An introduction to best-cost sourcing

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We recently heard that one of our more enlightened customers (an acquisitive, dynamic American industrial conglomerate – market cap $30bn) call it ‘best-cost’ sourcing. They don’t refer to ‘low-cost’ sourcing because it misses too many other points. They focus on the total cost of doing business with us, rather than simply the purchase price.

Best-cost sourcing means they look at the additional cost of internal and external resources tied up in managing an extended supply chain. They take into account the cost of bloated finished good stock, the journey from supplier to customer, and the time spent in their warehouses, where it’s often comfortingly referred to as a safety buffer, like some old, friendly station master making sure everything runs smoothly. They count the cost of dealing with down-time (where critical parts are missing because of delays at customs or in loading) and they count the cost of physical returns (where the parts delivered are incorrectly coloured, shaped or configured). It can be a hassle calculating all of this, so the more sluggish purchasing departments will simply ignore it and present their credentials (for cost-saving) based on their PPVs (Purchasing Price Variance – price paid for the part in the UK, minus price paid for the part in their low-cost supplier’s country). That’s it, job done.

But these lethargic, introverted purchasing teams haven’t worked out that:

1 – Low-cost economies have themselves developed into attractive markets for the best of their indigenous supply base; the best low-cost suppliers are no longer waiting to be beaten over the head on price in transactions with their (high-cost?) customers in different time zones, who don’t speak their language. They’ve moved on to working with local customers in fast-growing local markets.

2 – European buyers have therefore been left to deal with less sophisticated, second- and third-tier low-cost suppliers who are just as willing to, but less capable of, delivering the same quality on time. They’ll make all the right noises when a foreign buyer turns up needing large quantities of this or that, but the problem is that having been abandoned all those years ago, the local manufacturing supply base (particularly in the UK, but also in Western Europe in general) is a shadow of its former self. However, we believe the investment we’ve made at Goodfish will lead the return of this work to the UK. This is why we say, Manufacturing’s Coming Home.