Offshoring Case Study

Since the late 50s of last century, the need to lower costs led firms to choose offshoring as a popular practice in operations management. This outsourcing practice offered lower taxes and more liberal environmental regulations along with the lower labor costs as seen above.

However, there are nowadays more and more manufacturers that have started bringing production activities closer to their domestic countries; i.e. nearshoring has been observed. According to Haberberg & Rieple (2008), near-shoring is the outsource strategy similar to offshoring but located to a geographically closer foreign country. This change in outsourcing activities is supported by the rising increase of costs in the offshore locations along with the shipping uncertainty

According to Frankel (2000), international trade and globalized industrialization is contributing to this development. The continuous changes in economic, currency and market conditions require also immediate adjustments of supply

When corporations outsource, they first research if this action can reduce costs, as seen above. Thus they estimate the unit production cost and ocean-shipping cost (Hummels, 2007). The problem begins as supply chains extends while direct, indirect, and hidden costs incur (Stalk & Waddell, 2007). The authors explain that direct and indirect costs include shipping, nesting and de-nesting of containers at both ends of the ocean pipeline, inventory storage, handling, procurement, insurance, and overall financing. These costs can eventually add up to as much as 4 to 8 percent of retail shelf costs. However, the majority of costs are hidden and they arise from the gross margins that are lost when the product is not available to the customer when looking to purchase it (Harrison & van Hoek, 2008). Also the effectiveness on the timely shipping of finished products can be disrupted on sudden strikes at loading ports of Asia, as firms are unable to contribute to the minimization of delays (Turnbull, 2000). Also, the constant need for bigger vessels creates need for port infrastructure improvements. These two measures are not increased proportionally, as vessels are getting bigger and bigger but ports expand in smaller rate. This increases the loading and unloading time of cargo, which creates delays in the planning horizon of a firm (Stalk & Waddell,