The idea of sourcing worldwide for high-quality low-cost parts is nothing new in the electronics industry. For years, purchasing organizations have tried to find new emerging sources of electronics supply to make their companies more competitive and profitable by reducing their costs of materials.

However, with sales revenues down drastically for most electronics companies, the need to improve profitability by cutting costs is imperative. Since about 70% of the cost of electronics equipment is in components and services, much of the effort to lower costs falls squarely on the shoulders of purchasing.

Many purchasing organizations, in response, are looking at low cost regions for components and electronics manufacturing services (EMS). The challenge for electronics buyers is that hot spots for low cost supply change often. Japan was a low cost source for component supplies and manufacturing services in the 1960s and 70s. Since then, the honor has moved sequentially to Korea, Taiwan, Singapore and Mexico. Now China is the low cost benchmark. But labor rates are already rising in parts of China, Shanghai for example, so buyers are trying to forecast where the next low-cost area for electronics supply will be.

Another challenge global buyers face is that certain areas being touted as emerging regions don't live up to their billing. Example: India, which is an important low-cost source for software development, but has not emerged as a source for electronic components.

"I have followed electronics from Japan to Korea to Taiwan and to China," says Gene Richter, a procurement consultant and former chief procurement officer at IBM. "I would assume Thailand, Malaysia and the Philippines will emerge as the next hot countries to buy things in."

But, for now, China is the place to source everything from passives and connectors to electronics manufacturing services. Semiconductor production in China has begun, but remains in its early stages, says Richter.

He notes that some companies source parts in certain markets because they want to sell finished goods there.

"China is a good market for PCs, workstations and mainframes, but there are lots of emerging markets," says Richter. "I sourced there because it was a good place to buy. I think computer companies are buying from China not to facilitate eventual sales, but because there are some good sources with good engineers and hardworking reliable employees to do assembly work," he says.

Richter says China is moving up the electronics component supply chain, and is following a similar pattern that Japan, Korea and Taiwan followed in terms of the level of parts sophistication.

"My first forays into China were to buy simple electromechanical devices for Black and Decker. Now China is a red-hot source for all kinds of components. There's not a lot of chip production, but what is there is good. Some Japanese and Taiwanese companies have chip production in China and it will likely increase in the future," he says.

Richter says while China is an important sourcing locale, so too is Eastern Europe. He says IBM sourced much of its Y2K software development with companies in Belarus and Latvia. Hungary, the Czech Republic, and Slovenia are emerging as "wonderful places to buy stuff," mainly passives, electromechanical components and software development.

"For software development you don't need a billion dollar fab. You need billion dollar brainpower," says Richter.

Some electronics supply managers believe this is an ideal time to look for and develop emerging sources of supply. "This is actually the greatest time in the history of the world to be in sourcing," says Scott Searls, director of global procurement for Lucent Technologies. And that's not just because it's a buyers' market and prices are good.

"More things are possible because there is more available," says Searls. "A couple of years ago, when everything was sold out, your options were limited. You may have wanted to break into Thailand but there was nothing available because the few sources that were there were already captured," he says. "Now those companies have surplus capacity and are available."

"A real strategic sourcing professional determines where his costs need to be and what regions of the world may be able to meet those cost targets. Then he starts to build relationships and lock up capacity now," says Searls. "A sourcing professional who waits another year will be in the hunt like everyone else. If he shows up in Malaysia, there will be five of his competitors showing up at the same time. The window will be closed," he says.

It's easier to move sourcing and create cost differentials in down markets than it is when markets are booming, according to Searls. "A lot of [suppliers in] emerging markets are willing to work on a longer term basis to build relationships. They will work at a lower level now with the promise of investment. In the go-go days, you may show up in some of these places and you will need the items so badly there will be no time to build relationships."

So where should buyers be looking to build relationships with emerging suppliers? Searls says look to the rural provinces of China, Vietnam and certain parts of Mexico.

These areas are emerging because they have potential to provide big cost differentials due to low labor rates. "Emerging low-cost, low-labor rate areas are Vietnam and anywhere off the border in China. If you want to drive substantial benefit of localized labor you need to get deep into the countryside in provinces like Wuhan," he says.

In North America, Mexico is still an emerging low-cost labor market. Historically, companies set up operations on the U.S. border. However, sources of supply and manufacturing are moving deeper into Mexico to places like Hermosillo.

"On the border you have high turnover, quality isn't so good. It takes a lot of process control. You get into the more stable mature communities and you find you have a much lower cost of labor, higher productivity rates and less training," according to Searls.

He says the emerging markets will likely become sources of supply for commodities such as lower-end passives, interconnects and enclosures and printed wiring boards.

But finding the new low-cost regions is not enough for a successful global sourcing strategy because low labor rates don't guarantee that products will cost less.

Mike Crabtree, manager of IBM's global procurement services group solutions, says generally it's not a good idea to source high-volume, low-cost products just because of low labor rates in a particular region of the world. Example: mechanical cabinets for computers.

"We have struggled with this for years," he says. "We looked at the cost of building a frame in China. It was 20 cents on the dollar for building the thing in the U.S. But by the time you shipped it and dealt with the supply chain, it was a wash, more trouble than it was worth. We didn't save enough to deal with the pain of the transition," he says.

However, building cabinets in China became viable when more value add could be done there. "When more of the infrastructure was in place in China that allowed us to do a bare bones assembly, then it became practical to build the cabinet in China," says Crabtree. Assembly included putting in preassembled cables, diskette drives, and power supplies.

He adds that with light, small items like components it makes sense to buy the parts even if there is no value add. "It makes sense to buy capacitors from low cost places because they are so small and light. Shipping mechanical cabinets can kill you, but if you can get a 15% cost break on capacitors and package up two weeks worth of supply, there is a cost advantage," he says.

Crabtree says it also makes a lot of sense to source software development from emerging areas because the cost savings can be 50-80% over sources in the U.S. and western Europe. He says Hungary and Russia both are emerging as software development locations.

Crabtree suggests that to maximize global sourcing strategy, procurement should be involved in new product development and low cost suppliers should be used from the beginning.

"The Achilles Heel in a procurement organization is to wait until the decision is done and then go source the stuff that development wants," Crabtree says. "Seventy-five percent of your opportunity is gone by the time the design is finished," he says, "so, we have driven our procurement focus much more upstream in the development cycle." He says IBM has "a very proactive process" especially in the PC arena where it is highly dependent upon sourced parts. "Early involvement with the product development teams helps to build some sweet spots and helps suppliers target their activity to the sweet spots," says Crabtree.

A sweet spot can be a certain type of component. For instance if a computer company plans to use primarily double data rate DRAM in new designs instead of synchronous, the supplier could concentrate on DDR.

Besides finding regions for low-cost supply, buyers also need to identify emerging sources of low cost electronics manufacturing services because OEMs are outsourcing more. Right now, China is the low-cost benchmark for EMS services, says Eric Miscoll, chief operating officer for Technology Forecasters, a market researcher and consulting firm.

Most of the major EMS providers have operations in China because of low labor rates. Miscoll, says the average wage in China is $85 per month, but is rising in certain areas like Shanghai where it is about $110. Nonetheless, that is still lower than other developed countries in Asia.

"For turnkey manufacturing you can see up to 25% reductions over other developed countries such as Taiwan, Malaysia and Singapore," says Linn Nelson, president of EMS services provider PNE International. "Plus you could have a definite market advantage for reselling your products back into the Chinese domestic market, which many are considering. Just buying components does not equate to ultimate savings."

While many EMS companies are increasing their footprints in China, they are also looking at other countries as potential new low-cost manufacturing locales. Vietnam and the Philippines are two countries that could emerge as manufacturing venues.

Some companies in China may decide to operate new product development centers in places like Shanghai, which have higher labor costs, but open new production facilities in rural Chinese provinces, which will have lower labor rates, says Miscoll.

To identify emerging areas of EMS and component supplies and to handle global sourcing issues many companies have international procurement offices (IPOs).

IPOs are the eyes and ears of companies in particular regions. Richter, IBM's former CPO, says IPOs find new companies that are worth taking a chance on and can provide on-sight surveillance at these companies.

"Say you're buying something for $12 and you get a quote from a supplier in Thailand for $6," says Richter. The question is, "Can the Thai supplier actually deliver the part in the right quantities on time with the needed quality levels?" The IPO can quickly check out the supplier.

In addition, the IPO can help develop a new supplier. "You have to have a top-notch, well staffed IPO in order to do business with embryonic suppliers because you have to lead them by the hand. You have to help them prioritize their investments. You have to help them with employee relations, technology, modern quality control and SPC capabilities," he says.

He says another role the IPO plays is handling the bureaucracy involved in importing and exporting and making sure parts don't get held up in customs. The IPO can also manage any currency problems.

"For instance if the dollar has increased 12% against the local currency in the last quarter and you haven't renegotiated your prices, it will be costing you money," says Richter. The IPO can monitor local currency situations to make sure that prices are renegotiated whenever they need to be.

IBM has a centralized IPO structure with about 175 people who look for new sources of supply, says Crabtree.

When the memory industry moved from Japan to Korea and then to Taiwan, IBM's IPOs were on top of it and were able to invest in the new sources guaranteeing supplies of low cost memory. Besides finding new sources of supply, IBM's IPOs, in a lot of cases, help suppliers make strategic decisions about where they need to go for low cost supply.

At Lucent, international sourcing teams handle duties that are similar to IPOs. "Each sourcing team has members in each region of the world," says Searls. "For instance we source antennas, which are used in cellular phone sites. We source them in virtually every region of the world. We have teams that we have constructed into sourcing cells. They are made up of tight collections of people who are geographically dispersed," says Searls.

"Team members act as financial analysts, understand who the best companies are, understand the customer needs and communicate with each other on how to completely leverage the global spend. That is different than the traditional IPO where they are an extension of a North American-based company," says Searls.

Perhaps, but as OEMs outsource more they will continue to need IPOs to buy globally and to identify emerging sources of supply. Says Richter: "I never purchased globally without an IPO, and I don't know how you would."