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Low Cost Country Sourcing

March 19, 2012 Leave a comment

Imagine a situation where you are buying say 10 kg sugar @ Rs. 50/Kg from the grocer next door. You end up spending Rs. 500 on the same. Now, there’s a new hypermarket in town, about 3 kms away from your home and is selling sugar with same quality if not better at Rs. 45/Kg, for 10 kgs, you incur Rs. 450. You will quickly calculate and quantify: A. Amount of expense on fuel, B. Cost of carrying sugar across a distance of 3 Kms, C. Amount of effort you will incur in the activity. If the sum of these 3 is less than Rs. 50, you will obviously go and buy the sugar from hypermarket. This is the essence of Low Cost Country Sourcing (Hereafter referred as LCC Sourcing).

In the example above, the two crucial facts though were, A. Availability of the ‘Information’ that there’s such a hypermarket in town selling sugar at Low Cost. B. Your calculations and Willingness to save that extra penny. Here comes the role of how aptly the ‘NEW’ source has orchestrated his or her offering and the avenues it has for expanding it horizon. Also, it depends on the ‘Trustworthiness’ of the new source. You may buy the sugar from Hypermarket, but if it’s just another grocer, 3 Kms away, giving huge discounts, you will definitely find it dicey and stick to your old source.

The current global competitive scenario is dominated by improved communication technologies and opening of global economies. These factors have paved the way for introduction of new players in traditionally insulated markets across industries. These new entrants with improved business and operational methodologies are exerting immense pressure on companies across the globe to cope up with the dynamics of modern day operations. New equations on the diplomatic levels, realignment of relations between economies, emergence of developing countries as regional hubs of trade and commerce are increasingly adding new dimensions to .

The LCC Sourcing is prudent concept gathering momentum in the industry circles due to this realignment of economies across the globe. In such a dynamic scenario, the winning formula lies in the hands of the companies who are most flexible and open for changes. The kinetics of adopting new entrants in the company’s ecosystem assumes topmost priority. One very important species in any organization’s ecosystem is its suppliers. LCC Sourcing is a smart way of sourcing items not only at the lowest cost but also (at times) at better quality. The manufacturing, resource, technological and other benefits give some countries unassailable lead over the others in terms of producing items better… faster and cheaper than other countries.

Author: P. Mane, ODScommerce

Originally Posted on Rishabh Software Pvt. Ltd

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Categories: Uncategorized

Strategic Sourcing

March 14, 2012 Leave a comment

Strategic Sourcing is the science of evaluating and continuously monitoring purchasing activity of an organization for improving overall efficiency. It alters the way of looking at the process of Sourcing. Sourcing, no longer is seen as an operational process but a Strategic and Impactful function. It analyses the long lasting impact of sourcing from ‘A’ particular vendor on the business operations. The Strategic Sourcing Process Cycle is a five step process of Spend Analysis, Supplier Performance Management, Supplier Identification, Sourcing and Contract Management.

Spend Analysis focuses on increasing the visibility of management on their items. It categorizes items based on annual spend, vendors, use, strategic importance to company, etc. It thus opens up avenues for a detailed version of companies sourcing expenses. The Spend Analysis also reveals relative performance of suppliers on identified parameters.

Post spend analysis, companies initiate Supplier Performance Management. During this stage, individual suppliers are identified and a Supplier Scorecard is prepared for rating suppliers on desired parameters. The improvement areas for Suppliers are communicated to the suppliers and companies go one step ahead in developing certain capabilities in suppliers’ manufacturing processes that otherwise are not available with them. The companies take a holistic approach and consider long term association with supplier as prime goal. However, if the suppliers fail to meet the requisite criteria, the association with the same is reconsidered.

Supplier Identification is the next step in Strategic Sourcing Process cycle that caters to filling lacunae in the suppliers’ ecosystem. LCC (Low-Cost Country) Sourcing is one such activity practiced by modern sourcing organizations. For items that are not of Strategic Importance (or very high value in terms of production continuity) to the company, Supplier identification paves way for ensuring the firm gets the best available resources from market at competitive terms.

Sourcing follow the supplier identification phase. Sourcing essentially means shortlisting the best source to buy the requirements considering all important and relevant parameters. Progressive organizations prefer eSourcing (or electronic Sourcing) to the traditional sourcing methodology. In eSourcing, once the suppliers are brought at technical par with each other, an online reverse auction is conducted between suppliers. The supplier cannot see the details of other suppliers, but can only see the price quoted by them. In a competitive scenario, the costs are driven down, shrinking the supplier margins and ultimately passing on the benefits to buying organization.

Contract Management is the last stage of Strategic Sourcing Process cycle, where the impetus is laid on ensuring that the deliverables of the contract are executed smoothly. It is a crucial phase to for the Strategic Sourcing Process Cycle as market and industry dynamics effect the contract terms.

Strategic Sourcing Process is a cycle and not a one time initiation. It is way of thinking keeping long term objectives in focus. It is about time that in a fiercely competitive market where companies are gunning for consumer space, Strategic Sourcing is implemented as a cost optimization solution.

Author: P. Mane, ODScommerce

Orginally post on Rishabh Software Pvt. Ltd.: The Strategic Sourcing 

Categories: procurement

3 Steps for Annual Cost Reduction

With the current state of economy, it’s more than likely that most organizations would have fallen short of their cost reduction targets for the year. With a steady decrease in industrial outputs, corporations are left with no other alternative but to find methods for cutting costs in business and adhere to the cost reduction targets this year. But, how does one go about doing this?

In a series of 3 articles, we will browse through 3 simple yet effective ways of cutting costs in business while avoiding friction at your workplace.

Our first step toward cutting costs would be Value Analysis. Surely, you’ve heard of it and either implemented it or rubbished it saying it’s only for the ‘Top Notches’. But, is it? After all, it’s not rocket science and is an area to work on for Small Medium Businesses (SMBs) as well.

Step 1 for Cutting Costs in Business : Value Analysis/Value Engineering

The root cause for the ‘Cost’ component can be traced back to the original supplier for the item and the Supply Chain that advances the same  item to you. Quite often the suppliers and the Supply Chain Management personnel (or engine) are themselves not aware of the areas where they can tap a potential cost leakage. A thorough Value Scorecard should be developed to analyze the following aspects and their sub-components depending upon the type of item (or category):

  • Manufacturing costs
  • Quality costs
  • Delivery costs
  • Purchasing costs
  • Overhead costs
  • Engineering and design

It’s more than likely that the Supplier lacks the expertise and ‘intent’ to evolve with this exercise. This is where ‘Collaboration’ comes into picture. A detailed value analysis, based on cost centers for matrices developed in tandem, by you and the supplier will help you understand the cost structure better.

The next step is to quantify the benefit. Once, step ONE is out of the way. Ask the supplier to reduce (say) 5% cost in these areas without compromising on quality.

Caution: Merely, putting up a stipulation will not serve the purpose. It has to be backed by adequate compensations for the suppliers in order to motivate them. It can even be in soft terms like,

  • Payment term lenience
  • Consolidated Orders
  • Scrap Sale at reduced (or free) rate
  • Freight or FOB rate changes
  • Any thing that makes them happy and incentivizes them!

But, how do you go about it? Do you leverage IT for this initiative or go the traditional route of manual calculations?

Purely, up to you! It’s about you believing in the necessity and comprehensiveness of the exercise. Needless to say, an IT Enabled application would be a better and a systematic option, but the other school of thought could be “Let me see if it works and then take a call!” Good for you!

That brings us to the end of our first edition of the series 3 Steps for Cutting Costs in Business. Watch this space for more action…

Author: P. Mane, ODScommerce

Originally posted on Rishabh Software Blog