Outsourcing and the Cost of Transportation

Filed in archive Opinions & Insights on June 19, 2008

Photo courtesy of iStockphoto, Dan Barnes

While most of what I address is outsourcing of information-based services, an interesting set of concerns are arising in the manufactured-goods outsourcing community. Sparked by the hefty increase in transportation costs and combined with the weak dollar, the cost benefits of outsourcing the manufacturing process is beginning to erode.

What does this mean? One can expect the eventual re-patriation of certain manufacturing - particularly manufacturing with a relatively low per-unit labor component and a relatively high per-unit shipping component. On the other hand, providers of goods requiring substantial tooling investments will likely wait until a new equilibrium is reached, and make their decisions based on the relative value at that time.

What this will test, however, is the tipping point for transportation costs and exchange rate fluctuations, and corporate management's stomach for shifting their manufacturing efforts back-and-forth. Over the next couple of years, these sea changes could prove dramatic for the goods-outsourcing business.