BCG: Don't Write Off Low-Cost Country Sourcing: The Downturn Offers Hidden Opportunities

Although many factories in China and elsewhere in Asia are closing, buyers should not overestimate the reduction in supply, since the closings represent a small percentage of total factory capacity, according to a report published today by The Boston Consulting Group (BCG). Furthermore, the slowdown has picked off the weakest players, while the larger, more efficient factories continue to operate.

These insights and others, published in "Sourcing Consumer Products in Asia: Managing Risk--and Turning Crisis to Advantage," suggest that some companies may be missing out on the significant cost advantages that Asia continues to offer. A quick survey of key consumer-goods categories such as apparel indicates that sourcing in Asia can produce an advantage of 30 to 50 percent in the so-called landed price (the price companies pay once the product is delivered to their home country). "With the huge price gaps between low-cost countries and developed markets, there is still a significant cost savings to be found even in the face of increased complexity, uncertainty, and costs," notes David Lee, a coauthor of the report and a partner in BCG's Shanghai office.

Yet effective and efficient sourcing from low-cost countries (LCCs) is by no means a given. The economic crisis and declining demand for many products will lead to the collapse of numerous suppliers, in both high- and low-cost countries. To prevent a disruption in supply, therefore, companies must assess the risks in their supply base as well as their options for alternative sources.

A critical consideration when deciding where to source is the total cost of the product being sourced. Major cost components are the supplier's price in the local currency, which is driven by labor costs, raw material prices, and required operating margins; the conversion of that cost into the buyer's home currency; and total costs in the supply chain, including transportation costs. Jim Hemerling, a coauthor and a senior partner in BCG's San Francisco office, adds that although port congestion in the West might affect the length and variability of supply chains when sourcing from distant countries, ocean freight actually constitutes only a small part of the total cost of goods.

The report details a diagnostic tool developed by BCG that helps managers assess, for each of their product categories, the probability that their current supply base in Asia will collapse and the availability of an alternative and qualified supply base. Managers can then identify high-risk categories early on and implement preemptive strategies to mitigate the risks.

The currency depreciation in many low-cost countries, and the rapid decrease in transportation costs, make LCC sourcing for Western companies an increasingly attractive option for reducing the costs of operations.
To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire gregoire.eric@bcg.com.