Integrate LCCS into your strategy

Low-cost country sourcing has been proving highly successful for many companies. But you must make sure the policy is embedded in your organisation, says Pierre Attendu.

We hovered 5,000 metres over Ostrada, Poland, in a WWII helicopter. The thermometer showed minus 23 degrees centigrade. As we started our descent through the fog, treetops appeared left and right a few hundred metres away. We landed in the middle of the town square very early in the morning to the delight of the local children who were amazed at the sight of a helicopter in the heart of their remote town.

Armed with briefcases, three businessmen in suits set off on their first adventure in sourcing from a low-cost country.

Low-Cost Country Sourcing (LCCS) might not always be so dramatic, but it is a source of many interesting stories and offers a true sense of adventure derived from the cultural diversity such initiatives bring to a company.

LCCS is today a major cost reduction lever that can’t be overlooked, but it brings many challenges to the companies that venture into it. The crucial point to remember is that LCCS must be incorporated into your company as a whole. Unless it is woven into the fabric of your organisation, there is a good chance it will fail. Your teams will need to work differently. There will be upfront investments to justify and, some days, you will want to drop the whole thing. But in the end when LCCS has proved successful, you will ask “why didn’t we do it sooner?”

At Bombardier Transportation, the world leader in the field of rail transportation, with a workforce of 31,500 operating out of 45 manufacturing facilities in more than 21 countries and through ten divisions, LCCS is one of four major cost reduction levers.

With US $7. 6 billion in sales, procured services and goods are close to US $4 billion. Each time we bring in LCCS we achieve savings of 30-50 per cent – music to the ears of procurement professionals.

Organising LCCS for your company is something that should be looked at carefully on a case-by-case basis.

First you should talk to people who have done it before you. Experience tells us that most companies are happy to engage with non-competing organisations about their successes in LCCS – it’s nice to share good news. For example, we talked the subject over with at least ten major corporations that had been operating in China for ten years or longer. They each had different organisational set-ups, but there were also some common threads.

There are several basic points anyone would be wise to bear in mind before embarking on any substantial LCCS activities. Inadequate preparation could well slow you down to the point of stalling and eventually kill the initiative.

Before you do any buying, you’ll need to do a lot of selling.

First, before you do any buying you will need to do a lot of selling. At Bombardier Transportation the first guy we put in charge of our global sourcing team (Mike X) was a sales person who had come over from our services division.

Leading up to the launch of the LCCS programme, Mike spent six months visiting each division, talking the plans over with senior management, telling them how difficult it would be, how much it was going to cost, outlining where others had failed and, of course, highlighting the benefits. This scene-setting was paramount.

You need to perform an in-depth review of your business plans.

You should undertake an in-depth review of your company’s business plans. In our case, we looked at the business plans within each division. What were the geographies in which they were planning to do business in the next three to five years? What were the localisation requirements? Which products would they sell? Did these target areas represent growth opportunities, low-cost manufacturing/sourcing countries or new marketplaces where we needed to gain a presence in order to remain globally competitive?

The key issue here is understanding where you are now and where you want to be in three to five year’s time.

Perform your strategic sourcing activities on the commodities

Strategic sourcing is a fashionable activity in any modern procurement organisation. It can be more or less sophisticated depending on the maturity of your organisation, but fundamentally it should provide the answers to a few simple questions: what do you buy (broken down into commodity segments), who buys it (in which divisions), and who do you buy it from?

This mapping is a prerequisite to strategic sourcing. For each commodity you must understand the cost drivers, as they will vary from supply base to commodities market pricing through technical levers, labour cost elements and so on.

From the analysis of our 46-category segmentation, we discovered that all of them included an element of labour-intensive content that could be cost-improved with LCCS. We drew up a plan, commodity by commodity, quarter by quarter, target geography by target geography. We knew before starting where we wanted to go, with which commodity and in what timeframe.

Remember, you must be aware of the socio-economical context of the target geographies and factor these into your plans.

Leading the organisational issues.

You are now ready to look at the organisational aspects of LCCS. In order to succeed, you will discover that it is all about cross-functional effort for the entire organisation. You will need to involve many stakeholders including engineering, quality finance, manufacturing, HR, IT and others.

You should put a very senior executive with credibility in charge of this critical operational phase. I once asked one of my seasoned operational procurement guys if he wanted to go to China for a few years to head up a team. At first he was a bit shocked at being chosen, but eventually took up the challenge. The fact was he was very credible in this role from an operations point of view. In Eastern Europe we selected a former site general manager for this key role. He had managed a plant with 800 people and knew what it meant to produce things. He was also very credible. Both guys went out and started attracting the best engineering, quality, procurement professionals to help them succeed.

Most organisations are afraid of LCCS and, indeed, the idea of failing in a highly visible initiative is not a popular career move. Good leadership will encourage the right talent to come forward. The best people are those who come from the ground floor and build their operational credentials.

Two distinct organisational design issues must be tackled at the same time, one with the foreign country and the other with the home base organisation.

The foreign organisation we called the IPO (International Procurement Office) was a start-up. We needed to balance the right mix of skill sets in the various disciplines (quality assurance, engineering, operations, logistics and procurement) and the cost of populating it with enough expatriates.

Two important issues must be borne in mind, one is that an expatriate costs about two to three times the home base pay package and that they will sooner or later return home, especially as family issues arise. Building a sense of belonging to the company is also a major challenge. Strong induction programmes and team building are important to work on. The future leader of this organisation and key local people need to be brought on board very early in the hiring process. These people are most likely to remain behind, and salary is not enough to retain them. This is a delicate balancing act and you need to be prepared for a high turnover as these are very volatile markets.

The home country organisation will also need to be adjusted to this new reality. Technical specifications will need to be rewritten, logistics aspects looked at with different eyes and, foremost, peoples’ mindsets changed completely to encourage them to buy at a distance of 5,000km rather than a cosy 30km from the plant.

Cross-cultural training is required and some language barriers must be overcome. Strong senior management must be reenforced by issuing targets to be met. Stumbling on this issue at the beginning, we then forced each plant procurement organisation to nominate an LCCS coordinator who reported to the head of procurement. This allowed us to accelerate the process of identifying files, preparing the enquiry packages and co-ordinating the IPO’s progress and issue resolution.

When dealing with home base multidivisional set-ups, I would suggest an additional central co-ordination is needed to manage day-to-day follow-ups with the IPOs, to centralise progress reporting and to assist the divisions in selecting the right file to buy in the right IPO.

Today, we have three IPOs operating in China, Poland and Czech Republic, with two new ones due to open in Romania and India.

These organisations will report to me until they are stabilised and fully operational. Indirect Low Cost Country Sourcing – meaning having our tier-one suppliers buy in these countries – is an additional cost reduction lever. You also need to have resources available to support your supplier’s transition into such ventures. We have created a dedicated team to help coach our suppliers to go low cost.

The long-term plan at Bombardier Transport is for this indirect LCCS activity to grow as big as our direct buying. There is one aspect of embedding LCCS into an organisation that can kill any initiative if not properly handled – follow-up.

You will have understood the change management issues arising from the above if senior management is not involved day-in day-out in following-up. We had established a plan by commodities, by division and by IPO geography and so regular follow-ups were crucial. This meant weekly conference calls to start with, moving to monthly meetings. If you are not on top of the performance issues, the home base organisation will prove you wrong. If you are not tackling foreign supplier issues they will walk away. If you don’t cater for the IPO people you will not build a sustainable organisation.

To make this a success, procurement leaders need to lead the organisation and stay ahead of the game. You have made a lot of noise about this in your organisation – you don’t want to fail. However, there are unfortunately no short-cuts in gearing up your LCCS activities. It is painful and it is a drain on the organisation.

If you are to go down this road be very ambitious. Start small but think big. We have set ourselves a target of going LCCS for 30 per cent of our procured goods and services. At the end of the day, LCCS improves the bottom line, and helps you compete in a global market.

Pierre Attendu is executive vice-president, group procurement, at Bombardier Transportation (www.bombardier.com)