A&M experts on the practice of best cost country sourcing

24 May 2021 Consultancy.uk 4 min. read

Cost is still the defining factor for the international sourcing strategies of most companies. In light of the changing trade environment and the need for agility and resilience in supply chains, Alvarez & Marsal (A&M) experts Juergen Wetzstein, Kevin Garvey, Thorsten Schaefer and Philippe Rose call for a more holistic approach.

For years, sourcing has been an international affair – be it outsourcing services to cheaper labour markets or finding the best price for raw materials or manufacturing activities. The driver is clear-cut: competitive sourcing can contribute to lower total landed costs and better margins.

Over the years, developments in global markets have injected a fair degree of complexity into this equation. An example is China – a traditionally low-cost, high-capacity sourcing and labour market and a core link in global supply chains. In recent years, labour costs in the country have driven up, while a trade war with the US followed by a global pandemic made single-sourcing from China a risky affair. 

Evolving hourly wages over time across manufacturing hubs in Europe, Asia and North / Central America

Similarly, other traditional low-cost sourcing locations – Mexico for the US and Eastern European markets such as Poland and Romania for Europe – are also presenting their challenges in costs, complexities of doing business and more. For Alvarez & Marsal, businesses looking to stay ‘in control’ need to consider an all-important transition from seeking ‘low-cost countries’ to finding ‘best-cost countries’. 

Best-cost country sourcing

Juergen Wetzstein, a Managing Director at A&M in Germany, explained the difference. “Best-cost country sourcing (BCCS) takes into account all elements of a company’s relationship with a sourcing location, not just labour costs.”

“BCCS allows companies to take into account the total costs of ownership, involving tangible expenditures (labour, transport, tax etc.) as well as more qualitative outcomes like cultural synergies, production and engineering capabilities, and ease of supplier management.” This could range from finding a similar tax regime, or a logistical fit with a specific product.

“A company’s approach to sourcing semiconductors – a highly concentrated market that requires very sophisticated industrial infrastructure – must be very different from the sourcing strategy for commodified goods like machined parts, textiles or mass-produced food products,” explained UK-based A&M Managing Director Kevin Garvey.

Key drivers of BCCS decision-making

Benefits from a more holistic sourcing strategy resonate through a business. Cost-saving remains a reality, complemented by lower risk, higher agility and a consequent boost to resilience – worth its weight in gold in light of the heavy disruptionrecently

That said, shifting to BCCS can be a complex, costly and capital-intensive affair, but pays off in terms of sustainable savings, supply chain flexibility and ultimately improving the companies’ competitiveness in challenging markets, if done right – as explained by Thorsten Schaefer, co-leader of A&M’s global Best Cost Country Sourcing service offering, and Philippe Rose, A&M Senior Directors based in Germany and France respectively.

“Often, executives fail to anticipate the complexity of delivering BCCS optimisation programmes, which demand a nuanced understanding of the various global and local characteristics and derived strategies that affect sourcing as well as requiring advanced operational capabilities. In addition, inertia and resistance to change can present difficulties for management teams seeking to redesign operating models or deliver transformations.” 

Businesses need to ensure that best-cost country sourcing is done right – something A&M has supported a myriad of clients across the globe with in recent years with transformative effects. “In a volatile economic climate, the advantages of adopting a careful approach to risk mitigation with and sourcing strategies are clear,” concluded the experts.