Success factors low cost country sourcing

"Do it right or leave it!" In-house resistance can undermine sourcing from low-cost countries. Here is some advice from our expert on how to clear this hurdle. Spirits are low at PrelumTech*. Head of Engineering, Werner Mansbach*, predicted straight away that it will soon be hard to sell the high-tech presses. Important components are now due in from China and, as he tells his colleague from Sales, everyone knows the quality is poor. His colleague agrees: the management's plans to source from low-cost countries are bound to fail. There's trouble ahead. Low-cost-country sourcing initiatives, as they are known, have now become crucial to the survival of many Western companies. Yet, as our project experience shows, where they go wrong it is most likely due to in-house resistance. In addition to commercial considerations, some fundamental ethical and political value judgements also come into play here. Are such initiatives economically responsible? Aren't we digging our own grave by harming home suppliers? Can these "developing countries" possibly produce in our quality? The unfamiliarity and strangeness of countries that are so far away make them appear a daunting prospect. The success of these initiatives comes from having the right management attitude. Management must grasp how decisively their own people in the company can influence the outcome and take seriously their reservations. On the basis of our experience, we have identified eight factors that, in most companies, are central to the success of LCC sourcing initiatives. 1. Rooting initiatives in top management If Purchasing is treated as the sole "owner" of the initiative, there is no higher level that can resolve and settle the conflicts that naturally arise between the functions. By making it a top-management focus, the entire initiative automatically acquires higher priority, receives more support and, consequently, has a stronger roll-out. This point was emphasized again and again by respondents in a survey covering different types of companies with many years' experience in LCC sourcing. 2. Clearly presenting all the consequences from the start A policy of open information counters unfounded fears and enables the well-founded fears to be dealt with rationally. It is very important not to keep quiet about negative consequences. They are, in fact, an opportunity for management to demonstrate that it has thought through the initiative, has planned it carefully and has considered all the possible consequences – even if there are still some drawbacks that can only be minimized. 3. Setting up a cross-functional team In addition to personnel from Purchasing, it is also important to bring in people from Development, Quality, Logistics and Production. Moreover, a team member with experience in the country concerned can immediately deal with any reservations in the team and generate greater trust in the initiative. Staff who are skeptical but amenable to rational arguments should be involved at an early stage. They are important multipliers who should be convinced "on the job". 4. Choosing the right product groups The success of the initiative stands or falls by the choice of product groups to be sourced. By making the right choice, the management shows its people that it knows the true strength of the company's products and is working to consolidate these strengths. The first step should therefore be to go for product groups that have already proved very successful in practice. This includes products with a high share of manufacturing or standard products that are put out in high volumes. It would obviously be a mistake to bring in product groups or whole assemblies that contain core competencies or key technologies. 5. Thinking through all aspects of project planning This is critical for the proverbial first impression. If organizational problems occur straight away, the motivation of the team and, with it, the overall success of the initiative can suffer lasting damage. For the first trip to the country concerned it is therefore worthwhile for management to take over the planning from the team. They should make sure that the travel dates and appointments are properly coordinated, translators are available and the team members have familiarized themselves with the specifics of that country. 6. Ensuring transparent presentation of the whole process The initiative is most likely to be successful if management shows very clearly how individual people and functions must interact and depend on each other. In one case, a company went so far as to organize roadshows with presentations and brochures. It introduced the individuals and the team behind the initiative, clearly set out the objectives, tasks and the project plan, and shared the initial success stories. And the effort paid off by significantly boosting staff motivation. 7. Arguing on the basis of facts Concentrate on the facts. This improves transparency, undermines the influence of irrational and fuzzy opinions and makes decisions more sustainable and conclusive. Scoring models can be used here to make it easier to access and document the tangible and objective facts. A system of weighting the relevant factors is first agreed, then the total scores for the various suppliers are calculated and compared. In this context, the team should definitely voice its subjective assessments. It can then see whether feelings of unease can be explained objectively and whether others share those feelings. 8. Investing capital and time A company needs above all its good and experienced people for the success of an LCC sourcing initiative. Freeing up these staff for their tasks demands money and energy. Top management must also find the time needed. In addition, travel, support in the countries, consultancy, tools and samples, etc. will also weigh heavily on budgets. If you try to save on the wrong things at this stage, the ultimate saving potential of LCC sourcing cannot be achieved. 2 Every organization can successfully carry out an LCC sourcing initiative. But: every company has just one chance to make the initiative work. If it fails, the subject will have to be dropped for a long time. And in the worst case, the whole subject is finished forever. So companies must plan the initiative all the more carefully and avoid the most difficult hurdle, namely internal resistance, from the outset. Companies must also be quite clear that the tasks associated with the initiative are more demanding than classic purchasing and procurement issues. It is not just about finding and evaluating suppliers and conducting negotiations. It also involves project management, change management and internal marketing. At the same time, a company must find the right way of dealing with the specifics of new supplier countries, which for them are usually still alien. In many cases it is not versed in the ways of a country or lacks a general knowledge of the markets. Companies must decide for themselves how they will build up the expertise they need – in-house or through external providers. At any event, they must make a conscious effort to make up for their lack of experience. How, then, can we sum up all these success factors? That's easy: "Do it right or leave it!" Thomas Rinn is a Partner at Roland Berger Strategy Consultants in the Operations Strategy Competence Center. He can be reached at Thomas_Rinn@de.rolandberger.com 3