Offshoring decisions as a function of supply chain fuel cost

Filed in archive Research on August 30, 2008

Some while ago I wrote a piece on the MIT's Dr. Simchi Levi research on simulation of supply chain fuel cost. He was showing that in the case the fuel cost increase to high levels (around $200), it makes sense to draw back from outsourcing to Asia or hold more inventory.





In this post I've brought another relevant graph based on his research (taken from SC Digest) which formulates the offshoring decisions as function of the cost to move the warehousing and logistics infrastructure and also logistics cost (mostly influenced by fuel cost).

The matrix facilitates the decision making process for finding the optimum network analysis by considering two variables in a simple 2-by-2 matrix. First, are logistics costs to move products from Asian factories as a percent of total supply chain costs high or low? Second, are the costs or barriers to move infrastructure from Asia high or low?
While each company may define the boundaries differently, such a matrix can be used to visually assess where a company's products fall. For example, products with high logistics costs as a percent of total costs and with low costs or barriers to moving the infrastructure are the prime candidates for moving sourcing back from Asia. Conversely, products with low logistics costs and high costs to move infrastructure likely won't make sense to reconsider.