Low-cost country sourcing
   HOME

TheInfoList



OR:

Low-cost country sourcing (LCCS) is
procurement Procurement is the method of discovering and agreeing to terms and purchasing goods, Service (economics), services, or other works from an external source, often with the use of a tendering or competitive bidding process. When a government agenc ...
strategy in which a company sources materials from countries with lower
labour Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the labour ...
and production costs in order to cut
operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provid ...
s. LCCS falls under a broad category of procurement efforts called
global sourcing Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include ...
. The process of low-cost sourcing consists of two parties. The customer and the supplier countries like US, UK, Canada, Japan, Australia, and West European nations are considered as high-cost countries (HCC) whereas resource rich and regulated wage labor locations like
China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
,
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
,
Indonesia Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania between the Indian and Pacific oceans. It consists of over 17,000 islands, including Sumatra, Java, Sulawesi, and parts of Borneo and New Guine ...
,
Bolivia , image_flag = Bandera de Bolivia (Estado).svg , flag_alt = Horizontal tricolor (red, yellow, and green from top to bottom) with the coat of arms of Bolivia in the center , flag_alt2 = 7 × 7 square p ...
,
Brazil Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
,
Russia Russia (, , ), or the Russian Federation, is a List of transcontinental countries, transcontinental country spanning Eastern Europe and North Asia, Northern Asia. It is the List of countries and dependencies by area, largest country in the ...
,
Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
, and
East Europe Eastern Europe is a subregion of the European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russia, whic ...
an nations are considered low-cost countries (LCC). In low-cost-country sourcing the material (
product Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Produ ...
s) flows from LCC to HCC while the
technology Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
flows from HCC to LCC. The primary principle behind LCCS is to obtain sourcing efficiencies through identifying and exploiting cost
arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between the ...
between geographies. Aside from price other reasons for engaging in global sourcing can include improved manufacturing capacity/ time frames, quality of goods, improved customer services and logistics benefits.


Destination

Not necessarily all "low cost countries" are destinations for LCCS. Only those countries with relatively stable political and economic
environment Environment most often refers to: __NOTOC__ * Natural environment, all living and non-living things occurring naturally * Biophysical environment, the physical and biological factors along with their chemical interactions that affect an organism or ...
, modern infrastructure and acceptably compatible legal system are considered to be ideal for sourcing. Examples and most popular regions are China,
Indonesia Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania between the Indian and Pacific oceans. It consists of over 17,000 islands, including Sumatra, Java, Sulawesi, and parts of Borneo and New Guine ...
,
Thailand Thailand ( ), historically known as Siam () and officially the Kingdom of Thailand, is a country in Southeast Asia, located at the centre of the Indochinese Peninsula, spanning , with a population of almost 70 million. The country is bo ...
,
Vietnam Vietnam or Viet Nam ( vi, Việt Nam, ), officially the Socialist Republic of Vietnam,., group="n" is a country in Southeast Asia, at the eastern edge of mainland Southeast Asia, with an area of and population of 96 million, making i ...
,
Malaysia Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
,
Ethiopia Ethiopia, , om, Itiyoophiyaa, so, Itoobiya, ti, ኢትዮጵያ, Ítiyop'iya, aa, Itiyoppiya officially the Federal Democratic Republic of Ethiopia, is a landlocked country in the Horn of Africa. It shares borders with Eritrea to the ...
,
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
,
Ukraine Ukraine ( uk, Україна, Ukraïna, ) is a country in Eastern Europe. It is the second-largest European country after Russia, which it borders to the east and northeast. Ukraine covers approximately . Prior to the ongoing Russian inv ...
,
Romania Romania ( ; ro, România ) is a country located at the crossroads of Central Europe, Central, Eastern Europe, Eastern, and Southeast Europe, Southeastern Europe. It borders Bulgaria to the south, Ukraine to the north, Hungary to the west, S ...
,
Bulgaria Bulgaria (; bg, България, Bǎlgariya), officially the Republic of Bulgaria,, ) is a country in Southeast Europe. It is situated on the eastern flank of the Balkans, and is bordered by Romania to the north, Serbia and North Macedon ...
,
Albania Albania ( ; sq, Shqipëri or ), or , also or . officially the Republic of Albania ( sq, Republika e Shqipërisë), is a country in Southeastern Europe. It is located on the Adriatic and Ionian Seas within the Mediterranean Sea and shares ...
,
Mexico Mexico (Spanish: México), officially the United Mexican States, is a country in the southern portion of North America. It is bordered to the north by the United States; to the south and west by the Pacific Ocean; to the southeast by Guatema ...
,
Bolivia , image_flag = Bandera de Bolivia (Estado).svg , flag_alt = Horizontal tricolor (red, yellow, and green from top to bottom) with the coat of arms of Bolivia in the center , flag_alt2 = 7 × 7 square p ...
,
Cambodia Cambodia (; also Kampuchea ; km, កម្ពុជា, UNGEGN: ), officially the Kingdom of Cambodia, is a country located in the southern portion of the Indochinese Peninsula in Southeast Asia, spanning an area of , bordered by Thailand t ...
,
Hungary Hungary ( hu, Magyarország ) is a landlocked country in Central Europe. Spanning of the Carpathian Basin, it is bordered by Slovakia to the north, Ukraine to the northeast, Romania to the east and southeast, Serbia to the south, Croatia a ...
and
Czech Republic The Czech Republic, or simply Czechia, is a landlocked country in Central Europe. Historically known as Bohemia, it is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to the southeast. The ...
.


Labour costs

Labour costs have been rising across Asia as Asians now are more willing to pay a premium for the products and services they receive and thus causing production cost to increase. Many countries in Asia have seen a rapid rise in wages since the late 2000s. One factor contributing to the wage rises is due to the shift of labour from agricultural work into more productive jobs in industry, labour
productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
has increased quickly thus leading to
wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...
growth. Workers will demand for better wages as
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, borde ...
's
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
and
living costs Cost of living is the cost of maintaining a certain standard of living. Changes in the cost of living over time can be operationalized in a cost-of-living index. Cost of living calculations are also used to compare the cost of maintaining a c ...
are gradually increasing. Businesses will thus face pressure on their
profit margin Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Prof ...
s as rising
labour costs A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as '' minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remune ...
leads to higher
production costs Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
. Labour costs in China and India have been increasing over the years. China was initially one of the lowest labour cost countries known. However, due to the rising demands of people and the increase in the cost of goods, China is no longer regarded as the ‘cheapest’ country to manufacture goods anymore. China is now deemed as less competitive compared to other countries. The increased labour costs have resulted in some foreign firms exiting the country, in search of countries where labour cost is cheaper, like
Thailand Thailand ( ), historically known as Siam () and officially the Kingdom of Thailand, is a country in Southeast Asia, located at the centre of the Indochinese Peninsula, spanning , with a population of almost 70 million. The country is bo ...
and
Philippines The Philippines (; fil, Pilipinas, links=no), officially the Republic of the Philippines ( fil, Republika ng Pilipinas, links=no), * bik, Republika kan Filipinas * ceb, Republika sa Pilipinas * cbk, República de Filipinas * hil, Republ ...
. Other countries apart from China are beginning to provide
raw materials A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...
at a lower cost, leaving manufacturers with more choices as regards their suppliers. A 2012
Ernst & Young Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewaterh ...
report says that "Wages have been pushed up by long-term decline in the aggregate
labor force The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic regio ...
, combined with a rapid depletion in
rural In general, a rural area or a countryside is a geographic area that is located outside towns and cities. Typical rural areas have a low population density and small settlements. Agricultural areas and areas with forestry typically are describ ...
surplus labor, which has until recently provided an ultimate source of cheap labor,". But it warned that the massive reallocation of labor "from low productivity agriculture to higher productivity manufacturing is coming to an end".http://www.ey.com/Publication/vwLUAssets/China_productivity_imperative_en/$FILE/China-Productivity-Imperative_en.pdf Even before the Chinese economy started to turn down, there were concerns that it was facing a
middle income trap The middle income trap is an economic development situation in which a country that attains a certain income (due to given advantages) gets stuck at that level. The term was introduced by the World Bank in 2006 and is defined by them as the 'middl ...
, widely identified by economists as showing the danger of a
Lewis Turning Point The Lewis turning point is a situation in economic development where surplus rural labor is fully absorbed into the manufacturing sector. This typically causes agricultural and unskilled industrial real wages to rise. The term is named after eco ...
, a phenomenon observed in history of Japan, which showed that rapid
urbanization Urbanization (or urbanisation) refers to the population shift from rural to urban areas, the corresponding decrease in the proportion of people living in rural areas, and the ways in which societies adapt to this change. It is predominantly t ...
led to a growth in manufacturing. However, eventually, the phenomenon comes to an end as wages rise and the country's competitive edge disappears. The number of
migrant worker A migrant worker is a person who Human migration, migrates within a home country or outside it to pursue work. Migrant workers usually do not have the intention to stay permanently in the country or region in which they work. Migrant worker ...
s in China has been increasing at a slower pace since 2005. Although there are 320 million laborers still in
agriculture Agriculture or farming is the practice of cultivating plants and livestock. Agriculture was the key development in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people to ...
, only 20 million have the potential to migrate to cities, pushing the country to a point at which "the excess labor in the
subsistence A subsistence economy is an economy directed to basic subsistence (the provision of food, clothing, shelter) rather than to the market. Henceforth, "subsistence" is understood as supporting oneself at a minimum level. Often, the subsistence econo ...
sector is fully absorbed into the modern sector, and where further
capital accumulation Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form o ...
begins to increase wages" - pointing to a Lewis scenario.


Situation in China

Labor shortage In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply ( surplus). Definitions In a perfect market (one that matches a si ...
is not yet a major problem in China, as there are still governmental measures to free up the pool of rural labor, such as the further easing of the
hukou ''Hukou'' () is a system of household registration used in mainland China. The system itself is more properly called "''huji''" (), and has origins in ancient China; ''hukou'' is the registration of an individual in the system (''kou'' li ...
, or household registration, system. “However, these are unlikely to reverse the trend of increasing labor costs". They will continue to rise as minimum wages and
social welfare Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
improve, adding that on top of the 13 percent annual increase in the minimum wage as set in the 12th Five-Year Plan (2011–15), mandatory social welfare will add another 35 to 40 percent to the payroll cost. Because there is a large supply of workers, especially in rural sector, wage growth for unskilled labor will grow slowly. At the same time, “wage growth for skilled labor will also likely taper off because of the convergence of college wage premiums to international standards in recent years and the anticipated robust supply of university graduates and professionals returning from overseas”. Therefore, overall wage will slowly grow in the near future. "Rising wages are most significant to primary producers and services industries, as labor takes the major share of total costs in these sectors,". Apart from labor, capital - still relatively cheap in China - will also become more expensive as policymakers move the country toward interest rate liberalization. Material costs, too, will continue to rise and will reach global levels. As the economy slows down, it becomes harder and harder for companies to pass on the costs to customers. China's rising labor costs will help other South Asian countries gain a foothold in low-end manufacturing.


References


External links

*


See also

*
Global sourcing Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include ...
*
International trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significant ...
*
Offshore company The term "offshore company" or “offshore corporation” is used in at least two distinct and different ways. An offshore company may be a reference to: * a company, group or sometimes a division thereof, which engages in offshoring business pro ...
*
Offshore outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
*
Offshore software R&D In software engineering, offshore custom software development consists in offshoring the software development process in a country where production costs are lower, thus decreasing budget spending. Background Early days Since the 1960s and t ...
*
Offshoring Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gover ...
*
Resource curse The resource curse, also known as the paradox of plenty or the poverty paradox, is the phenomenon of countries with an abundance of natural resources (such as fossil fuels and certain minerals) having less economic growth, less democracy, or worse ...
{{DEFAULTSORT:Low-Cost Country Sourcing Procurement International trade Global business organization