Excessive inventory and stock-outs, poor visibility, a lack of trust, unreliable supply, price hikes, discrepancies between samples and final products, and broken supply chains are some typical symptoms associated with low cost supply chains.
Companies who have successful low cost supply chains are doing following things
1. Assess it: LCCS is not for everyone, they will assess the LCCS opportunities carefully, establish appropriate strategy, plan every step, review and fine tune it constantly. Few things need extra attentions here:
a. Select the right product/category, do not rush things over.
b. Make sure which tier of supplier is right for you. Companies tend to fall in two scenarios:
i: easy option: well know tier 1 suppliers who work with everybody(include many of your competitors) in which case you will have limited leverage over them. Your volume is less than 1%.of their business, imagine your position on their priority list.
ii: cheap option: always choose the cheapest acceptable offers(likely from tier 3 suppliers), where things might go horribly wrong the second when you let them go loose. You represent a significant amount of their business (30%+)
c. Do have a strong supplier evaluation process before the engagement, never just rely on good samples and attractive prices.
2. Align it: By definition your supplier is not fully aligned to your supply chain. Fixing a problem after it occurs is exponentially more costly. Experienced organisations will handhold suppliers during the initial order cycle. Things to bear in mind are:
a. Feed your supplier based on your judgement of their capacity and capability since they will never say “No”. Carefully consider 3Vs (volume, variety and volatility), often variety and volatility will cause problems
b. Develop a SOP(standard operational procedures) with suppliers, give suppliers a clear instructions on what to do under each scenario and how to manage changes.
c: Always give supplier clear and simple instructions, never assume they should do something.
3. Develop It: Personal contacts are key to your low cost supply chain. Successful companies use Guanxi(relationship) wisely and maintain high level interactions with suppliers. They will:
a. Work closely with suppliers on ever steps from product design to delivery
b. Not just rely on phones and emails, visit suppliers frequently and invite suppliers to visit them as well.
c: Always ask supplier the question of: “what can I do to make your lifer easier” and find ways for improvement.
d: Build targets/measurements for both sides to achieve and help each other all the time, no finger-pointing.
4. Correct it: When things went wrong, they will analyze them from both ends, not simply blame supplier for the faults. Provide recovery plans and work with suppliers to:
a: Prioritize the issues, and give suppliers a clear to-do list.
b: Tackle technical problems(send engineers over if necessary).
c: Review the recovery process constantly, and adjust plans and scheduling
d: Establish preventative action plan and check the improvement results
e: Develop a risk mitigation profile, and reduce the exposure to potential issues.
5. Sustain it: Despite the best efforts, new challenges still come up. The best run low cost supply chains are always prepared for various events. They have:
a: Agreed price mechanism with supplier to cope with cost increase issues caused by raw material and local regulatory issues. Supplier can often agree to share part of the increase.
b: Local expertise on tax and regulatory related issues, understand the real cost change implication is the key to avoid being ripped off.
c: Excellent negotiation tactics on price and contractual terms
d: Long term commitment to develop partnerships with suppliers and help suppliers to understand their processes and strategies.
Low cost country sourcing needs continuous improvement, and the above five steps will be constantly repeated and verified. The root causes of many problems encounter by companies with low cost supply chain can be traced to they haven’t done one or some of the steps mentioned above properly
