference between traditional and new SRM………………………...
more than 50 people have responded to this survey. The collected data and discussions has been analyzed and presented in graphical form which helps us to see the major reasons behind the resourcing. It is important to understand the process of sourcing strategy and also put light on different type of sourcing strategy. communication gap etc. the best countries for resourcing and some other important things to understand the importance of LCCS and the different problems while doing sourcing in LCC. The thesis helps us to understand. Offering products on lowest price is a competitive advantage for the marketing perspective.Abstract Low Cost Countries are those countries where we find the raw material and labor on lowest prices. The conclusion of this thesis is based upon a survey. To keep rolling the ball toward the main target firstly clarify the basic idea and then light on the main areas and finally developed a supplier introduction process model for current and new suppliers to company and survey on sourcing in LCC based upon the questionnaire and discussion with the professionals. The main purpose of writing this thesis is to understand “what we can expect by moving to low cost country”. the very basic idea of sourcing is to put emphasis on sourcing strategy and supplier relationship management. Along these all advantages there are some drawbacks too like logistic problem. Here also introduced the global supplier introduction process model with the help of previous experience in purchasing and a discussion with various professionals. I also discuss about supplier relationship management and also the different level of supplier relationship. To start with. These countries provide the best conditions to make some saving on total cost. local rule and regulations. what kind of problems companies face while resourcing in low cost country. quality issue. 7 . Here.
Background Globalization has brought an immense competition in the market. why not all the sourcing is done in LCC then? How does the sourcing process start? How long does it take to select a supplier from LCC? These questions started coming in my mind during my one year internship at Valeo last year. It is important for all the firms to be competitive in this new global arena.epiqtech. no matter from China. companies set ambitious goals that more than 50% of their expenditure will be in low cost countries by 2012. Introduction This thesis is mainly concentrated on sourcing in low cost countries (LCCS). “Purchasing: No time for long rangers” 8 . Brazil. Low cost country sourcing has been adapted as an important sourcing strategy in different intensity. however.1.. The main purpose of writing this thesis is to understand why companies are moving to LCC? What are the things which influence companies to go all over there in a different world? What benefits do they get by moving there? What problems do they face? LCCS. In order to meet the market demand. Business world thinks that LCCS is the only way to recover from this hard time. India. the spending in low cost countries was 8-15% on average of the total expenditure of a western multinational. It mainly came into knowledge end of last century and it has been a hot top since beginning of last decade starting from year 2000. across almost all industrial sectors.htm Source: Timothy L. LCCS is not an old topic for most of the industries.com/eSourcing-Global.¹ ¹ Purchasing represents a very important part of a firm’s total turnover. Five years ago. 1997. at the same time they are focus on to faster delivery and providing more diverse product portfolio. Is it always beneficial? If yes. definitely it will help them to increase their margins ¹¹ ¹ ¹ Source: http://www. I got answers for some of the questions written above but wanted to go into depth and that’s why started my research. Mexico and etc. it has grown to 20-25% on average. If firms are able to reduce costs on purchased goods (raw materials). Today all the firms are continuously trying to reduce their total cost. It consists in 60% 80% of total turnover of most of the companies. I have tried to understand and answer these questions. In some extreme cases. Companies are taking advantages to source from low cost countries. Due to current economic downfall Low Cost Country Sourcing (LCCS) became important topic in the business world. Today. Chapman et al.
economical knowledge. The main problem arises are supplier introduction and the impacts of resourcing in LCCS. for this firms need a lot of knowledge about the local infrastructure of LCC. laws and languages skills. infrastructure. Problematic area Sourcing in low cost countries can be a difficult task. Indeed. In this research. carried out a survey by sending the questionnaire 9 . in LCC the labor is not so expensive and these countries are really rich by natural resources. Companies can increase the revenue by establishing the procurement process in these countries. that’s the rule of “economies of scale”. efficiency and countries local political issues etc. To achieve the target and the desired result. low-cost sources offer them other benefits also. lower the total cost is. have used the quantitative research approach.After turning to LCC. delivery commitment. On the other hand if we say in simple language what could be the primary reasons or the advantage and the disadvantages of moving sourcing to LCC? In spite of this which countries are the best place for sourcing and what kind of products we can source from these countries? Research Questions The following are the research questions: • What companies can expect by moving to LCC? • What are the major difficulties in organizing the cooperation in different entities: o What does it require from the companies and its purchaser/Employees o What does it implies from the companies and its purchaser/Employees Research approach To find the solution of the above mentioned problems which are related to the resourcing in LCC. The companies don’t have any knowledge regarding supplier’s product quality. their financial system. mainly used the quantitative approach and how do I used the quantitative approach below it is explained with the help of justification notes against the characteristics of quantitative approach in chapter 3. In this way they can expand their market by offering goods to local consumers. so the cost of raw material is low. more you buy or produce. terms & conditions.
This process is for the new suppliers to the company as well as for the existing suppliers. Chapter 5 is about research analysis. I present my two finding first one is “Global supplier introduction process model” and second one is “Synthesis of result” which is based upon a survey. Which are the most favourite LCC? Why companies are doing resourcing in low cost country? Chapter 2 gives a clear view about LCC I will discuss about different definitions like sourcing. I will present the different research methods. outsourcing and the type of product that companies can resource from LCC. Here I will explain about the Qualitative and Quantitative research approach. In chapter 4. Suppliers play an important role in order to set a successful low cost country sourcing process.and having discussion with various professionals across the world belongs to different sectors. For first finding “Global supplier introduction process model” I had discussion with some professional who are working in the same sector. come to know about the solutions of the problems that companies face while resourcing in LCC. The purpose of this chapter is to have a deep understanding about the sourcing and supplier relationship management. Also. From the conducted survey come to know about the various advantages and disadvantages of sourcing in LCC. This survey helps us to see the “what we can expect by moving to LCC?” This survey shows us the 10 . Outcome of thesis The outcome of this research is the Global supplier introduction process to company. Thesis Plan In chapter 1 I will focus on low cost countries. Chapter 3 also describe about the supplier relationship management which is really useful while doing resourcing in LCC. This information is presented is the form graphs. I will discuss about the sourcing process. In this part I will put emphasis on sourcing. type of supplier relationship and the relationship between sourcing and supplier selection strategy and the different risk facing importers. In this part I also conduct a survey based upon a questionnaire. Here I will compare the traditional and modern supplier relationship management approach. With the help of that information I developed this model. I will do the comparison between Qualitative and Quantitative research approach. I will present my research approach which I used in this thesis. And the “risk facing importers” part will indicate us about the different risk while doing resourcing in LCC. By consolidating the information or data received from the professionals. In chapter 3 is the theoretical part of the thesis. sourcing function and different type of sourcing strategies.
Despite of these constraints. time zones. Some hotspot low cost countries are China. companies are obliged to find solutions to survive and to be competitive in market. LCCS provides competitive advantage for those companies who have resources for LCCS and overcome the constraints. It helps to see the advantages and disadvantages by moving to LCC. benefits are still enough to consider LCC for sourcing.1 Low cost countries Low Cost Countries are those countries where companies have different advantages like raw material and labor at lowest prices. LCCS have many benefits and some constraints also. this ongoing crisis is getting longer and longer. supplier’s responsiveness. 11 . low labor costs and entering in new market. supplier reliability. In this part I’ll summarizes my report and well represent my ideas. product quality. 2.different opinion about the LCC. The main reasons for companies to go in LCCS is to have low raw material costs. cultural difference. There are many things to consider before moving to like transportation costs. Sourcing in low cost countries has been the most proactive topic in the procurement fields for a decade or so. In final chapter 6 I will present the conclusion. inventory costs. supplier adaptability. Since. Definitions 2. language and political instability.
In China and India is less than half a Euro. Of course. Slovakia. Bulgaria and Romania). Actually low cost countries sourcing help companies to improve their bottom line by reducing their purchase price upto 40 % and more (depending on products and markets). there is still a huge savings while sourcing in low cost countries: Table 1 Model from the Procurement Strategy Council (Hannon David. Brazil. Savings generally mainly results from low labor and infrastructure costs. we pay more on transport and there are some hidden costs also but in the end. Moving to low cost countries in the quest of savings on purchased material is also called “Cost reduction program” at some companies. Where cost of labor per hour is around 12–15€ in Europe. 31/12/2009) There are other benefits also of low cost countries sourcing.India. Most of the multi national companies are sourcing in these countries since last decade in order to optimize their costs and maximize their profits. Average percent of spending by category in low cost countries: 12 . Companies can achieve market growth in emerging regions by moving to low cost countries and they can fetch substantial markets by extending highly competitive pricing to buyers. and Mexico etc. Vietnam and Eastern European countries (Turkey. Thailand.
language and political instability. you wonder if the suppliers can provide the consistent quality you need and your customer’s expect¹¹ According to a report from AMR Research: Low-cost country sourcing include "understanding and dealing with the additional risk of cultural differences. time zones." says David Morgenstern¹.Figure 1: Banister. currency. Monthly labor review in different country As there are many benefits of sourcing in low cost countries there are some pitfalls also: Main downsides are cultural and political differences. managing director of low-cost ¹ ¹ Source: http://www. distance.com/eSourcing-Global.epiqtech. logistics constraints. for the first time we may find these suppliers established. J. "You could end up with a scenario that maybe the first sample parts pass muster.purchasing. Doing low-cost country sourcing right involves more than just looking at costs and companies must revisit the strategy regularly. practice leader for procurement and supply chain at The Hackett Group in Atlanta "You don't want procurement to just go out and save money by getting the cheapest supplies” ¹ While looking for suppliers in low cost countries.com/article/226382-low_cost_country_sourcing_Around_the_world_in_5_not_so_easy_steps. connectivity.htm http://www. Another issue is to find the capable suppliers in unfamiliar places and if you find them."¹¹ According to Chris Sawchuk. then you see a dramatic drop-off in quality.php 13 . qualifying the sources and fulfilling the requirements but validating their products and making the transition to them may take longer than expected. 2005.
companies buy their products or services locally and also from any part of the world. to satisfy the needs of the company and with a view to continuing and enhancing the current competitive position of the company. intellectual property protection and potential for fraud. . Chinese population is around 1. then literature review is conducted. High tech. government interference. 2. Companies are increasingly using global sourcing to shift work to less expensive labor. After China. 3.country sourcing for Ariba in Sunnyvale. who are new to LCCS. India is the most emerging market for sourcing. India is recognized worldwide as one of the top sourcing markets for Engineering. what kind of products we are planning to source. 4. IT. including staff quality and technical capabilities in the region. Calif. should also be concerned about other issues. Many factories are located in clusters near to each others and also near to ports which make easier for them to export the goods. 3 billion people and china's labor force is 800.2 Sourcing In sourcing. Machinery. 14 . In the first part of my thesis. In recent years." Companies. to offer more competitive pricing and grab market share. (People are the most adaptable machines) 5. China’s logistics and transportation system is grown up and very reliable. China's factories are very flexible. There are many reasons: 1. China has low costs of raw material. Global sourcing strategy varies from industry to industry i. Apparel.e. "We highly recommend a sustained approach of supplier on-boarding. research metholody is implemented and analysis are done on the basis of research. to cut costs. 7 million people (in 2007) There is lot of unemployment which keeps the wages low. R&D. Pharma etc. Automotive. For example small scale industries in fresh food might not be able to implement the same strategy as electronic industry. Sourcing is more like buying in any part of the world which also includes local country. the concept of LCCS is introduced and defined. 2. Business process outsourcing (BPO). China has many large ports and they have efficient shipping capabilities. companies preferred China for sourcing and in future also China seems to have dominance in low cost countries sourcing.
the United States alone sourced over $1. the functions that are performed by the third party can be performed on-site or off-site. Overall. and political risk etc.about. ¹ ¹ Source: Bakker. T. the biggest reason for global sourcing is the cost savings. For this company choose those suppliers who are specialize for the given product/services on lower price. Some common example of outsourcing are manufacturing component. but is instead contracted to a third party for a significant period of time. a bridge too far?” http://operationstech. By outsourcing company save money by less recruitment. Latest technology at lower price: . Advantage of outsourcing:Cost saving: . Outsourcing is really beneficial for the company to outsource the technical solution from other company. “Strategy sourcing.Outsourcing helps the company to get a skilled labor at lower price.Technical world is growing too fast everyday there is a new technology launched in the market. customer care service etc.3 trillion in goods to low-cost suppliers around the globe.Cost saving is the initial reason to do outsourcing for some product/services. They need to analyze the other things too like logistic cost. inventory cost. In this way company increase their productivity on the other hand they reduce their expenses.. Hiring a temporary employee while your secretary is on maternity leave is not outsourcing”¹¹ Outsourcing occurs when a firm purchase product and services from some overseas supplier in order to cut the cost.3 Outsourcing According to James Bucki. Of course. job or process that could be performed by employees within an organization. et al. Skilled labor at lower price: . global sourcing is not an easy deal that some company just shifts their production center to some low cost countries. According to an article published in 2001. So it’s really hard to keep up with latest technology and innovation.htm 15 . “Outsourcing is any task. In addition.Today in the business world sourcing is the hot topic for everyone. Most companies report an average savings of up to 30% when they begin global sourcing.com/od/glossary/g/Outsourcing. training and other human resource that they would have to spend internally to manage all these things.¹¹ 2. even they have in house supplier for the same product. operation. which can be significant.
Logistics – transportation and handling are also important cost drivers. these products are closely related to the production process. There are some common problems associated with procurement of raw materials are. coal. Semi-manufactured products – Are those products which have been already go through the production process. major price fluctuations for economic. political reasons or because of natural conditions. Hereunder different types of products are classified: a. 16 . batteries etc. Supplementary materials – This kind of materials are used during the production process. misunderstanding of the contact. These components are just need to joint with end products and used without any modifications. Some other disadvantages are like renewing contract. industrial gases. Components – They can be of two different types: specific and standard. This group includes for example: steel plates. etc. poor quality etc. bearings. coffee etc. c. d. Here the crucial issue from supplier and buyer side is to balance the right processed quantity.4 Types of Products to source There are many different types of product that can be sourced from low cost countries. grains. handling and stock keeping of the processed material. there are different kind of supplementary materials are like lubricating oil.Disadvantages of outsourcing By doing outsourcing with some company for an entire department or for a single task may be you lose you managerial control to another company. rolled wire and plastic foils. welding electrodes. and their utilization is very much determined by the technology and the design of the products and processes in the operation in which they are used. 2. Standard ones are manufactured by big companies. b. Examples: screws. Raw materials – All the materials which are used to manufacture a product come in raw material category like iron ore. Another issue is transportation.
¹ ¹[Robert et al. 2008] ¹ Robert M. are not sophisticated from a technical point of view. Handfield.. “Purchasing and supply chain management”. Robert B. Finished products – are the products purchased to be sold. 4th Edition. but require some kind of adaptation to the buyer’s demand. Giunipero and James L. Patterson. Larry C. Specific components.2008. ISBN-10: 0-324-38134-4 17 . just like standard ones. Monczka.Specific ones are specially manufactured for some special products and they create critical issues regarding the function and design of the components in relation to the final product.
lead time. After that I will put light on different relationships that occur between the buyer and suppliers are presented to give an overview of supplier relationships Management. Theoretical Framework This chapter provides theories that will help to understand the sourcing process. S & Meindl. sourcing functions and also about the different sourcing strategies that companies have for the purchasing of items or components from suppliers. planning & operation”. reliability. ISBN 0-13-173042-8) Supplier Assessment It is a process that used to rate supplier performance. also affect the total cost of doing business with supplier.3. selecting and developing suppliers. the sourcing decisions are base upon price charged by a supplier. First of all I will discuss about the overview of sourcing strategy. 3rd Edition. P. 18 .1 Overview of sourcing strategy Sourcing is a complete set of business processes for purchasing activity and refers to the process of identifying. It also describes the risk factors that companies are facing while doing resourcing in LCC. Most of the time. 2007. “Supply chain management strategy. According to this figure there are five different steps of sourcing process that I have explained below:- Figure 2: Sourcing related process (Chopra. In order to check the supplier performance companies mainly focus on their supply chain surplus and total cost. 3 . There are so many other characteristics to consider such as quality.
“Supply chain management strategy. In design collaboration both parties are work together on the product design. Tactical Sourcing Function: Tactical sourcing function is also known as operational sourcing. ISBN 0-13173042-8 19 . 3rd Edition. to high-profit and non critical items. Design collaboration After the “supplier selection and contract negotiation” the next step is Design collaboration. planning & operation”.1.¹¹ 3. A good contract should consider the entire factor that affect the supply chain performance. The tactical or operational sourcing refers to low-level decisions that are related low-risk items.. 2007. & Meindl. Procurement When both companies are agreeing on the product design. The motive of this analysis is to see the total expenditure on sourcing and find the different way to reduce this expenditure. The highest rated supplier should be selected.1 Sourcing Functions: The sourcing function can be either on a tactical or strategic level. then procurement process is beginning. P. Tactical sourcing also refers to the short-term decisions. ¹ Chopra. Design collaboration also ensure that any kind of product design change only happens if the both parties are agree on it. Sourcing planning and analysis In sourcing planning and analysis company do the analysis on different supplier and on different product. After this a negotiation happens between buyer and supplier to make an agreement on supply contract.Supplier selection and contract negotiation Supplier selection is based upon the first step “supplier assessment”. Also a good contract is designed like this which helps to increase the supply chain profit in a way that gives benefits both suppliers and buyers. The procurement goal is to deliver the product at buyer place at right time and at minimum cost.. In procurement process supplier made the product delivery in response to buyer order. S.
The number can vary from field sector to field sector or industry to industry and between different product categories. The strategic sourcing mainly refers to strategic and bottleneck products or goods and services that have a high supply risk. Single sourcing is required for establishing a close relationship with suppliers. The use of tactical or strategic sourcing depends on the following: Purchase The business environment The use of an effective and appropriate strategy for sourcing can enable to realize: Reduction of costs Reduction of lead times Improvements in the quality of products To achieve these advantages choices have to be made concerning a number of regions or areas. Single Sourcing The term of a single sourcing strategy is defined by the use of one supplier for the supply of each item.Strategic Sourcing Function: The strategic sourcing is related with the top-level and long-term decisions. The use of this approach enables companies: 20 . 3.1. Single Sourcing Sole Sourcing Single Group Sourcing Multiple Sourcing Dual Sourcing Hybrid Sourcing Following more details will be provided for each of them.2 Different type of Sourcing Strategies There are several types of sourcing strategies which companies used while doing sourcing in LCC. Choices regarding the number of suppliers can be an example of this. Even the strategic sourcing refers to the formulation of the long-term purchasing policies.
O. The difference is that there is just one supplier available on the market in sole sourcing.com/frameusers_singlesource.scriptorium. Sole sourcing may ¹ Sarah S.pdf 21 . just as in the case of single sourcing. In sole sourcing only one supplier is used for the supply of a particular item. cost per unit decreases Stronger relationship with supplier and gain access to design and engineering Low administrative cost Other purchasing costs The following are the disadvantages: More dependent upon supplier Supplier can increase price in short term Increased supply risk Quality issues¹ ¹ Figure 3: Single Sourcing [By Author] Sole sourcing Sole sourcing is an alternative variant to single sourcing. Single sourcing overview: Single Sourcing with frame maker and web work publisher http://www. Keefe.. The following are the advantages of single sourcing: Reduce quality variability and have a standardized product Transportation economics As volume goes up. 1998. To focus on one supplier for each item More emphasis can be put on each remaining supplier On the other hand it increases the possibility for establishing: Profitable relationships Mutual competitive advantages against other supply chains.
On the other hand.technologyevaluation. Figure 5: Single Group Sourcing [By Author] Multiple sourcing ¹ http://rfptemplates. The use of sole sourcing can also be self chosen by the buying company when one separate supplier is chosen to develop and manufacture a special item that is only interesting for the buyer.occur due to that existing alternative suppliers have disappeared from the market because of the competition. By using single group sourcing. but a whole group of items with similar characteristics. the buying company will become more dependent on one supplier than the case is in single sourcing. This sourcing strategy indicates that one supplier is responsible for the delivery of not just one particular item.com/What-is-Sole-Source.html 22 . Sole sourcing makes the buying company even more dependent on the supplier. At the same time there is a possibility for developing the collaboration between buyer and supplier when it comes to issues regarding for example material development and the development of new manufacturing technologies. the higher volumes supplied by one single supplier in this case opens up an opportunity for additional economies of scale.¹ Figure 4: Sole Sourcing [By Author] Single group sourcing Single group sourcing is another sourcing strategy that can be seen as a variant of single sourcing.
et al. The following are the reasons why companies use several suppliers: Low dependency of suppliers Encourages price competition Disaster contingency Flexibility during downside and upside Spreading risks Technology Competition Strategic reasons The following are the disadvantage of multiple sourcing: Reduces supplier loyalty Supplier may only supply preferred customers in case of shortage Result in different product attribute with varying quality Suppliers can let performance slide a bit if the order volume is not high enough Suppliers are reluctant to cost saving ideas so it could increase in price over time¹¹ Figure 6: Multiple Sourcing [By Author] Dual sourcing When a dual sourcing strategy is used.Multiple sourcing means that a company uses several suppliers for the sourcing of one specific item. It can also be the case that one of the current suppliers is selected as a primary supplier while the ¹ Telgen. usually two suppliers are used parallel per item. “Public purchasing future: Buying from multiple suppliers” 23 . J. The multiple sourcing is far most commonly practiced when it comes to sourcing strategies regarding the number of suppliers...
2 Supplier Relationship Management Supplier Relationship Management is very important in order to establish a successful supply chain while doing resourcing in LCC. When you thinking for low cost country sourcing. like for example economies of scale due to being a large customer is cared for. For company it’s really important to be sure about the consistently get the right products. the unreasonably high focus on spend management. Figure 7: Hybrid Sourcing (By Author) 3. ¹ Hybrid sourcing Hybrid sourcing strategy is a combination of single and multiple sourcing. The primary supplier answers to deliver the larger part of the supply. It has been developed in order to preserve the advantages with the two strategies. whereas the secondary suppliers together answers for the delivery of the remaining part.others will be considered as secondary suppliers. At the same time the disadvantages of risk exposure to material shortages is avoided. In hybrid sourcing strategy multiple sourcing is usually implemented on item group level and single sourcing on the individual items within the groups. of the right quality. By using this sourcing strategy many of the advantages of single sourcing. at the ¹ Source : http://dictionary. because most of the time supplier never made the delivery on time and they struggling with different issue. The advantages of single sourcing can in this case be maintained at the same time as the disadvantages can be reduced in form of delivery interruptions.com/Dual-sourcing 24 .babylon.
immature supplier etc. quality issue. The main objective of supplier relationship management is to achieve reduction in cost. In LCC. solution development. supply companies are struggling with different issue like poor infrastructure. and management of. To solve this issue. and at the right price. In this research I would focus on this issue. perfect communication. That time buyer focus on to find a supplier at lowest price possible rather then the lowest total cost and 25 . 3. Before the globalization the relationship of buyer – supplier was not like today. This is not likely to happen consistently and without incidence if you do not have good relationships with your suppliers. 2.Supplier relationship depends on the development of trust and start understanding each other requirements and interests. Internally & Externally Better collaboration with. The nature of this relationship between the two firms has focus on customer satisfaction. 1 An overview of supplier relationships Supplier relationship management is a very good approach to manage a firm interaction with the supplier of goods and services. This is the only way to avoid the risk from supplier side. for companies it is important to select the suppliers who meet the requirements. service improvement. So. Buyer. flexibility and mutual benefits etc. So in LCCS how does supplier relationship management help you? • • • • • • • Increased Productivity / Improved Performance Improved Service Levels. I developed a global supplier introduction in chapter 4 with the help of some professionals which could be useful for companies.right time. providers Reduced supplier selection risk Utilization of best practices and governance structures Reduced Decision Time Cost Savings To choose a best supplier in LCC is a tuff job because in these countries suppliers are not meeting the requirement.
supplier relationship management is really important for the entire firms. In this way a large profit margin can be gained by both parties.. 2009.¹ Difference between traditional and new supplier relationship management approach: Traditional Approach Many competitive supplier Contact focus on price Simple buyer-seller relationship Short term contract Evaluation by bid New SRM Approach Selected supplier Contact focus on Total cost and high delivery Complicated.S et al.org/Proceedings/2009/proc/p080922003. 2007) But in this globalization age. Buyer’s also put emphasis on long term contract. one is “the way of working” and the “share of surplus value”.2. Purchasing. the firms have developed a close and intimate relationship with a limited number of suppliers. The first way refers to the ¹ ¹ Source: http://blog.From Traditional to Contemporary) http://www.2 Types of supplier relationships There are lot of classifications can be found regarding supplier relationships management within the literature. including internal relationship Long term contract Evaluation by commitment to partnership Table 2: Difference between traditional and new supplier relationship management (By Dejbord .aspx Source :( Article by Richard E. Crandall & William et al. Buyer and supplier relationships This framework explains that buyer-supplier relationships can be explained in two different ways. now buyer and supplier work together to satisfy the end customer demand. The buyer’s used different supplier in order to get the lowest price and keep the high competition in the market and also make the short term contract. So. Now-a-days most of the companies are doing sourcing in low cost countries.. As compare to traditional approach.sourcinginnovation.sedsi.¹ 3. Following framework explains the different levels of suppliers’ relationships.high ability to deliver.pdf 26 . Now firms are more concern to minimize the total cost and high product delivery.com/2006/10/29/supplier-relationship-management.
buyers and suppliers work jointly either to reduce the supplier’s costs or to increase the functionality of the product. partnership suppliers.different ways that a buyer can interact with a supplier. This kind of “way of working” shows the high contact and very closes communication between buyer and supplier.¹ The different levels of relationships There are three different levels of relationships between a company and its suppliers these are.com/doc/6570470/Srm 27 . Collaborative: In this kind of “way of working” is much more proactive. In this way. In the first case supplier get the most of benefits from gained surplus value and in case surplus value is derived from manufacturing and tier 2 sourcing surplus.scribd. Different level of supplier relationship Partnership Supplier Associated Supplier Conventional Supplier ¹ Source: http://www. Share of surplus value:Surplus value describes the gap between the cost incurred by the supplier and the utility function of the buyer. The “ways of working” can be divide into arm’s length and collaborative. There are three ways of sharing surplus vales In the first case buyer get the most of benefits from gained surplus value and in case surplus value is derived from customer surplus. In this case buyer and supplier share surplus values from customer and manufacturing surplus. Arm’s length: In this kind of “the way of working” relationship characterized by a low level of contact between the buyer and supplier. The buyer and supplier only share the contractual information required for the transaction to take place. associated suppliers and conventional suppliers.
There is a high degree of integration and the two companies work together to improve for example production processes. The two companies work together in order to continuously reduce stock and delivery time.. Associate suppliers: These suppliers have a long-term agreement with buyers. “Change in purchasing and the buyer supplier relationship] [Cox.2. the relationships with partnership supplier also involve a common product development and frequent exchange of information. Orders and deliveries are made continuously and the flows between the buying company and the supplier are to a large extent synchronized.¹ 3. The purchasing price is in this level of relationship just one of several factors that is considered when choosing supplier. products and quality. This relationship is characterized by deliveries being made against an occasional order. The relationships on this level are to a large extent characterized by the same conditions as the ones with associate suppliers. A et al. R. Partnership supplier: The highest level of relationship exists with the partnership suppliers.3 Relationship between sourcing and supplier selection strategy ¹ Source Thesis: [LaFlamme. However.Figure 8: Different level of supplier relationship (By Author) Conventional suppliers:These are the lowest supplier in this level. “The role of incentives in buyer-supplier relationships: Industrial cases from a UK study”] 28 . which are revised periodically.
the industry. so the strategy can be developed to both reduce the cost and improve the supplier performance. Find the potential suppliers that meet the requirement. Sourcing strategy development:- 29 . policy statements. There is an appropriate sourcing strategy for all kind of industry. Supplier selection analysis is one of the most important and useful analysis for buyers.All the firms are doing some analysis on procurement spending and supplier performance and use this analysis result for future sourcing decisions.marketworks-advisory. about the key players and the industry trend. It helps you to see the current and future business need of your organization. This analysis includes the corporate and business unit strategy. business plans and technology plans. sourcing strategy can define the product information. In a sourcing strategy all the firms are looking for the answer of the following questions how to: Get the needed material and services.co. Supply Market analysis:Supply market analysis helps to understand the situation of supply market. Negotiate and implement contract with selected supplier.za/content/outsourcingadvisory) This figure describe that the sourcing strategy have five processes: Business requirement analysis:First of all need to understand what the things are need to be sourced? For this collect as much as data it will help you to see that your business requirement match the need of the organization. the conditions and the weakness of related supplier base. In general. Business Requirement Analysis Supply Market Analysis Sourcing Strategy Development Supplier Selection Contract Implementation Figure 9: Different step of sourcing strategy process (source: http://www. firm that fit the business strategy. Improve current supplier relationship.
or not deliver on time. The aim is to understand the idea how purchasing fit in the organization. After that. This risk arises since exchange rates between currencies can vary over time and there may be a time delay between signing a contract and making the payment. In this case companies should have very strong contract 30 . Exchange (currency) risk – The local currency amount payable on an agreement might be higher than the amount calculated when entering a contract. deliver the wrong or inferior goods. the product. how suppliers are selected and how decision are made concerning what to buy from whom and when. Supplier selection:After collecting the information by RFI the sourcing team develops the supplier information matrix. ability to meet specification and standard. Risk of non-delivery or non-performance – Supplier might not perform according to the contract (e. We can say that companies should have strong contract management department to proceed in case of a problem. It makes importing of goods and services more complicated. This can be managed through foreign exchange risk management. bad quality).3 Risks Facing Importers Business with suppliers in foreign countries is not an easy task. that companies most of the time do hedging (accountancy term to get rid of this risk). This risk makes a lot of impact on the margin of the turnkey projects.It is a standard and formal process to collect the information about the market. product and service quality etc. This risk arises when a supplier may not be willing or able to perform as agreed upon. Therefore the importing company should be aware of potential risks and fraud and have knowledge about all the contract terms and conditions or strategies that can facilitate protection against them. The companies that are having turnkey projects. potential supplier is selected on the base of competitive price.g. 3. Contract Implementation:This contract is between buyer and supplier that both are agree on the standard terms and conditions.
Unexpected regulatory changes can occur between entering and settling a contract. To mitigate this risk companies should have to have transport insurance so that in case of problem companies can claim. such as cancelling of permits or licenses. the complexity of international trade can 31 . Risk of fraud arises since there are always people seeking to take advantage of others. provision for the secondary source and also to remove this problem from roots. Transport risk – Involves that goods can be stolen or damaged during transport and may occur when the goods are transferred from the supplier. Country risks cannot be mitigated. A credit risk can be mitigated through not entering contracts or making advance payments unless it is confident that the supplier is willing or able to deliver. supplier should have to select carefully so that company should not face credit risk problem. becomes insolvent. This type of risk arises since many countries regulate the transfer of money and conversion of foreign currency receipts. Further. Credit risk – Credit risk is really a very big risk and especially in the case of turnkey projects.management team. the best way is to have very good or effective way of supplier selection. When a payment has been made before a shipment and the supplier lacks the financial ability to complete the shipment. Occurs when the supplier or other parties in the payment chain. make special provision for this kind if losses. Country risk – A change in government regulations prevents or restricts the ability to receive goods. Unexpected regulatory changes. may occur between entering and settling a contract. Risk of fraud – The supplier is not doing business in good faith. Transfer risk – A change in government regulations may prevent or restrict the ability to make payments or exchange foreign currency. Transfer risks cannot be mitigated. such as banks. A risk arises because many countries have rule and regulation on the import and export of goods. The best way in this case is to add some laws in the contract by consulting contract manager so that in bad situation companies can save their money. Especially in the big or turnkey or fast track projects when companies do cash forecasting.
ifpmm. The political risk could make impact on the main three categories and that three categories are further divided into sub categories. The role of banks in facilitating trade transactions mean that they come across many attempted and perpetrated frauds.¹ 3. there should be a sourcing team that do supplier visit time to time to evaluate the supplier performance on the basis of different sourcing indicators. Risk management for business with low cost country http://www.4 Country Risk Analysis The purpose of country risk analysis is to consider the probability that undesirable circumstances due to political. Stakeholder exposure Asset destruction Asset spoliation Assets immobility Employee exposure Kidnapping Gangsterism Harassment Operational exposure Market disruption Labor problem Racketing ¹ Source Article :VLCEK.org/files/ERPSRiskMgmt. Being aware of offers that seem too good to be true and through discussing reservations with a banker. economic or social actions will make a negative or bad impact on the business of the company. This can be mitigated by sourcing by dealing only with the reliable suppliers and should have very strong supplier selection criteria and team.pdf 32 . Country risks can be categorized into four parts: Political – Political risks are probable disruptions due to internal or external events or regulations resulting from political action of governments or societal crisis and disturbances.make it difficult to detect fraud before it occurs.J.
telecom. Supply shortage Economic – Exposure of business performance to the extent that the economic business drivers can vary and in that way jeopardizes profitability. networks and corrupt practices. either because government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable. The economic risks could be: Economic growth Variability Inflation Cost of inputs Exchange rates Competitive – Risks are related to non-economic distortion of the competitive situation due to cartels. Operational risks are divided into two main parts: Infrastructure Power. transport Suppliers Regulations Nationalistic preference Taxes 33 . The business risks can be interpreted as: Business logics Corruption Networks Operational – Directly affects the foundation of a business.
In market. which approach they choose also depends upon their needs.pdf 34 . “LCC sourcing under uncertainty of economy” http://www.J. 2008.org/files/ERPSRiskMgmt. local content¹ Figure 10: Different type of risk in sourcing (By Author) 4. With their help you can measure them also you can configure your own customised with your business. Ph. there are lots of tools. Constraints on local capital.ifpmm. Research Method In this research I have mentioned different ways to measure business results in an organisation. local employment. But each and every tool will come under main two sections or In other words we can say that there are only two ¹ Source Article :Zhang.d. It varies from organisation to organization.
and the business process through an evidentiary cause and effect chain that relates intermediate outcomes to the value streams listed above and concurrently isolates confounding factors that could have produced the same effects.html Source: James Neil. The two approaches are as follows. revenue generation. “Analysis of professional literature case 6: Qualitative research I” 35 .2 Quantitative Approach The Quantitative Approach allows the user to calculate generally accepted financial business metrics. process oriented Non Standardized measuring devices.¹ 4. Literature review at beginning of study ¹ Qualitative Values and judgments based on data. Discovery oriented Literature review at end of study ¹ http://www. such as return on investment (ROI) and net present value (NPV) by capturing detailed business data on the industrial hygiene impact on cost avoidance. 4.1 Qualitative Approach The Qualitative Approach allows the user to estimate the value of the industrial hygiene contribution by tracking its impact on health. And rest all will come under these two. and other strategic aspects of the business.org/votp_NEW/study/report-online-phase3. outcome oriented Standardized measuring devices. In quantitative analysis you will get much closer as well more perfect results.aiha. risk.main approaches to measure business results. Qualitative Quantitative 4.3 Comparison between Qualitative and Quantitative approach¹ Quantitative Conclusions are based on data. In this approach there are lot of ways to measure business results which are mentioned as follows. Verification oriented. cost savings.
“Analysis of professional literature case 6: 4.Deductive in nature. Unknown reliability and validity Assumes a dynamic reality Results based on case studies Not sure about Accurate and Measurable Results It is not a case here Observations and interviews.4 Research approach In this thesis a quantitative research method has been used. The outcome of this gathered information or data is survey on sourcing in LCC. come to know about following things: • • • • Major risks Major elements of total cost during sourcing in LCC Obstacles during sourcing in LCC Primary reasons for sourcing in LCC etc. Known reliability and validity. Table 3: Difference between Quantitative and Qualitative method by James Neil. Assumes a static reality Results based on Numbers or figures Accurate and Measurable Results Know clearly in advance what we are looking for Various instruments used. In order to find the answer of second research question “What we can expect by moving to Low Cost Countries?” The conclusion of research is based upon the data collected with the help of questionnaire. Long duration Rich narrative description. The results of both questions are based upon survey and discussion with professionals. Short duration Descriptions based on numerical data. 36 . Through this survey. The result of the survey is based upon the numbers and that numbers has been transformed into graphical form. In order to find the answer of first research question I did some literature review at the beginning of the study and after that I have discussion with professionals in order to develop “Global Suppler Introduction Process” it is present with the help of figures. All these different steps to have the answer of research questions show the characteristics of quantitative research methodology. more than 50 professionals from different sectors and countries have responded. Qualitative research I” Inductive in nature.
Below you will find the details of both the analysis. The answer of research questions: • What are the major difficulties in organising the co-operation in different entities -What does it require from the companies and its purchaser/employees -What does it implies from the companies and its purchaser/employees • What companies can expect by moving to LCC These answers are provided with the help of two research analysis “Global supplier introduction process model” and “Survey based upon sourcing in LCC”. Research Analysis The two findings are carried out by keeping in mind.5. the objective of research and the research questions. the research analysis has presented in two parts: 37 . Keeping in mind various aspects of sourcing in LCC.
Process under operations control: . 38 . I have done the analysis and created this Global supplier introduction process. This process has been broken down into 3 main controls areas: Process with in PMP’s control: . 1 Introduction of Global Supplier On the basis of the discussion.Global supplier introduction process model: The objective of this model is to present the use of this process for new suppliers to the company and current suppliers in the company. global requirement and approve supplier.This process cover the remaining sub parts which are supply planning. implementation and on going supply chain management. This process model is basically divided into 4 processes and 7 sub processes. Process outside PMP’s control: . In figure I highlight this part by using blue color. In every process there are some shapes representing actions and there are some responsibilities for actions that have been explained in the figure below that’s gone be a useful to understand the process. The whole process executes in 7 steps shown below: • • • • • • • Supply of component Global requirement Approve supplier Global supply agreement Supply planning Implementation Ongoing supply chain management 5. In figure supplier introduction process this part highlight by using green color.In this process cover the 3 sub process supply of component.This process covers the global supply agreement part and in order to highlight this part I used yellow color in the figure.
5.1. Figure 11: Supplier introduce process (By Author) 5. 5.1.1. The process has been used differently with new suppliers and current suppliers.2 New supplier: For the new supplier will have to go through all the steps and through the whole process.1 Global supplier introduction process overview The whole process is divided into mainly 4 processes and 7 sub-processes and the letters written on every phase shows the role of particular teams and departments in that process.3 Supplier selection process: 39 .
Then the global data has been reviewed and complied. Process under PMP’s (Procurement management platform) control. 2. If GSPE (Global supplier procurement engineer) approves all the parts: Then the information(working scope of parts) has been sent to the manufacturing units and again upon sending the global data has been reviewed and complied and gain during this again they check if all the parts are in scope or not. If GSPE does not approve all the parts: In this case the quality. if all parts are not in scope then there are two loops in one loop if parts are in PMP’s scope of work then they update that and in second lop if the parts is not in scope of PMP then that parts are rejected from the scope and then updated scope of working parts has been sent to the team update in the web tool. industrialization and sourcing team again go through the reviewing and approval process to approve parts if there is requirement to remove some parts from the scope then its removed and if there is need to add something then the team update in the common web tool and again GSPE compares and consolidate the list and send to MU’s (Manufacturing unit) the updated working scope of parts. 40 . On the other hand industrialization is responsible for providing the approved list of parts for suppliers. The different team like sourcing team. In the next step the global supplier procurement engineer compares and consolidates the two lists provided by the sourcing team and industrialization team.For current suppliers just validate the first four steps before bringing a current supplier under PMP control. To explain the figure below the sourcing team provides the initial scope of parts from global commodity list. Then circle continues upon the decisions and then finally after going through all the steps and loops they agree upon the scope of parts that leads the way to step 2 for global requirement. Here two cases occur: 1. industrialization team and quality team act different sub phases during this process. In this sub process there is an interfacing between different processes controls viz. The whole process is divided into following steps: Step 1: Supply of component The main objective of the supply of component is to agree upon the final scope of components. Process under operations control and process with in business control. If all the parts are in scope the team create PMP’s proposed scope of components and in the finally agree upon the scope of components.
costs and the strategy. In this sub process the main interfacing between the process under PMP’s control and the process outside PMP’s control but at the end there is also interfacing between the process under operation control and the process under the PMP’s control. Then all of this information has been reviewed by the sourcing team then if the engineering changes required then the team review and approve changes and update in the engineering data base and also in the web tool. Industrialization team finalizes the global packaging format and also agrees upon the global delivery frequency and 41 . Otherwise if no change required then the sourcing team defines the tooling status. To move on. the delivery frequency and the warranty at cost has been defined. In the following step agree upon the global forecast and also upon the bill of quantity.Figure 12: Flow of supply process [By Author] Step 2: Global Requirements Process In this part the target is to come to know about the global requirements for all the parts in scope. life cycle. after finalizing for each part scope of components. teams will validate and compile the global usage and then in the following step will define the global bill of quantity and proceeding towards the main target. Mainly the sourcing team and the industrialization teams are acting during the different phases.
industrialization team. sourcing. process under operations control and process outside PMP’s control. To begin this process the supplier is allocated to industrialization. Finally the outcome of this sub process is to come to know about the global requirements for all the parts. Teams check if there is any issue with the supplier then the teams try to resolve that issues with the supplier if teams fail to resolve that issue with the supplier then they reject the supplier an it’s the end of the process. quality team. In the supplier selection process mainly two process viz. On the other hand if teams turn successful in 42 . The teams select the suppliers according to their specialized criteria for supplier selection and in the audit of supplier again the two team’s quality and sourcing teams takes part. The four specialized teams viz. procurement and quality teams. this process is for the supplier selection (Approval) for the company who can fulfil the demand of components required by company. Figure 13: Global requirement process (By Author) Step 3: Supplier Selection As it’s clear from the name. sourcing team and procurement team are involved in the supplier selection process at different sub phases.also upon the location of the delivery.
In this mainly there is interaction between the supplier and the sourcing team.resolving the issues with the suppliers then in the next step samples are produced by supplier and the samples are tested by the industrialization teams and the quality teams. In the second step the sourcing team sends the list of global requirement to the supplier if the supplier do not agree upon this then again change the requirements and if this time supplier don’t agree upon this then reject part from the scope of supplier and that is the end of process at this stage. Figure 14: Supplier selection process (By Author) Step 4: Global supply agreement In the global supply agreement part the three main control processes like under PMP control. In this sourcing team make sure that the supplier is aware of the PMP process. On the other hand if supplier agrees to the global requirements and then supplier 43 . In the following steps the industrialization. quality and sourcing teams approve the samples sent by the supplier. under operations control and not under PMP control are included. if the samples approved by the teams then they update the information in the web tool and in other case if the teams don’t approve the samples sent by supplier then the supplier is rejected and that is the end of process.
In this. supply frequency. the BCQ (Box call of quantity).propose the global pricing as per the requirements that also include logistics. this part is mainly under the control of PMP. After they review the current stock and current commitments and create a supply plan for all the parts and has been sent to the manufacturing units if units agree with this plan then its fine otherwise there is need of amendments in the MU’s plan. Again there is negotiation between the supplier and the sourcing teams stage regarding the prices and if both parties don’t agree upon this and then part is removed from the suppliers scope. 44 . Figure 15: Process of global supply agreement (By Author) Step 5: Supply Planning Supply planning is the main part. and logistics and parts costs has been discussed and planned. after agreeing upon that they create a global supply plan and then the sourcing team stays in touch with the supplier for further success. Here in this mainly sourcing team acts at different sub phases. Otherwise if they agree upon the price and then finally global contract is agreed between the two parties and also save the agreed global contract and also the agreed pricing.
process under PMP control and the process not under PMP control. 45 . Also in the mean time obtain open order per part from each MU and obtain forecasts from each MU and then create global forecast including MU split and Po’s. Then complete forecast PMP supplier sheet and communicate global forecast to the supplier and then manage the on going process of supply chain that leads to the step6 of the process. in case of changes in the plan amend that change in the plan and communicate regarding that changes to the manufacturing units. This process is fully under PMP control and also there is interfacing between the two control processes i.Figure 16: Supply planning process (By Author) Step 6: Implementation Step 6 is the implementation process.e. In this process introduce the supplier to the PMP process and communicate the global supply plan to the supplier and then agree upon it.
Then global supplier procurement engineer compiles and validates the global forecast and then the concerned person or engineer send this forecast of the supplier and supplier sends the confirmation of receipt of information and make commitment. In this circle firstly forecasts and delivery data has been sent to the PMP. This is a regular supply chain cycle. 46 .Figure 17: Implimentation process (By Author) Step 7: Ongoing supply chain management The step 7 is to manage the ongoing supply chain process. After this manufacturing units forecast sent to the MU’s and MU’s create next weeks forecast and receive goods.
The following are the key discoveries from the survey: • • • • • • • • Percentage of products sourced from LCC Percentage of products value sourced from LCC Hotspots for sourcing Major risks Major elements of total cost during sourcing in LCC Obstacles during sourcing in LCC Primary reasons for sourcing in LCC Obstacles for sourcing in LCC etc.Feedback of various professionals across the world in different industries has been consolidated and then presented in the form of graphs .2 Survey: The objective of this survey is to present the positive outcomes and negative impacts of sourcing in LCC. the question facing procurement executives is not whether to source goods 47 . The practice of sourcing in low-cost countries has grown significantly over the past few years. This survey is based upon questionnaire . In the current economic climate of spiralling costs and intense competition in almost every market segment.Figure 18: Ongoing supply chain process (By Author) 5.
2. commodity buyer.2 Synthesis of survey 1 Which industry sector respondents belong to? Questionnaire has been sent to different people in different sectors viz. but what to source.and/or services from low-cost countries. The persons who responded to the survey are supply chain managers. nearly 21% people have responded from this industry. how much of it. Out of these 55 people has responded to the survey. A number of questions have been asked to these professionals’ people to develop the key drivers for sourcing in low cost countries. Majority of the people (45%) has responded from electronic sector and followed by automotive sector. 48 . sourcing director. energy. chemical. The third major respondents are from energy sector. automotive etc. the question related to supplier performance over various range of products has been asked to the professionals and the supplier performance is categorized into different categories and presented in the graphical form. To have the better regarding this. senior buyers. it also put light on the obstacles that the companies are facing while sourcing in low cost countries. consulting and some other sector has also responded but the percentage of their response is little bit less in comparison to the response received from energy. The people belongs to information technology. information technology. 5. electronic.1 Overview of Survey Questionnaire has been sent to over 70 people working in different sector across the world. 5. automotive and electronic sector. In spite of this. sourcing manager etc.2. and when to start. the strategic reasons to mitigate the risk have been also discussed. The survey is not limited to only the above mentioned things.
Here its explained with the percentage. Canada etc. The 31% of the people responded from France and that’s a huge response received from people working in France. approximately 13-15% people responded from these countries. On the other hand nearly 20% of the German professionals also responded. The questionnaire has been sent to the people working across Europe. The professionals from United Kingdom have also responded very well and their response percentage is 22%. The response from other professionals based in Belgium and Canada has also given a response.Figure 19: Industry sector of respondents (By Author) 2 What is the location of respondents? As its already mentioned in the overview of survey regarding the location of respondents. Figure 20: Location of respondents (By Author) 3 When did respondents start sourcing in LCC? 49 .
The percentage of people. 9% of the respondents haven’t moved their sourcing operation to the low cost countries. On the other hand. As per the survey report nearly 50% of the people the people considered that “low material cost” and “the low labor cost” are the main reasons for sourcing in low cost countries. 50 . On the hand 43% of the people think it’s a way to enter into a new market. The percentage of respondents doing sourcing operations in low cost countries for 3-5 years and 1-3 years are 21% and 27%. Figure 21: When respondents begin sourcing in LCC (By Author) 4 What are the key factors for sourcing in LCC? In this part it is explained that what are the key factors or key drivers for resourcing in low cost countries. who think that its shorter distance to reach the final customer market is only 16%.Nearly 91% people already have ongoing sourcing operations in low cost countries.41% have been doing sourcing in these countries more than 5 years of time.
The percentage of people opted India is 49%. According to this survey 47% people believes that other Asian countries like Taiwan. 71% of people voted China as a good place for sourcing and India is marked as a second most favorable country for sourcing. Figure 23: Different low cost countries (By Author) 51 . Indonesia and Malaysia etc. Various respondents have marked their choices as per their product range and the type of products required for their business. are the third best destination for sourcing.Figure 22: Primary reasons for sourcing (By Author) 5 Which countries are the best places for sourcing? There are various countries in Asia and in Eastern Europe that are the hotspots for sourcing. The maximum number of who target China as a Low cost sourcing country. Only 37% of people consider Eastern European countries for sourcing.
33% of the people mentioned that they are resourcing less than 15% of the products form LCC. 11% & 6% and 21% from LCC as per the respondents reply. Commercial services and other services are sourced respectively 13%. 44% of the respondents are relying on LCC for the consumption of the electronic component. 52 . That’s why the pie chart below shows that as the percentage range of products resourced from LCC increases the % of respondents lying in this range decreases respectively. 49% of the respondents mentioned that they are resourcing raw material from LCC. 16% of people mentioned that they are sourcing IT services and industrial equipments from LCC. Figure 24: Product/services resourced from LCC (By Author) 7 Percentage of products/services sourced from LCC In this respondents replied that how much percentage of products/services is resourced from LCC in their organization. According to the respond I discover that there are not so many respondents who want to resource their 45-90% of their products from LCC. 30% respondents replied that their organized resourced in between 15-30% product/services from LCC. Chemical. As per the survey.6 Which products/services are resourced from LCC? There are various products/services are resourced from LCC as per the requirement of the company business or products. Automotive component.
On the other hand exactly the quarter of people resource product value less than €0.5M from LCC. Only 19% of the respondents mentioned that they source the products value lies between €5M-€25M and more than €25M from Low cost countries. Figure 26: Value of product/services sourced in LCC (By Author) 53 .Figure 25: Percentage of product sourced from LCC (By Author) 8 Value of products sourced from LCC More than quarter of the respondents declared that they resource the products from LCC ranging €5M-€25M.
What are the major elements affecting total cost?
In this part it is presented with the help of the graph the up to which extent the various factors make an impact on the total cost. Nearly 50% of the respondents consider that the material cost is the major element that’s affecting the total cost. If we look at the response of 45%, their finding is labor cost. These respondents consider that labor cost is hitting drastically the total cost. There are still 31% respondents in this survey impeach “Logistics cost” for the gradual increase in total cost. The 10% of respondents consider the various other reasons are responsible for the impact on total cost.
Figure 27: Major elements of total cost (By Author)
What are the major obstacles during sourcing in LCC?
Sourcing from LCC is not an easy task. There are so many things that really allow the buyers to think upon some points before moving to LCC.In the conducted survey more than 50% of the respondents are worried of quality issues in LCCS. Nearly 45% of the people also impeach the poor infrastructure in case of sourcing from LCC. Respectively 37% and 39% of respondents consider different rules and regulations and immature suppliers as an obstruction in sourcing .Still there are 27% of people in various companies and sectors consider tariffs and customs as troublesomeness.
Figure 28: Obstacles during sourcing in LCC (By Author)
Risks in sourcing from LCC
There are several risks while resourcing in LCC. Here with the help of graph, presenting the data of the respondents that are considering the some risks as a major risk as per their conditions. Nearly 50% of the respondents consider “questionable delivery and quality” as a major issue in this. 39% of the people consider that “supply chain safety and security” is also makes a lot of impact. Nearly quarter of the people said that” efficiency and political issues” are the major risks for the business. In spite of all the above mentioned risks 11% people consider some other reasons that could be the risk in resourcing from LCC.
Figure 29: Major risk (By Author)
Risk Mitigation Strategy
With the help of graph, we discussed and presented above risks and obstacles during sourcing in LCC. How companies and their professionals mitigate their risks? To conduct this survey several options has been given to the respondents to know what they really think or what mitigating strategy do they really want to follow while in mitigating the risks during sourcing? As per our survey nearly 50% people are in favor of carrying additional inventory as a mitigation strategy .On the other hand almost quarter of the people consider “secondary source in another region and pre shipment inspection” could be mitigation strategies that they gone a follow. 11% of respondents gone a use or implement another strategy to mitigate the risks.
Figure 30: Risk mitigation strategy (By Author)
Well, respondents replied that 48% of the suppliers are good and nearly quarter of the respondents marked their suppliers as an average. 15% of the people have rated the suppliers in LCC as an excellent from various prospects. But 12% respondents mentioned but still there is a room for improvement in the performance of suppliers.
They have their APO (Asian purchasing office) in Beijing. 49% of the people say Low material cost is their primary reasons to move to LCCS. Their low cost countries purchase represents 22% of total purchases in 2004.Figure 31: Measure of supplier performance level (By Author) As we all know. In 2009. 5. Their purchasing strategy is called “Plan – 30”. percentage was more than 50 and their target is to reach around 70% by end of year 2010. AS in my survey.3 Discussion Main reasons for companies to go for LCCS are to have low raw material costs. Hereunder you can see a chart showing the part of globalization in 2008 and forecast for 2010 for automotive and industrial manufacture. It means to reduce around 30% of their purchasing costs in each 2 years and they have been able to do it by reducing supply costs through increased sourcing in low cost countries. 57 . These days term globalization (especially in purchasing) directly corresponds to low cost countries sourcing. low cost countries sourcing provide us upto 40% of savings. low labor costs and entering in new market. These offices help French purchasing business units of Valeo to buy in Asia. versus 13% in 2003. Followed by Low labor costs (48%) and 43% of the respondents opted entering in a new market as one of their reasons for LCCS. India. China and IPO (Indian purchasing office) is in Chennai. Here are some more examples of low cost countries sourcing: Valeo is one of the well known European companies in automotive industry.
The percentage of people opted India is 49%. product quality. cultural difference. language and political instability. Purchased raw material represent in between 60-80 percentage of the total turnover of most companies. As I have mentioned earlier. Despite of these constraints. LCCS provides competitive advantage for those companies who have resources for LCCS and overcome the constraints. this ongoing crisis is getting longer and longer. 58 . 71% of people voted China as a good place for sourcing and India is marked as a second most favourable country for sourcing. 2nd most likely goods were the electronic components (44%) followed by industrial and automotive components (16%). time zones. supplier’s responsiveness. There are many things to consider before moving over there. According to my survey.China and India represents more than 50% of all LCCS. inventory costs. Since. In my survey. supplier adaptability. almost half of the respondents click on raw material as a resourced good from LCC (49%). it means final saving on finished goods is around 25 – 30%. transportation costs. supplier reliability. low cost country sourcing help companies to optimize their costs and maximize their margin by reducing up to 40% of their purchasing costs. It’s not that easier to just jump in LCC and start the sourcing process. like. benefits are still enough to consider LCC for sourcing. companies are obliged to find solutions to survive and to be competitive in market.
With the help of this survey. In this cut throat competition all the different firms are focusing on to make saving on total cost. This model has seven different steps. Even companies have some issues with LCC but these countries have a great resource in the form of raw material. for this. Through this thesis I provide the answer of different question that’s come in mind while doing resourcing in LCC like:What kind of product/services can be resourced from LCC? Which countries are providing the best environment for sourcing? What are the major elements of total cost? What are the major risks in LCC? To have a good supplier panel is a big issue with LCCS and firms are always having problem with supplier selection. What they think about LCC? On the other hand this survey helps us to see the advantages and disadvantages of LCCS. The fourth step is “Global supplier Agreement” In this part mainly about the interaction between the supplier and the sourcing team in order to meet the global requirement. In this thesis I focused on this issue too. Third step is “Supplier selection process” this process is for the supplier selection for the company who can fulfil the demand of components required by company. Step six is about “Implementation” this part is about implementation of whole process. The fifth part is “Supply planning” in this. The first step is “supply of component” the main purpose of this step is to agree upon the final scope of components. It could be useful for supplier selection while doing LCCS.6. and logistics and parts costs has been discussed and planned. I developed a “Global Supplier Introduction Process” model with the help of some professional. In the last the seventh step is about “Ongoing supply chain management” this is a regular supply chain process of this complete model. CONCLUSIONS In this thesis I explained the importance of Low Cost Countries in term of business point of view. The second step is “Global requirement process” in this part the target is to come to know about the global requirements for all the parts in scope. In chapter 4 I had sum up all different question of survey in the part of discussion. Due to ongoing 59 . I get the opinion of different professionals. For this LCCS is the only hope to achieve this target. firms need to prepare them self before switch to LCC. But LCCS is not an easy task. When firms start thinking to switch on LCC then there is a common question come in mind “What we can except by moving to LCC?” And I tried to find the answer of this question through a survey. labor (skilled labor) to offer to business world. both firms discuss about supply frequency.
In these days all the different firms are thinking to increase the share holder in this (LCC) market. 60 .economic crises the importance of LCCS has been increased. We can say that for companies LCCS is the only hope to survive in this competitive world.
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8. Appendix Questionnaire • Qualification a) University degree or equivalent b) Master degree c) Bachelor degree Occupation a) Self employed b) Academia c) Student d) Professional practice e) Self employed f) Public sector worker g) Private sector worker Age group a) 23-30 b) 30-39 c) 40-49 d) 50+ Sex a) Male b) Female Designation/Position a) Junior buyer b) Senior buyer c) Sourcing manager d) Commodity coordinator e) Senior sourcing manager f) Sourcing trainee g) Supply chain analyst h) Sourcing director f) Other Number of years spent on current position a) 1-5 b) 5-10 c) 10-15 d) 15.20 e) More than 20 Experience in sourcing a) Less than 1 year b) 1-5 years c) 5-10 years d) 10-15 years e) 15-20 years f) Above 20 years Number of employees in your organization a) Less than 100 b) 100-1000 64 • • • • • • • .
• • • • • • • • c) 1000-10000 d) 10000-70000 e) More than 70000 Professional competences or certifications a) APICS b) Six sigma c) EVM d) Other Industry sector you belong to a) Automotive b) Energy c) Telecommunication d) Electronic e) Consulting f) Information Technology h) Other i) Chemicals g) Health & Pharma. Location of respondents a) France b) Germany c) UK d) Belgium e) Canada When did respondents start sourcing in Low cost countries? a) Less than 1 year ago b) 1-3 years ago c) 3-5 years ago d) More than 5 years e) I haven’t moved any action in LCC *What are the reasons behind the resourcing in low cost countries? a) Low material cost b) Low labour cost c) To enter in new market d) Shorter distance to final customer market *Which countries are the best for resourcing? a) China b) India c) Other Asian countries d) Eastern Europe *What kind of product/services resourced from low cost countries? a) Raw Material b) Electronic component c) Industrial equipment d) IT services e) Automotive component f) Chemical g) Commercial services h) Other *What are the major elements of total cost? a) Material cost 65 .
€40m e) More than € 40m *What are the major risks in resourcing from LCC? a) Quality b) Delivery c) Supply chain security & safety d) Efficiency e) Political issues f) Other Supplier performance level a) Good b) Excellent c) Average d) Improvement required *What risk mitigation strategies are in use? a) Carry additional inventory b) Secondary source in another region c) Pre shipment inspection d) Secondary source in same region e) Other * What are the major difficulties or risks preventing buyers meeting their LCCS goals? a) Longer lead time b) Planning & forecasting barrier c) Limited supply chain visibility d) Higher logistics cost e) Customs & tariffs f) Poor supplier performance/response g) Supplier discovery h) Late delivery 66 .• • • • • • • b) Labor cost c) Logistic cost d) Other *What kind of problem do they face while resourcing in LCC? a) Poor infrastructure b) Quality issue c) Immature supplier d) Different rule and regulation e) Custom and tariff What is the percentage of products or services sourced from Low Cost Countries? a) Less than 15% b) 15 – 30 % c) 30 – 45% d) 45 – 60% e) 60 – 75% f) 75 – 90% g) More than 90% What is the value of products/services sourced from LCC? a) Less than €0.5m .5m b) €0.€5m c) €5m .€20m d) €20m .
• i) Quality defects What are the key factors to identify or select the supply markets? a) Comparative growth rate of the company b) Available to the ground resources c) Inexpensive but skilled labour d) Size of the available supply base e) Stability of social and political environment f) Size of the target market place for your organization Note: for some *questions respondents can select more than one option 67 .
Abbreviations LCC LCCS GSPE PMP MU BCQ GS ROI NPV BPO R&D IT APO IPO Low cost country Low cost country sourcing Global supplier procurement engineer Procurement management platform Manufacturing unit Box call of quantity OR Batch call of quantity Global supplier Return on investment Net present value Business process outsourcing Research and development Information technology Asian purchasing office Indian purchasing office 68 .9.