Low Cost Country Sourcing: An introduction for companies on the verge of starting their LCC sourcing initiatives

Abstract: This thesis was originally written on behalf of ASSA ABLOY AB, a company on the verge of increasing its low-cost country sourcing. The main purpose of this thesis was to investigate which type of products are most suitable to source in low-cost countries and which type of contractual business form that is most suitable for sourcing in low-cost countries. The thesis also examines how the structure of the organization is affected by the company’s low-cost sourcing strategy. Three propositions were made based on previous research findings within this subject. In order to test the three propositions, four international companies; IKEA, Ericsson, Electrolux and Powerwave, have been studied. The results of this thesis are therefore based on several cases and different types of companies with a lot of experience from low-cost country sourcing. In order to obtain more general results I have let the interview objects go outside their specific companies and give their expert view on the area of low-cost country sourcing and comment more general about what and how companies should source in low-cost countries. The results show that products with high labor content are best suited to source in low-cost countries. Heavy and bulky products are not as suitable to source from low-cost countries due to high transportation costs, especially if the geographical distance is far from the sales market. However, the results do not confirm the assumption that companies tend to source more non-critical products in low-cost countries than highly strategic products. The findings in this thesis show that it is possible to source both high- and low-tech products, regardless of their strategic importance, depending on if you can find labor with the right know-how and skills in the low-cost countries. The results also partly support the second proposition that long-term relationships are the most common type of contractual business form in LCCs. However, the findings do not confirm joint ventures/partnership with local companies as other common business forms. Instead the results show that wholly owned entities are a more frequent set up in LCCs. This partly derives from the long learning curve suppliers in low-cost countries have, before they can deliver products according to the needs of the buying companies. Finally, the results confirm the third propositions. We see that the biggest changes on the organization structure takes place within the purchasing organization, when companies start to source from low-cost countries. The low-cost country sourcing activities are often set up with a central decision making organ in the home country, while the operational activities are put locally in the low-cost country. As the company’s low-cost country sourcing increases, the local organizations get more authority.