Reshoring And The Cost Of Off-Shoring
By admin In Uncategorized Posted June 7, 2012 0 Comments

The MIT Forum for Supply Chain Innovation, in conjunction with SCDigest.com, has announced a new research initiative to study “re-shoring.”

CAMBRIDGE, Mass. — The MIT Forum for Supply Chain Innovation and SCDigest.com announced today that they are partnering to launch a major survey focusing on manufacturing and the reshoring decision. MIT Prof. David Simch-Levi stated “this survey is extremely important in understanding the geographical movement of manufacturing production and assembly and informing government policies that would help U.S. manufacturers bring manufacturing back to the U.S.”

As you know, re-shoring is the term given to companies that bring manufacturing (and other jobs) back to the United States. This discussion really began in earnest a few years ago when oil prices sky-rocketed, gasoline was over $4 a gallon, and the experts told us that there was no end in sight to the high costs of oil. The reaction was as expected with many predicting the return of manufacturing to the US simply because of the increasing costs of shipping long distances. We are now seeing the price of oil dropping significantly, and the cost of gasoline, which had been climbing towards a $4/gallon national average once again flirting with a price below $3. Does this mean the re-shoring effort was short-lived and perhaps ill-conceived?

Of course, other aspects beyond fuel costs come in to play as well. As a result, I, along with Dr Rich Young and Dr Pete Swan, revisited the classic “Inventory Theoretic Model” that is the underpinning of so much work since it’s introduction. We chose to look at the full spectrum of costs associated with the production of inventory overseas, not focusing solely on cheap labor, or fluctuating fuel costs.
We wrote in our abstract for the article (published in the Journal of Transportation Management in the Spring 2010 issue):

Major U.S. corporations have been importers for over 200 years. A significant impetus for “offshoring” has been reducing costs—usually labor costs. Often, other costs were overlooked. There has been a growing disenchantment with sourcing goods overseas, especially when there may be domestic alternatives as other costs begin to dominate. Baumol and Vinod’s Inventory Theoretic model was useful in adding transportation considerations. Baumol leaves out several important costs that unless considered in offshoring decisions can lead to suboptimal solutions This paper extends that model, providing a prescriptive model that could be operationalized by firms to evaluate offshore sourcing decisions.

As noted, our goal was to provide the initial stages of a tool that firms could use.

Take a few minutes and read the article, and let us know what your thoughts are on off-shoring, and re-shoring here in the comments.

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