Strategic Sourcing from Low Cost Countries

Abstract: Authors: Henrik Eriksson and Jockum Lerenius Problem: Due to an increasingly competitive environment, a greater pressure from capital markets for shareholder value and reduced earnings growth, companies try to increase efficiency of internal processes and cutting costs, which puts purchasing on the agenda. Organisations need to balance price, quality, lead-time, delivery precision and product development when selecting suppliers and implementing cost saving strategies. Many major manufacturing companies have worked out distinct objectives regarding the share of total procurement spend that shall be sourced from low cost countries in the future. According to West-European mid-range automotive manufacturers, suppliers in East & Central Europe, China, India, and other Asian countries are likely to gain more business. The issue is, if companies have the intention to increase their share of purchases from low cost countries, how come it is not executed to a larger extent? It has turned out to be a demanding task to realize these objectives, since companies encounter problems during the process. Therefore it is a matter to examine these issues in order to realise why the objectives are so hard to achieve in practice. Purpose: The purpose of the thesis is based on the hypothesis: “many major Swedish manufacturing companies have the ambition to increase the share of purchased items from low cost countries”. To be able to provide recommendations for companies on how to reach these objectives, the following research questions were defined; 1) What type of resources, capabilities and knowledge is needed within the procurement organisation? 2) What are the main challenges, key issues and success factors? 3) What are the procedures and how time-consuming is the sourcing process? 4) Which regions and what type of product categories are manufacturing companies sourcing from low cost countries and why? Method: To examine the research questions a survey was designed and directed towards procurement managers working within the manufacturing industry in Sweden. As the number of industries and respondents are limited, the outcome should not be considered as a representative sample of the total manufacturing industry in Sweden. However, it should provide an indication of how companies within the industries involved, pursue sourcing from low cost countries. The foundation needed for formulating the questionnaire, was gathered through nondirective interviews with consultants and different sources of literature covering the topic. The survey was documented in a standard Word-document and then programmed in the web survey application ConfirmIT, before it was launched on the Internet. Potential respondents were initially contacted via telephone and invited to participate in the survey. 92 procurement professionals agreed and received an e-mail containing an invitation along with an individual link to the survey. A group of Top Performers was identified through an initial analysis of the respondents’ procurement performance. The primary objective was to discover respondents for an in-depth interview to clarify certain issues and test hypothesis developed from the gathered material. Further, by comparing the sourcing practices between Top Performers and other companies from the survey, successful practices could be recognized. Five focused individual interviews were conducted via telephone. To minimise misunderstandings, the respondents were sent supporting documents containing charts and the questionnaire in advance. The interviews were also recorded so that quotes could be reproduced correctly. Conclusions: Through our investigation we have identified success factors and critical activities, which can be applied to improve existing best practise methodologies when sourcing from Low Cost Countries. Further, we have concluded that sourcing from low cost countries is a strategy of increasing importance