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SKEMA BUSINESS SCHOOL

Sourcing in Low Cost Countries

From:

Sandeep KUMAR

Combined Master Thesis


Submitted in partial fulfillment of the requirements of the degree of:
MSc in Supply Chain Management and Purchasing

Supervisor:

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’

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Acknowledgement

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.

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Table of contents
Acknowledgement ………………………………………………………… 2

Abstract ……………………………………………………………...…… . 7

1. Introduction …………………………………………………………...... 8-11


2. Definition…………………………………………………….................. 12-17
2.1 Low Cost Country……………………………………………… 12-14
2.2 Sourcing………………………………………………………... 14-15
2.3 Outsourcing……………………………………………………. 15-16
2.4 Types of Products to Source…………………………………… 16-17
3. Theoretical Framework ………………………………………………… 18-34
3.1 Overview of Sourcing Strategy………………………………… 18-19
3.1.1 Sourcing Functions…………………………………… 19-20
3.1.2 Different Type of Sourcing Strategy…………………. 20-25
3.2 Supplier Relationship Management……………………………. 25-26
3.2.1 An Overview of Supplier Relationship………………. 26-27
3.2.2 Type of Supplier Relationship……………………….. 27-29
3.2.3 Relationship in Sourcing and Supplier Selection Strategy... 29-30
3.3 Risk Facing Importers…………………………………………….. 30-32
3.4 Country Risk Analysis……………………………………………. 32-34
4. Research Method …………………………………………………………. 35-37
4.1 Qualitative Approach……………………………………………... 35
4.2 Quantitative Approach……………………………………………. 35
4.3 Comparison between Qualitative and Quantitative approach…….. 36
4.4 Research approach ……………………………………………….. 36-37
5. Research Analysis ………………………………………………………… 38-58
5. 1 Introduction of Global Supplier …………………………………………. 38-39
5.1.1 Global supplier introduction process overview ………………… 39
5.1.2 New supplier ……………………………………………………. 40
5.1.3 Supplier selection process……………………………………….. 40-47
5.2 Survey …………………………………………………………………….. 47-48
5.2.1 Overview of Survey …………………………………………….. 48
5.2.2 Synthesis of Survey………………………………………………. 48-57
5.3 Discussion………………………………………………………………….. 57-58

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6. Conclusion ………………………………………………………………… 59-60

7. Bibliography ………………………………………………………………. 61-63

8. Appendix ……………………………………………………………… ….. 64-67

9. Abbreviations……………………………………………………………….. 68

List of Figures
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Figure 1: Monthly labor review in different country…………………………. 13
Figure 2: Sourcing related process…………………………………………….. 18
Figure 3: Single sourcing……………………………………………………… 21
Figure 4: Sole sourcing………………………………………………………... 22
Figure 5: Single group sourcing……………………………………………….. 23
Figure 6: Multiple sourcing……………………………………………………. 24
Figure 7: Hybrid sourcing……………………………………………………… 25
Figure 8: Different level of supplier relationship………………………………. 28
Figure 9: Different steps of sourcing strategy process…………………………. 29
Figure 10: Different type of risk in sourcing…………………………………… 34
Figure 11: Supplier introduction process………………………………………. 40
Figure 12: Flow of supply process……………………………………………… 41
Figure 13: Global requirement process…………………………………………. 42
Figure 14: Supplier selection process…………………………………………… 43
Figure 15: Process of global supply agreement…………………………………. 44
Figure 16: Supply planning process…………………………………………….. 45
Figure 17: Implementation process……………………………………………… 46
Figure 18: Ongoing supply chain process……………………………………….. 47
Figure 19: The industry sector of respondents…………………………………... 49
Figure 20: Location of respondents……………………………………………… 49
Figure 21: When respondents begins sourcing in LCC………………………….. 50
Figure 22: Primary reasons for sourcing…………………………………………. 51
Figure 23: Different low cost countries………………………………………….. 51
Figure 24: The product/services resourced from LCC…………………………… 52
Figure 25: Percentage of product sourced from LCC……………………………. 53
Figure 26: Value of product /services sourced from LCC……………………….. 53
Figure 27: Major element of total cost…………………………………………… 54
Figure 28: Obstacles during the LCC…………………………………………….. 55
Figure 29: Major risk……………………………………………………………... 55
Figure 30: Risk mitigation strategy………………………………………………. 56
Figure 31: Measure of supplier performance level………………………………. 57

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List of Table
Table 1 Model from the Procurement Strategy Council………………………..12
Table 2: Difference between traditional and new SRM………………………...27
Table 3: Difference between Quantitative and Qualitative method…………….36

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Abstract
Low Cost Countries are those countries where we find the raw material and labor on lowest
prices. These countries provide the best conditions to make some saving on total cost.
Offering products on lowest price is a competitive advantage for the marketing perspective.
Along these all advantages there are some drawbacks too like logistic problem, quality issue,
local rule and regulations, communication gap etc.

The main purpose of writing this thesis is to understand “what we can expect by moving to
low cost country”. The thesis helps us to understand, what kind of problems companies face
while resourcing in low cost country. 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.

To start with, the very basic idea of sourcing is to put emphasis on sourcing strategy and
supplier relationship management. It is important to understand the process of sourcing
strategy and also put light on different type of sourcing strategy. Here, I also discuss about
supplier relationship management and also the different level of supplier relationship.

The conclusion of this thesis is based upon a survey, 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, 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. Here also introduced the global supplier
introduction process model with the help of previous experience in purchasing and a
discussion with various professionals.

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1. Introduction
This thesis is mainly concentrated on sourcing in low cost countries (LCCS). LCCS is not an
old topic for most of the industries. 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.

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, Is it always
beneficial? If yes, 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.
I got answers for some of the questions written above but wanted to go into depth and that’s
why started my research. I have tried to understand and answer these questions.

Background
Globalization has brought an immense competition in the market. It is important for all the
firms to be competitive in this new global arena. Today all the firms are continuously trying
to reduce their total cost, at the same time they are focus on to faster delivery and providing
more diverse product portfolio. In order to meet the market demand, Companies are taking
advantages to source from low cost countries, no matter from China, Brazil, India, Mexico
and etc. Due to current economic downfall Low Cost Country Sourcing (LCCS) became
important topic in the business world. Business world thinks that LCCS is the only way to
recover from this hard time.

Low cost country sourcing has been adapted as an important sourcing strategy in different
intensity, however, across almost all industrial sectors. Five years ago, the spending in low
cost countries was 8-15% on average of the total expenditure of a western multinational.
Today, it has grown to 20-25% on average. In some extreme cases, companies set ambitious
goals that more than 50% of their expenditure will be in low cost countries by 2012.¹ ¹
Purchasing represents a very important part of a firm’s total turnover. It consists in 60% -
80% of total turnover of most of the companies. If firms are able to reduce costs on purchased
goods (raw materials), definitely it will help them to increase their margins ¹¹
¹
Source: http://www.epiqtech.com/eSourcing-Global.htm
¹
Source: Timothy L. Chapman et al., 1997, “Purchasing: No time for long rangers”
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After turning to LCC, low-cost sources offer them other benefits also. Companies can
increase the revenue by establishing the procurement process in these countries. In this way
they can expand their market by offering goods to local consumers.

Indeed, in LCC the labor is not so expensive and these countries are really rich by natural
resources, so the cost of raw material is low, more you buy or produce, lower the total cost is,
that’s the rule of “economies of scale”.

Problematic area
Sourcing in low cost countries can be a difficult task, for this firms need a lot of knowledge
about the local infrastructure of LCC, their financial system, economical knowledge, laws and
languages skills. The main problem arises are supplier introduction and the impacts of
resourcing in LCCS. The companies don’t have any knowledge regarding supplier’s product
quality, terms & conditions, infrastructure, delivery commitment, efficiency and countries
local political issues etc. 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, have used the quantitative research approach. In this research, 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.
To achieve the target and the desired result, carried out a survey by sending the questionnaire

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and having discussion with various professionals across the world belongs to different sectors.
By consolidating the information or data received from the professionals, come to know about
the solutions of the problems that companies face while resourcing in LCC.

Outcome of thesis
The outcome of this research is the Global supplier introduction process to company. This
process is for the new suppliers to the company as well as for the existing suppliers. From the
conducted survey come to know about the various advantages and disadvantages of sourcing
in LCC. This information is presented is the form graphs.

Thesis Plan
In chapter 1 I will focus on low cost countries. 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, outsourcing and the type of product
that companies can resource from LCC.
In chapter 3 is the theoretical part of the thesis. In this part I will put emphasis on sourcing. I
will discuss about the sourcing process, sourcing function and different type of sourcing
strategies. Chapter 3 also describe about the supplier relationship management which is really
useful while doing resourcing in LCC. Here I will compare the traditional and modern
supplier relationship management approach, type of supplier relationship and the relationship
between sourcing and supplier selection strategy and the different risk facing importers. The
purpose of this chapter is to have a deep understanding about the sourcing and supplier
relationship management. Suppliers play an important role in order to set a successful low
cost country sourcing process. And the “risk facing importers” part will indicate us about the
different risk while doing resourcing in LCC.
In chapter 4, I will present the different research methods. Here I will explain about the
Qualitative and Quantitative research approach. I will do the comparison between Qualitative
and Quantitative research approach. Also, I will present my research approach which I used in
this thesis.
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. For first finding “Global supplier introduction process model” I had discussion with
some professional who are working in the same sector. With the help of that information I
developed this model. In this part I also conduct a survey based upon a questionnaire. This
survey helps us to see the “what we can expect by moving to LCC?” This survey shows us the
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different opinion about the LCC. It helps to see the advantages and disadvantages by moving
to LCC.

In final chapter 6 I will present the conclusion. In this part I’ll summarizes my report and well
represent my ideas. LCCS have many benefits and some constraints also. The main reasons
for companies to go in LCCS is to have low raw material costs, low labor costs and entering
in new market. There are many things to consider before moving to like transportation costs,
inventory costs, product quality, supplier reliability, supplier adaptability, supplier’s
responsiveness, cultural difference, time zones, language and political instability. Despite of
these constraints, benefits are still enough to consider LCC for sourcing. Since, this ongoing
crisis is getting longer and longer, 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.

2. Definitions
2.1 Low cost countries

Low Cost Countries are those countries where companies have different advantages like raw
material and labor at lowest prices. Sourcing in low cost countries has been the most proactive
topic in the procurement fields for a decade or so. Some hotspot low cost countries are China,

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India, Thailand, Vietnam and Eastern European countries (Turkey, Slovakia, Bulgaria and
Romania), Brazil, and Mexico etc.

Most of the multi national companies are sourcing in these countries since last decade in order
to optimize their costs and maximize their profits. Moving to low cost countries in the quest
of savings on purchased material is also called “Cost reduction program” at some companies.

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). Savings
generally mainly results from low labor and infrastructure costs. Where cost of labor per hour
is around 12–15€ in Europe, In China and India is less than half a Euro. Of course, we pay
more on transport and there are some hidden costs also but in the end, there is still a huge
savings while sourcing in low cost countries:

Table 1 Model from the Procurement Strategy Council (Hannon David, 31/12/2009)

There are other benefits also of low cost countries sourcing. 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.

Average percent of spending by category in low cost countries:

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Figure 1: Banister. J, 2005, 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. Another issue is to find the capable
suppliers in unfamiliar places and if you find them, 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, currency, time
zones, connectivity, distance, logistics constraints, language and political instability. Doing
low-cost country sourcing right involves more than just looking at costs and companies must
revisit the strategy regularly."¹¹

According to Chris Sawchuk, 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, for the first time we may find these
suppliers established, qualifying the sources and fulfilling the requirements but validating
their products and making the transition to them may take longer than expected.

"You could end up with a scenario that maybe the first sample parts pass muster, then you see
a dramatic drop-off in quality," says David Morgenstern¹, managing director of low-cost

¹
Source: http://www.epiqtech.com/eSourcing-Global.htm
¹
http://www.purchasing.com/article/226382-low_cost_country_sourcing_Around_the_world_in_5_not_so_easy_steps.php
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country sourcing for Ariba in Sunnyvale, Calif. . "We highly recommend a sustained
approach of supplier on-boarding."

Companies, who are new to LCCS, should also be concerned about other issues, including
staff quality and technical capabilities in the region, government interference, intellectual
property protection and potential for fraud.

In recent years, companies preferred China for sourcing and in future also China seems to
have dominance in low cost countries sourcing. There are many reasons:
1. Chinese population is around 1, 3 billion people and china's labor force is 800, 7
million people (in 2007) There is lot of unemployment which keeps the wages low.
2. China’s logistics and transportation system is grown up and very reliable. China has
many large ports and they have efficient shipping capabilities.
3. China has low costs of raw material.
4. China's factories are very flexible. (People are the most adaptable machines)
5. Many factories are located in clusters near to each others and also near to ports which
make easier for them to export the goods.

After China, India is the most emerging market for sourcing. India is recognized worldwide
as one of the top sourcing markets for Engineering, High tech, Automotive, Apparel,
Machinery, Business process outsourcing (BPO), IT, R&D, Pharma etc.
In the first part of my thesis, the concept of LCCS is introduced and defined, then literature
review is conducted, research metholody is implemented and analysis are done on the basis of
research.

2.2 Sourcing
In sourcing, 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. Sourcing is more like buying in any part of the
world which also includes local country. Companies are increasingly using global sourcing to
shift work to less expensive labor, to cut costs, to offer more competitive pricing and grab
market share. Global sourcing strategy varies from industry to industry i.e. what kind of
products we are planning to source. For example small scale industries in fresh food might not
be able to implement the same strategy as electronic industry.

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Today in the business world sourcing is the hot topic for everyone. According to an article
published in 2001, the United States alone sourced over $1.3 trillion in goods to low-cost
suppliers around the globe. Of course, the biggest reason for global sourcing is the cost
savings; which can be significant. Most companies report an average savings of up to 30%
when they begin global sourcing.

Overall, global sourcing is not an easy deal that some company just shifts their production
center to some low cost countries. They need to analyze the other things too like logistic cost,
inventory cost, and political risk etc.¹¹
2.3 Outsourcing

According to James Bucki, “Outsourcing is any task, operation, job or process that could be
performed by employees within an organization, but is instead contracted to a third party for a
significant period of time. In addition, the functions that are performed by the third party can
be performed on-site or off-site. 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, even they have in house supplier for the same product. Some common
example of outsourcing are manufacturing component, customer care service etc.

Advantage of outsourcing:-
Cost saving: - Cost saving is the initial reason to do outsourcing for some product/services.
For this company choose those suppliers who are specialize for the given product/services on
lower price.
Latest technology at lower price: - Technical world is growing too fast everyday there is a
new technology launched in the market. So it’s really hard to keep up with latest technology
and innovation. Outsourcing is really beneficial for the company to outsource the technical
solution from other company.

Skilled labor at lower price: - Outsourcing helps the company to get a skilled labor at lower
price. In this way company increase their productivity on the other hand they reduce their
expenses. By outsourcing company save money by less recruitment, training and other human
resource that they would have to spend internally to manage all these things.

¹
Source: Bakker. T, et al., “Strategy sourcing; a bridge too far?”
¹
http://operationstech.about.com/od/glossary/g/Outsourcing.htm
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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.
 Some other disadvantages are like renewing contract, misunderstanding of the contact,
poor quality etc.

2.4 Types of Products to source

There are many different types of product that can be sourced from low cost countries.
Hereunder different types of products are classified:
a. Raw materials –
All the materials which are used to manufacture a product come in raw material category like
iron ore, coal, grains, coffee etc. There are some common problems associated with
procurement of raw materials are; major price fluctuations for economic, political reasons or
because of natural conditions. Logistics – transportation and handling are also important cost
drivers.

b. Supplementary materials –
This kind of materials are used during the production process, there are different kind of
supplementary materials are like lubricating oil, welding electrodes, industrial gases, etc.
these products are closely related to the production process, 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.

c. Semi-manufactured products –
Are those products which have been already go through the production process. This group
includes for example: steel plates, rolled wire and plastic foils. Here the crucial issue from
supplier and buyer side is to balance the right processed quantity. Another issue is
transportation, handling and stock keeping of the processed material.

d. Components –
They can be of two different types: specific and standard.
Standard ones are manufactured by big companies. These components are just need to joint
with end products and used without any modifications. Examples: screws, bearings, batteries
etc.

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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.
Specific components, just like standard ones, are not sophisticated from a technical point of
view, but require some kind of adaptation to the buyer’s demand.
Finished products – are the products purchased to be sold.¹ ¹[Robert et al., 2008]

¹
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero and James L. Patterson,2008, “Purchasing and supply chain
management”, 4th Edition, ISBN-10: 0-324-38134-4
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3. Theoretical Framework

This chapter provides theories that will help to understand the sourcing process. First of all I
will discuss about the overview of sourcing strategy, sourcing functions and also about the
different sourcing strategies that companies have for the purchasing of items or components
from suppliers. 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.

It also describes the risk factors that companies are facing while doing resourcing in LCC.

3 .1 Overview of sourcing strategy


Sourcing is a complete set of business processes for purchasing activity and refers to the
process of identifying, selecting and developing suppliers.

According to this figure there are five different steps of sourcing process that I have explained
below:-

Figure 2: Sourcing related process (Chopra, S & Meindl, P, 2007, “Supply chain management strategy, planning &
operation”, 3rd Edition, ISBN 0-13-173042-8)

Supplier Assessment

It is a process that used to rate supplier performance. In order to check the supplier
performance companies mainly focus on their supply chain surplus and total cost. Most of the
time, the sourcing decisions are base upon price charged by a supplier. There are so many
other characteristics to consider such as quality, lead time, reliability, also affect the total cost
of doing business with supplier.

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Supplier selection and contract negotiation

Supplier selection is based upon the first step “supplier assessment”. The highest rated
supplier should be selected. After this a negotiation happens between buyer and supplier to
make an agreement on supply contract. A good contract should consider the entire factor that
affect the supply chain performance. 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.

Design collaboration

After the “supplier selection and contract negotiation” the next step is Design collaboration.
In design collaboration both parties are work together on the product design. Design
collaboration also ensure that any kind of product design change only happens if the both
parties are agree on it.

Procurement

When both companies are agreeing on the product design, then procurement process is
beginning. In procurement process supplier made the product delivery in response to buyer
order. The procurement goal is to deliver the product at buyer place at right time and at
minimum cost.

Sourcing planning and analysis

In sourcing planning and analysis company do the analysis on different supplier and on
different product. The motive of this analysis is to see the total expenditure on sourcing and
find the different way to reduce this expenditure.¹¹

3.1.1 Sourcing Functions:


The sourcing function can be either on a tactical or strategic level.

Tactical Sourcing Function:


Tactical sourcing function is also known as operational sourcing. The tactical or operational
sourcing refers to low-level decisions that are related low-risk items, to high-profit and non
critical items. Tactical sourcing also refers to the short-term decisions.

¹
Chopra, S., & Meindl, P., 2007, “Supply chain management strategy, planning & operation”, 3rd Edition, ISBN 0-13-
173042-8
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Strategic Sourcing Function:
The strategic sourcing is related with the top-level and long-term decisions. The strategic
sourcing mainly refers to strategic and bottleneck products or goods and services that have a
high supply risk.
Even the strategic sourcing refers to the formulation of the long-term purchasing policies.
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. Choices regarding the number of suppliers can be an example of this. The number can
vary from field sector to field sector or industry to industry and between different product
categories.

3.1.2 Different type of Sourcing Strategies


There are several types of sourcing strategies which companies used while doing sourcing in
LCC.
 Single Sourcing
 Sole Sourcing
 Single Group Sourcing
 Multiple Sourcing
 Dual Sourcing
 Hybrid Sourcing
Following more details will be provided for each of them.

Single Sourcing
The term of a single sourcing strategy is defined by the use of one supplier for the supply of
each item. Single sourcing is required for establishing a close relationship with suppliers. The
use of this approach enables companies:

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 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.

The following are the advantages of single sourcing:


 Reduce quality variability and have a standardized product
 Transportation economics
 As volume goes up, 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. In sole sourcing only one supplier is
used for the supply of a particular item, just as in the case of single sourcing. The difference is
that there is just one supplier available on the market in sole sourcing. Sole sourcing may
¹
Sarah S.O., Keefe, 1998, Single sourcing overview: Single Sourcing with frame maker and web work publisher
http://www.scriptorium.com/frameusers_singlesource.pdf
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occur due to that existing alternative suppliers have disappeared from the market because of
the competition. 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. Sole sourcing makes the buying company even more dependent on
the supplier.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. This sourcing strategy indicates that one supplier is responsible for the delivery of
not just one particular item, but a whole group of items with similar characteristics. By using
single group sourcing, the buying company will become more dependent on one supplier than
the case is in single sourcing. On the other hand, the higher volumes supplied by one single
supplier in this case opens up an opportunity for additional economies of scale. 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.

Figure 5: Single Group Sourcing [By Author]

Multiple sourcing

¹
http://rfptemplates.technologyevaluation.com/What-is-Sole-Source.html
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Multiple sourcing means that a company uses several suppliers for the sourcing of one
specific item. The multiple sourcing is far most commonly practiced when it comes to
sourcing strategies regarding the number of suppliers. 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, usually two suppliers are used parallel per item. It can
also be the case that one of the current suppliers is selected as a primary supplier while the
¹
Telgen. J., et al., “Public purchasing future: Buying from multiple suppliers”
23
others will be considered as secondary suppliers. The primary supplier answers to deliver the
larger part of the supply, whereas the secondary suppliers together answers for the delivery of
the remaining part. By using this sourcing strategy many of the advantages of single sourcing,
like for example economies of scale due to being a large customer is cared for. At the same
time the disadvantages of risk exposure to material shortages is avoided. ¹

Hybrid sourcing
Hybrid sourcing strategy is a combination of single and multiple sourcing. It has been
developed in order to preserve the advantages with the two strategies. In hybrid sourcing
strategy multiple sourcing is usually implemented on item group level and single sourcing on
the individual items within the groups. 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.

Figure 7: Hybrid Sourcing (By Author)

3.2 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, the
unreasonably high focus on spend management, because most of the time supplier never made
the delivery on time and they struggling with different issue. For company it’s really
important to be sure about the consistently get the right products, of the right quality, at the

¹
Source : http://dictionary.babylon.com/Dual-sourcing
24
right time, and at the right price. This is not likely to happen consistently and without
incidence if you do not have good relationships with your suppliers.

So in LCCS how does supplier relationship management help you?

• Increased Productivity / Improved Performance


• Improved Service Levels, Internally & Externally
• Better collaboration with, and management of, 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. In LCC, supply companies are struggling with different issue like
poor infrastructure, quality issue, immature supplier etc. So, for companies it is important to
select the suppliers who meet the requirements. This is the only way to avoid the risk from
supplier side.

In this research I would focus on this issue. To solve this issue, I developed a global supplier
introduction in chapter 4 with the help of some professionals which could be useful for
companies.

3. 2. 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. The nature of this relationship between the two firms has
focus on customer satisfaction. Buyer- Supplier relationship depends on the development of
trust and start understanding each other requirements and interests. The main objective of
supplier relationship management is to achieve reduction in cost, service improvement,
solution development, perfect communication, flexibility and mutual benefits etc.

Before the globalization the relationship of buyer – supplier was not like today. That time
buyer focus on to find a supplier at lowest price possible rather then the lowest total cost and

25
high ability to deliver. 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.¹

Difference between traditional and new supplier relationship management approach:

Traditional Approach New SRM Approach

Many competitive supplier Selected supplier

Contact focus on price Contact focus on Total cost and high


delivery
Simple buyer-seller relationship Complicated, including internal
relationship
Short term contract Long term contract

Evaluation by bid Evaluation by commitment to


partnership

Table 2: Difference between traditional and new supplier relationship management (By Dejbord .S et al., 2007)

But in this globalization age, supplier relationship management is really important for the
entire firms. Now-a-days most of the companies are doing sourcing in low cost countries. So,
the firms have developed a close and intimate relationship with a limited number of suppliers.
Buyer’s also put emphasis on long term contract. As compare to traditional approach, now
buyer and supplier work together to satisfy the end customer demand. Now firms are more
concern to minimize the total cost and high product delivery. In this way a large profit margin
can be gained by both parties.¹

3.2.2 Types of supplier relationships


There are lot of classifications can be found regarding supplier relationships management
within the literature. Following framework explains the different levels of suppliers’
relationships.
Buyer and supplier relationships
This framework explains that buyer-supplier relationships can be explained in two different
ways, one is “the way of working” and the “share of surplus value”. The first way refers to the

¹
Source: http://blog.sourcinginnovation.com/2006/10/29/supplier-relationship-management.aspx
¹
Source :( Article by Richard E. Crandall & William et al., 2009, Purchasing- From Traditional to Contemporary)

http://www.sedsi.org/Proceedings/2009/proc/p080922003.pdf
26
different ways that a buyer can interact with a supplier. The “ways of working” can be divide
into arm’s length and collaborative.

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.
Collaborative: -

In this kind of “way of working” is much more proactive. This kind of “way of working”
shows the high contact and very closes communication between buyer and supplier. In this
way, buyers and suppliers work jointly either to reduce the supplier’s costs or to increase the
functionality of the product.
Share of surplus value:-
Surplus value describes the gap between the cost incurred by the supplier and the utility
function of the buyer.

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 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.
 In this case buyer and supplier share surplus values from customer and
manufacturing surplus.¹

The different levels of relationships


There are three different levels of relationships between a company and its suppliers these are,
partnership suppliers, associated suppliers and conventional suppliers.

Different level of supplier relationship

Partnership Supplier Associated Supplier Conventional Supplier

¹
Source: http://www.scribd.com/doc/6570470/Srm
27
Figure 8: Different level of supplier relationship (By Author)

Conventional suppliers:-
These are the lowest supplier in this level. This relationship is characterized by deliveries
being made against an occasional order.

Associate suppliers: -
These suppliers have a long-term agreement with buyers, which are revised periodically.
Orders and deliveries are made continuously and the flows between the buying company and
the supplier are to a large extent synchronized. The two companies work together in order to
continuously reduce stock and delivery time. The purchasing price is in this level of
relationship just one of several factors that is considered when choosing supplier.

Partnership supplier: -
The highest level of relationship exists with the partnership suppliers. The relationships on
this level are to a large extent characterized by the same conditions as the ones with associate
suppliers. However, the relationships with partnership supplier also involve a common
product development and frequent exchange of information. There is a high degree of
integration and the two companies work together to improve for example production
processes, products and quality.¹

3.2.3 Relationship between sourcing and supplier selection strategy


¹
Source Thesis: [LaFlamme. R, “Change in purchasing and the buyer supplier relationship] [Cox. A et al., “The role of
incentives in buyer-supplier relationships: Industrial cases from a UK study”]
28
All the firms are doing some analysis on procurement spending and supplier performance and
use this analysis result for future sourcing decisions. Supplier selection analysis is one of the
most important and useful analysis for buyers. There is an appropriate sourcing strategy for
all kind of industry, firm that fit the business strategy. In a sourcing strategy all the firms are
looking for the answer of the following questions how to:

 Get the needed material and services.


 Find the potential suppliers that meet the requirement.
 Negotiate and implement contract with selected supplier.
 Improve current supplier relationship.
In general, sourcing strategy can define the product information, the industry, the conditions
and the weakness of related supplier base, so the strategy can be developed to both reduce the
cost and improve the supplier performance.

Business Supply Sourcing


Requirement Market Strategy Supplier Contract
Analysis Analysis Development Selection Implementation

Figure 9: Different step of sourcing strategy process (source: http://www.marketworks-advisory.co.za/content/outsourcing-


advisory)

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. It helps you to see the current and future business need of your organization.
This analysis includes the corporate and business unit strategy, policy statements, business
plans and technology plans.

Supply Market analysis:-


Supply market analysis helps to understand the situation of supply market, about the key
players and the industry trend.

Sourcing strategy development:-

29
It is a standard and formal process to collect the information about the market, the product.
The aim is to understand the idea how purchasing fit in the organization, 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. After that, potential supplier is selected on the base of competitive price, ability to
meet specification and standard, product and service quality etc.

Contract Implementation:-
This contract is between buyer and supplier that both are agree on the standard terms and
conditions.

3.3 Risks Facing Importers


Business with suppliers in foreign countries is not an easy task. It makes importing of goods
and services more complicated. 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. We can say that companies should have
strong contract management department to proceed in case of a problem.

Exchange (currency) risk –


The local currency amount payable on an agreement might be higher than the amount
calculated when entering a contract. 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. This risk makes a lot of impact on the margin of the turnkey projects. This can be
managed through foreign exchange risk management. The companies that are having turnkey
projects, that companies most of the time do hedging (accountancy term to get rid of this
risk).

Risk of non-delivery or non-performance –


Supplier might not perform according to the contract (e.g. deliver the wrong or inferior goods,
or not deliver on time, bad quality). This risk arises when a supplier may not be willing or
able to perform as agreed upon. In this case companies should have very strong contract

30
management team, provision for the secondary source and also to remove this problem from
roots, the best way is to have very good or effective way of supplier selection.

Credit risk –
Credit risk is really a very big risk and especially in the case of turnkey projects, supplier
should have to select carefully so that company should not face credit risk problem. 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, such
as banks, becomes insolvent. 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.

Transfer risk –
A change in government regulations may prevent or restrict the ability to make payments or
exchange foreign currency. This type of risk arises since many countries regulate the transfer
of money and conversion of foreign currency receipts. Unexpected regulatory changes can
occur between entering and settling a contract. Transfer risks cannot be mitigated. 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.

Country risk –
A change in government regulations prevents or restricts the ability to receive goods. A risk
arises because many countries have rule and regulation on the import and export of goods.
Unexpected regulatory changes, such as cancelling of permits or licenses, may occur between
entering and settling a contract. Country risks cannot be mitigated.

Transport risk –
Involves that goods can be stolen or damaged during transport and may occur when the goods
are transferred from the supplier. To mitigate this risk companies should have to have
transport insurance so that in case of problem companies can claim. Especially in the big or
turnkey or fast track projects when companies do cash forecasting, make special provision for
this kind if losses.

Risk of fraud –
The supplier is not doing business in good faith. Risk of fraud arises since there are always
people seeking to take advantage of others. Further, the complexity of international trade can
31
make it difficult to detect fraud before it occurs. This can be mitigated by sourcing by dealing
only with the reliable suppliers and should have very strong supplier selection criteria and
team; 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. Being aware of offers that
seem too good to be true and through discussing reservations with a banker. The role of banks
in facilitating trade transactions mean that they come across many attempted and perpetrated
frauds.¹

3.4 Country Risk Analysis

The purpose of country risk analysis is to consider the probability that undesirable
circumstances due to political, economic or social actions will make a negative or bad impact
on the business of the company. 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. The political
risk could make impact on the main three categories and that three categories are further
divided into sub categories.

Stakeholder exposure-
 Asset destruction
 Asset spoliation
 Assets immobility

Employee exposure-
 Kidnapping
 Gangsterism
 Harassment

Operational exposure-
 Market disruption
 Labor problem
 Racketing
¹
Source Article :VLCEK.J, Risk management for business with low cost country
http://www.ifpmm.org/files/ERPSRiskMgmt.pdf
32
 Supply shortage

Economic –
Exposure of business performance to the extent that the economic business drivers can vary
and in that way jeopardizes profitability. 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,
networks and corrupt practices. The business risks can be interpreted as:
 Business logics
 Corruption
 Networks

Operational –
Directly affects the foundation of a business, either because government regulations and
bureaucracies add costly taxation or constraints to foreign investors or because the
infrastructure is not reliable. Operational risks are divided into two main parts:

Infrastructure
 Power, telecom, transport
 Suppliers

Regulations
 Nationalistic preference
 Taxes

33
 Constraints on local capital, local employment, local content¹

Figure 10: Different type of risk in sourcing (By Author)

4. Research Method
In this research I have mentioned different ways to measure business results in an
organisation. It varies from organisation to organization, which approach they choose also
depends upon their needs. In market, there are lots of tools. With their help you can measure
them also you can configure your own customised with your business. 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.J, Ph.d, 2008, “LCC sourcing under uncertainty of economy”
http://www.ifpmm.org/files/ERPSRiskMgmt.pdf
34
main approaches to measure business results. And rest all will come under these two. The two
approaches are as follows.
 Qualitative
 Quantitative

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, risk, 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.

4.2 Quantitative Approach


The Quantitative Approach allows the user to calculate generally accepted financial business
metrics, such as return on investment (ROI) and net present value (NPV) by capturing
detailed business data on the industrial hygiene impact on cost avoidance, cost savings,
revenue generation, and other strategic aspects of the business. In quantitative analysis you
will get much closer as well more perfect results. In this approach there are lot of ways to
measure business results which are mentioned as follows.¹

4.3 Comparison between Qualitative and Quantitative approach¹

Quantitative Qualitative
Conclusions are based on data, outcome Values and judgments based on data, process
oriented oriented
Standardized measuring devices. Non Standardized measuring devices.
Verification oriented. Discovery oriented
Literature review at beginning of study Literature review at end of study

¹
http://www.aiha.org/votp_NEW/study/report-online-phase3.html
¹
Source: James Neil, “Analysis of professional literature case 6: Qualitative research I”

35
Deductive in nature. Inductive in nature.
Known reliability and validity. Unknown reliability and validity
Assumes a static reality Assumes a dynamic reality
Results based on Numbers or figures Results based on case studies
Accurate and Measurable Results Not sure about Accurate and Measurable
Results
Know clearly in advance what we are It is not a case here
looking for
Various instruments used. Observations and interviews.
Short duration Long duration
Descriptions based on numerical data. Rich narrative description.
Table 3: Difference between Quantitative and Qualitative method by James Neil, “Analysis of professional literature case 6:
Qualitative research I”

4.4 Research approach

In this thesis a quantitative research method has been used. The results of both questions are
based upon survey and discussion with professionals. 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.

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, more than 50 professionals from different sectors and countries have
responded. The outcome of this gathered information or data is survey on sourcing in LCC.
Through this survey, 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.

The result of the survey is based upon the numbers and that numbers has been transformed
into graphical form.
All these different steps to have the answer of research questions show the characteristics of
quantitative research methodology.

36
5. Research Analysis
The two findings are carried out by keeping in mind, the objective of research and the
research questions. 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”. Below you will find
the details of both the analysis.

Keeping in mind various aspects of sourcing in LCC, the research analysis has presented in
two parts:
37
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. This process model is basically divided into 4
processes and 7 sub processes. 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. 1 Introduction of Global Supplier


On the basis of the discussion, 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: - In this process cover the 3 sub process supply of
component, global requirement and approve supplier. In figure supplier introduction
process this part highlight by using green color.
 Process outside PMP’s control: - This process covers the global supply agreement part
and in order to highlight this part I used yellow color in the figure.
 Process under operations control: - This process cover the remaining sub parts which
are supply planning, implementation and on going supply chain management. 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.

38
5.1.1 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. The
process has been used differently with new suppliers and current suppliers.

5.1.2 New supplier:


For the new supplier will have to go through all the steps and through the whole process.

Figure 11: Supplier introduce process (By Author)

5.1.3 Supplier selection process:

39
For current suppliers just validate the first four steps before bringing a current supplier under
PMP control.
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. In this sub process there is an interfacing between different processes controls
viz. Process under PMP’s (Procurement management platform) control, Process under
operations control and process with in business control. The different team like sourcing
team, industrialization team and quality team act different sub phases during this process.

To explain the figure below the sourcing team provides the initial scope of parts from global
commodity list. On the other hand industrialization is responsible for providing the approved
list of parts for suppliers. In the next step the global supplier procurement engineer compares
and consolidates the two lists provided by the sourcing team and industrialization team. Here
two cases occur:

1. 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 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.

2. If GSPE does not approve all the parts: In this case the quality, 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. Then the global data has been reviewed and complied, 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.
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.

40
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. 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. Mainly the sourcing team
and the industrialization teams are acting during the different phases.

To move on, 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, the delivery frequency and the warranty at cost has
been defined. 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. Otherwise if no change required then the
sourcing team defines the tooling status, life cycle, costs and the strategy. In the following
step agree upon the global forecast and also upon the bill of quantity. Industrialization team
finalizes the global packaging format and also agrees upon the global delivery frequency and

41
also upon the location of the delivery. Finally the outcome of this sub process is to come to
know about the global requirements for all the parts.

Figure 13: Global requirement process (By Author)

Step 3: Supplier Selection

As it’s clear from the name, this process is for the supplier selection (Approval) for the
company who can fulfil the demand of components required by company. In the supplier
selection process mainly two process viz. process under operations control and process
outside PMP’s control. The four specialized teams viz. industrialization team, quality team,
sourcing team and procurement team are involved in the supplier selection process at different
sub phases.

To begin this process the supplier is allocated to industrialization, sourcing, procurement and
quality teams. 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. 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. On the other hand if teams turn successful in

42
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
following steps the industrialization, quality and sourcing teams approve the samples sent by
the supplier, 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.

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,
under operations control and not under PMP control are included. In this mainly there is
interaction between the supplier and the sourcing team.

In this sourcing team make sure that the supplier is aware of the PMP process. 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. On the other hand if supplier agrees to the global requirements and then supplier
43
propose the global pricing as per the requirements that also include logistics. 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. 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.

Figure 15: Process of global supply agreement (By Author)

Step 5: Supply Planning

Supply planning is the main part; this part is mainly under the control of PMP. Here in this
mainly sourcing team acts at different sub phases. In this, the BCQ (Box call of quantity),
supply frequency, and logistics and parts costs has been discussed and planned. 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, after agreeing upon that they create
a global supply plan and then the sourcing team stays in touch with the supplier for further
success.

44
Figure 16: Supply planning process (By Author)

Step 6: Implementation

Step 6 is the implementation process. This process is fully under PMP control and also there
is interfacing between the two control processes i.e. process under PMP control and the
process not under PMP control. In this process introduce the supplier to the PMP process and
communicate the global supply plan to the supplier and then agree upon it, in case of changes
in the plan amend that change in the plan and communicate regarding that changes to the
manufacturing units. 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.

45
Figure 17: Implimentation process (By Author)

Step 7: Ongoing supply chain management

The step 7 is to manage the ongoing supply chain process. In this circle firstly forecasts and
delivery data has been sent to the PMP. 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. After this manufacturing units forecast sent to the MU’s and MU’s create next
weeks forecast and receive goods. This is a regular supply chain cycle.

46
Figure 18: Ongoing supply chain process (By Author)

5.2 Survey:

The objective of this survey is to present the positive outcomes and negative impacts of
sourcing in LCC. This survey is based upon questionnaire .Feedback of various professionals
across the world in different industries has been consolidated and then presented in the form
of graphs .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.

The practice of sourcing in low-cost countries has grown significantly over the past few years.
In the current economic climate of spiralling costs and intense competition in almost every
market segment, the question facing procurement executives is not whether to source goods

47
and/or services from low-cost countries, but what to source, how much of it, and when to
start.

5.2.1 Overview of Survey

Questionnaire has been sent to over 70 people working in different sector across the world.
Out of these 55 people has responded to the survey. The persons who responded to the survey
are supply chain managers, commodity buyer, sourcing director, senior buyers, sourcing
manager etc. A number of questions have been asked to these professionals’ people to
develop the key drivers for sourcing in low cost countries. In spite of this, the strategic
reasons to mitigate the risk have been also discussed.

The survey is not limited to only the above mentioned things, it also put light on the obstacles
that the companies are facing while sourcing in low cost countries. To have the better
regarding this, 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.

5.2.2 Synthesis of survey

1 Which industry sector respondents belong to?

Questionnaire has been sent to different people in different sectors viz. chemical, information
technology, electronic, energy, automotive etc. Majority of the people (45%) has responded
from electronic sector and followed by automotive sector, nearly 21% people have responded
from this industry. The third major respondents are from energy sector. The people belongs to
information technology, 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, automotive and electronic sector.

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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.
Here its explained with the percentage. The questionnaire has been sent to the people working
across Europe, Canada etc. The 31% of the people responded from France and that’s a huge
response received from people working in France. The professionals from United Kingdom
have also responded very well and their response percentage is 22%. On the other hand nearly
20% of the German professionals also responded. The response from other professionals
based in Belgium and Canada has also given a response, approximately 13-15% people
responded from these countries.

Figure 20: Location of respondents (By Author)

3 When did respondents start sourcing in LCC?

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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
respondents doing sourcing operations in low cost countries for 3-5 years and 1-3 years are
21% and 27%. On the other hand, 9% of the respondents haven’t moved their sourcing
operation to the low cost countries.

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. 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. On the hand 43% of the people think it’s a way to enter into a new market. The
percentage of people, who think that its shorter distance to reach the final customer market is
only 16%.

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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.
Various respondents have marked their choices as per their product range and the type of
products required for their business. The maximum number of who target China as a Low cost
sourcing country. 71% of people voted China as a good place for sourcing and India is
marked as a second most favorable country for sourcing. The percentage of people opted
India is 49%. According to this survey 47% people believes that other Asian countries like
Taiwan, Indonesia and Malaysia etc. are the third best destination for sourcing. Only 37% of
people consider Eastern European countries for sourcing.

Figure 23: Different low cost countries (By Author)

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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. 49% of the respondents mentioned that they are resourcing
raw material from LCC. 44% of the respondents are relying on LCC for the consumption of
the electronic component. 16% of people mentioned that they are sourcing IT services and
industrial equipments from LCC. Automotive component, Chemical, Commercial services
and other services are sourced respectively 13%, 11% & 6% and 21% from LCC as per the
respondents reply.

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. As per the survey, 33% of the people mentioned that they are
resourcing less than 15% of the products form LCC. 30% respondents replied that their
organized resourced in between 15-30% product/services from LCC. 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. 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.

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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. 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)

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9 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)

10 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.

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Figure 28: Obstacles during sourcing in LCC (By Author)

11 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)

12 Risk Mitigation Strategy

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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)

13 Supplier Performance

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.

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Figure 31: Measure of supplier performance level (By Author)

As we all know, low cost countries sourcing provide us upto 40% of savings. Here are some
more examples of low cost countries sourcing:

Valeo is one of the well known European companies in automotive industry. Their purchasing
strategy is called “Plan – 30”. 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. Their low cost countries purchase represents 22% of total purchases in
2004, versus 13% in 2003. In 2009, percentage was more than 50 and their target is to reach
around 70% by end of year 2010. They have their APO (Asian purchasing office) in Beijing,
China and IPO (Indian purchasing office) is in Chennai, India. These offices help French
purchasing business units of Valeo to buy in Asia.
These days term globalization (especially in purchasing) directly corresponds to low cost
countries sourcing. Hereunder you can see a chart showing the part of globalization in 2008
and forecast for 2010 for automotive and industrial manufacture.

5.3 Discussion
Main reasons for companies to go for LCCS are to have low raw material costs, low labor
costs and entering in new market. AS in my survey, 49% of the people say Low material cost
is their primary reasons to move to LCCS. Followed by Low labor costs (48%) and 43% of
the respondents opted entering in a new market as one of their reasons for LCCS.

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China and India represents more than 50% of all LCCS. According to my survey, 71% of
people voted China as a good place for sourcing and India is marked as a second most
favourable country for sourcing. The percentage of people opted India is 49%.

In my survey, almost half of the respondents click on raw material as a resourced good from
LCC (49%). 2nd most likely goods were the electronic components (44%) followed by
industrial and automotive components (16%).

As I have mentioned earlier, low cost country sourcing help companies to optimize their costs
and maximize their margin by reducing up to 40% of their purchasing costs.
Purchased raw material represent in between 60-80 percentage of the total turnover of most
companies, it means final saving on finished goods is around 25 – 30%.

It’s not that easier to just jump in LCC and start the sourcing process. There are many things
to consider before moving over there, like; transportation costs, inventory costs, product
quality, supplier reliability, supplier adaptability, supplier’s responsiveness, cultural
difference, time zones, language and political instability.

Despite of these constraints, benefits are still enough to consider LCC for sourcing. Since, this
ongoing crisis is getting longer and longer, 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.

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6. CONCLUSIONS
In this thesis I explained the importance of Low Cost Countries in term of business point of
view. In this cut throat competition all the different firms are focusing on to make saving on
total cost. For this LCCS is the only hope to achieve this target. But LCCS is not an easy task,
for this, firms need to prepare them self before switch to LCC.
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. With the help of this survey, I get the opinion of different professionals.
What they think about LCC? On the other hand this survey helps us to see the advantages and
disadvantages of LCCS. In chapter 4 I had sum up all different question of survey in the part
of discussion.
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. In this thesis I focused on this issue too. I developed a “Global
Supplier Introduction Process” model with the help of some professional. It could be useful
for supplier selection while doing LCCS. This model has seven different steps. The first step
is “supply of component” the main purpose of this step is to agree upon the final scope of
components. 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. 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. 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. The fifth part is “Supply planning” in this, both firms discuss
about supply frequency, and logistics and parts costs has been discussed and planned. Step six
is about “Implementation” this part is about implementation of whole process. In the last the
seventh step is about “Ongoing supply chain management” this is a regular supply chain
process of this complete model.
Even companies have some issues with LCC but these countries have a great resource in the
form of raw material, labor (skilled labor) to offer to business world. Due to ongoing

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economic crises the importance of LCCS has been increased. In these days all the different
firms are thinking to increase the share holder in this (LCC) market. We can say that for
companies LCCS is the only hope to survive in this competitive world.

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7. Bibliography
Baily. P, Farmer. D, Crocker. B, and Jessop. D, (2008), “Procurement Principles &
Management” 10th Ed IBNS 978-0-273-71379-1
Bakker. T, Goede. M and Teusink. “G, Sourcing strategy; a bridge too far?”
Chip W. H, Reinecke. N, Spiller.P, (2007), “Inventing the 21st Century purchasing
organization” by “The Mckinskey Quarterly”
Chopra. S & Meindl. P, (2007), “Supply chain management strategy, planning & operation”,
3rd Ed ISBN 0-13-173042-8
David F. Pyke & M. Eric Johnson, (2002), “Sourcing strategy and supplier relationship,
Alliance vs. eProcurement” Source: Thesis
James Neil, “Analysis of professional literature case 6: Qualitative research I”
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero and James L. Patterson,(2008),
“Purchasing and supply chain management”, 4th Ed ISBN-10: 0-324-38134-4
Telgen. J, Linthorst.M.M, “Public purchasing future: Buying from multiple suppliers” Source
Thesis
Timothy L. C, Chapman.J.J, Dempsey.G.R, Michael.R.R, (1997), “Purchasing: No time for
lone rangers” by “The Mckinskey Quarterly”
Zhang. J.,, (2008). “LCC sourcing under uncertainty of economy”, Ph.D Thesis.

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mitigate-them.aspx
http://blog.sourcinginnovation.com/2006/10/29/supplier-relationship-management.aspx
http://www.businesswire.com/portal/site/home
http://www.businessdictionary.com/definition/global-sourcing.html
http://www.clarity-consulting.com/globalsourcing.htm
http://www.clarku.edu/departments/marsh/news/WP2009-05.pdf
http://www.cyfuture.com/advantages-of-outsourcing.htm
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http://en.wikipedia.org/wiki/Low-cost_country_sourcing
Low_cost_country_sourcing_Around_the_world_in_5_not_so_easy_steps.php
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http://www.esnips.com/

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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

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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
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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
b) €0.5m - €5m
c) €5m - €20m
d) €20m - €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
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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

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9. Abbreviations
LCC Low cost country
LCCS Low cost country sourcing
GSPE Global supplier procurement engineer
PMP Procurement management platform
MU Manufacturing unit
BCQ Box call of quantity OR Batch call of quantity
GS Global supplier
ROI Return on investment
NPV Net present value
BPO Business process outsourcing
R&D Research and development
IT Information technology
APO Asian purchasing office
IPO Indian purchasing office

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