Low-Cost Country Sourcing – Top Tips for a Profitable Sourcing Strategy
Low-cost country sourcing has been around for quite some time. Here are our top tips on how you make the most of your China sourcing efforts and add value to your business
July 12, 2021
It's the age of competition in the world of business. No matter which industry they operate in, modern-day businesses need to put in a whole lot of effort to stay competitive. One of the most common trends to have emerged among businesses of all sizes in recent years is low-cost country sourcing. In this post, we'll first take you through what this trend is all about. Later, we'll touch on some beneficial tips that you can follow to create a sourcing strategy that is profitable for your business - in both the short and the long terms.
Low-cost country sourcing explained
In recent years, businesses around the world have turned to specific countries, mostly developing ones, to source their products. These businesses don't rely on local manufacturers, especially if local manufacturing costs are high. Instead, they turn to the significantly cheaper labor and manufacturing costs in developing countries. As a result, these businesses can offer their products to their target audiences at a competitive price. In today's times, some of the most popular low-cost countries that businesses source from include China, Indonesia, India, Cambodia, Thailand, Vietnam and Brazil.
But what other benefits does low-cost country sourcing offer to businesses apart from making them competitive? Read on to know them all:
Efficient productionof large product volumes: When labor costs are high, it becomes difficult for small and medium-sized businesses to place orders for large volumes of products. However, when you source products for your business from low-cost countries, you will experience unparalleled efficiency in terms of production. Even large volumes of products can be produced in a short period, which means that you'll always have inventory on-hand. This can come in incredibly handy if demand for your products suddenly skyrockets. In such a situation you can keep your customers happy as you'll be able to deliver products to them without any delays.
Easier diversification of products: If your budget is restricted, your business may suffer if it relies on local manufacturing. You'll be restricted to only one or two types of products, with expansion and diversification becoming incredibly difficult. However, if you switch to sourcing products from low-cost countries, you can diversify your product catalog. For example, you can source a variety of products from a country like China by striking deals with multiple manufacturers at a fraction of what you would have to pay to domestic manufacturers.
Numerous manufacturers and/or suppliers to choose from: The most popular countries when it comes to low-cost sourcing have only experienced economic growth in the modern world in recent decades. As a result, their markets are developing at a rapid pace and the governments of these countries are only too glad to welcome investment from foreign companies. This gives your business the luxury of choosing from numerous manufacturers and/or suppliers. This ensures that you can source products at the most competitive rates, as each manufacturer within a particular industry will try to offer more competitive quotes than its competitors.
More time to devote to other areas of your business: If sourcing products becomes a headache, it can be incredibly difficult to grow your business in other areas. However, when you opt for low-cost country sourcing, your product sourcing worries will dissolve, and you can focus more on other areas of your business that need to be improved. Remember, making your business profitable and sustainable in the long run isn't only about sourcing products - it's much more than that.
Make your business profitable faster: Businesses that rely on local manufacturers, especially in regions of the world where local manufacturing is expensive, are unlikely to see profitability rise rapidly. Many businesses may not become profitable at all, and may struggle to break even. However, low-cost country sourcing is a great way to make your business profitable in a short span of time. The best thing about it is that your profitability will be sustained, and even more so, those profits should increase as your business gains more and more customers.
How to create a profitable sourcing strategy: The top tips
Now that you're aware of the multiple benefits that sourcing products from low-cost countries has to offer, it's time to talk about how you can create and implement a profitable sourcing strategy. The following tips are sure to help you do just that:
Think beyond the cheap labor and production costs: You may choose a country to source products from based solely on their labor and production costs. However, that would be a big mistake. When you source products from a foreign country, several additional costs will fall into the equation as well. Some of the most common additional costs include legal compliance, tax, and tariff costs. You should also consider how customs processes will affect the sourcing costs. Failing to understand these processes may lead to greater expenses in the form of fines levied by governments. We recommend conducting a thorough cost-benefit analysis before you choose a specific country for sourcing your products.
Don't rely solely on virtual meetings with manufacturers in a foreign country: Remember when you opt for low-cost country sourcing that unscrupulous manufacturers may mislead you just to secure a deal. That's why you will always need to exercise caution, even when dealing with the most reputable manufacturers and/or suppliers. The best way to verify whether or not a particular manufacturer is genuine is to visit its manufacturing unit(s) in the foreign country. Sure, this will involve greater expenses, but it will be worth it. If you can't visit yourself, use a reputable sourcing agent. There are also companies that perform inspection duties on behalf of foreign businesses that you can reach out to for this purpose. So, instead of solely relying on virtual conferences and meetings, you should instead visit factories of manufacturers in-person to know more about their capabilities, qualities, and weaknesses.
Ensure that the manufacturers you want to source products from meet legal standards: This point goes hand-in-hand with the previous one. When you strike a deal with a manufacturer based in a foreign country, you will want it to be one for the long haul. For that to become a reality, you need to verify whether or not legal and industry standards are met by the manufacturers. If the appropriate standards aren't met, there are various possibilities that could become real, with none of them being positive. For example, if the manufacturer you source from doesn't meet certain industry standards, you may be delivered products with below-par quality, which will hamper your business's relationship with customers. You may also land up in legal trouble if illegal trade practices are detected by authorities.
Longer contracts are better than shorter contracts: Shorter contracts may seem much more affordable on the surface than longer contracts. However, the truth is that in the long run, longer contracts are much better for your business. Working with manufacturers and/or suppliers based on longer contracts gives your business the chance to understand its supply requirements and make changes to the contracts when necessary. However, this typically is the case when it comes to shorter contracts. If you've signed a short-term contract and run into trouble, among other limitations, there won't be any way for you to make the required changes. In such a scenario, you'll either have to see out the contract or terminate the contract, both of which could cost your business heavily.
In a long-term contract, ensure regular performance assessments: We just mentioned how long-term contracts are better than short-term ones. However, long-term contracts, even the ones signed with reputable and generally reliable manufacturers can turn awry. Remember, sourcing from a foreign manufacturer doesn't just involve getting products manufactured and then shipped from one point to another. There's a lot of politics involved as well. For example, if there's civil unrest in the country where your manufacturer and/or supplier is based, it may have adverse effects on the production of your products. In this situation, you may experience fluctuations in terms of deliveries and product quality. That's why you always need to make the extra effort to stay on the heels of the manufacturers and assess their performances regularly.
You should always have a Plan B: As mentioned before, global politics have a key role to play in low-cost country sourcing. All it takes is a political misunderstanding or misstep for international sanctions to be imposed, and suddenly, the low-cost country that you source products from may not remain low-cost anymore. That's why you need to prepare for this possibility and have a plan B in place. If things do go wrong, you don’t want your business production to suddenly come to a halt, right? It needs to keep going and a plan B will help you to switch to another country in a smooth and seamless manner while phasing out production in the previous country.
Experiment with Dropshipping: Dropshipping is a recent trend in product sourcing where the manufacturers and/or suppliers in foreign countries ship a business's products to customers directly. The best thing about it is that business owners don't have to actually own their stock of products or ship the products. Dropshipping is a boon for small businesses that work with limited budgets. If your business is of a similar nature, you can definitely consider dropshipping, either as the primary form of product sourcing or as the plan B that we mentioned in the previous point.
Having a product sourcing strategy is vital in today's times, especially if you choose low-cost country sourcing. While we definitely recommend businesses to source from low-cost countries considering their benefits, we also believe that businesses should ensure they look out for their best interests while doing so. That's why having a profitable product sourcing strategy can ensure that at least on the production and supply fronts, your business operates in a healthy, sustainable, and most importantly, profitable way.
Sourcing Allies is a team of expert China sourcing agents that has helped western customers manufacture and source products from low-cost regions since 2006.