A Four-Filter Method for Outsourcing to Low-Cost Countries

Many companies face the challenge of outsourcing to low-cost countries. Still, many managers seem to be uncertain about (1) which inputs should be selected for this exercise; (2) which countries are preferred; and (3) whether to deal directly with suppliers or through a local distributor or agent. This paper deals with these three aspects in offering a practical and tested method, derived from theory. In each of four steps, inputs are filtered out that are less suitable for sourcing from low-cost countries. Step 1 clusters all of the hundreds of inputs into 50–90 product families. A portfolio analysis of the resulting product families in Step 2 enables differentiation in the nature of goods and services acquired and their supplier relationship characteristics. In this step, unique products and low volume, low-value inputs are filtered out. In Step 3, managers score the remaining product families on operationalized process- and product characteristics. Based on these scores, product families are assigned to four categories: (1) “Global Sourcing” or direct offshoring; (2) “Source Global, Buy Local” or indirect offshoring — for example produced in China but bought through a local agent/distributor; (3) “Buy Regional” or nearshoring; and (4) “Vicinity Buying.” Step 4 compares the present total costs of product families with the potential total costs after a switch toward the proposed areas. A case study revealed a significant potential for reduction in total costs for selected product families. In practice, the method serves three ends: (1) it clarifies the various product- and process characteristics that are perceived as important by stakeholders involved; (2) it guides the selection process of potential product families and potential areas in a structured way; and (3) it makes visible the financial results of alternatives to the present way of sourcing.