Big Savings, But Lots of Risk (page 4)
-- Supply Chain Management Review, 12/1/2005
| Page 4 of 4
Brokers and agents in low-cost countries essentially act as purchasers or distributors for clients, taking a percentage of each transaction as a service fee. Aberdeen’s research leads us to conclude that some agents and brokers in low-cost countries may provide high value. However, companies need to conduct careful due diligence before using an agent or a broker as a key component of an LCCS strategy. To some degree, the vested interest of brokers and agents—i.e., getting a “cut” of any transaction—works against the basic value proposition of LCCS: cost reduction. Moreover, using a broker/agent naturally blocks the visibility the buying organization can gain into a supply market and into the forces that affect pricing and other key factors. Brokers typically are very limited in providing assurances to the buying firm of product quality and on-time delivery, and they provide little, if any, supplier management services. An alternative approach is to outsource the IPO to a qualified and experienced partner service provider. This approach can free up working capital, speed supplier development, and capture the cost and performance benefits of LCCS. Third parties can access suppliers’ capabilities, pre-qualify suppliers, help suppliers minimize logistics costs by consolidating shipments, estimate total landed costs, manage, and even help develop suppliers. IPO services are provided by consulting firms, sourcing services firms, third-party logistics providers, or other third parties with LCCS knowledge and experience. Many already have infrastructure and staffing in low-cost regions and an established understanding of local suppliers, language, culture, and business practices. Such “out-of-the-box” resources can dramatically accelerate the time for enterprises to establish and reap benefits from low-cost region suppliers. Using a third-party firm for IPO support can also lower the costs of an LCCS program and help the buying organization realize cost savings more rapidly. Most of these firms share infrastructure and services across multiple customers, allowing them to amortize the costs of building and running an IPO. Using third-party service providers also enables an enterprise to “test the waters” of a particular low-cost country or region as a preliminary step to establishing its own IPO as it shifts more total spend to LCCS. Relying on a third party also greatly simplifies and reduces the cost of exiting the low-cost country when market conditions change. Any LCCS plan should have an “exit strategy” for moving sourcing operations out of that country when it is no longer the low-cost alternative. Support From the Top Kevin R. Fitzgerald (kevin.fitzgerald@aberdeen.com) is Vice President, Supply Management Research at the Aberdeen Group. |
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