Outsourcing and the Cost of Transportation
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.
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I quite see where you come from, but I differ in opinion on one point. Your observations hold water except for one loophole: exchange rate fluctuation directions and magnitudes are rarely fixed enough to warrant strategic shifts of the kind we are discusing here. How long will the $ be low? Long enough to make industrialists shift logistics systems? Enough to make CIOs consider hedging strategies anew, but not enough to get COOs to relocate labour.
Even Pareto equilibrium in the real world is a band and not a zero-dimension point.
Comment by P.V.Bhaskar on June 24, 2008 1:44 am