Wednesday, September 3, 2008

When Does It Pay To Bring Production Back to the US?


Many companies are asking themselves that question, and finally someone
has come up with an answer.  “That depends.”  Who said it would be easy?

Dr. David Simchi-Levi of MIT has been studying the “tipping point” for
4 to 5 years, and during that time transportation costs have risen 40% and
inventory carrying costs have also risen 50%.   His analysis showed the tipping
point to be $150.00/barrel for fuel oil.  In essence, if fuel oil reaches that price,
the trade-off between transportation and inventory costs compared to rising
fuel costs means it is cheaper to hold more inventory.



Dr. Semchi-Levi considers two variables:  are the logistics costs to import
high or low, and are the costs to move the infra-structure high or low?  For
example, products with high logistics costs and low barriers to moving the
infra-structure are prime candidates.  Conversely, if logistics costs are low,
a rise in transportation costs is not likely to have a large impact on sourcing
decisions.  This has proven true in the furniture and television industries but for
different reasons.  For furniture, it’s the high cost of transportation, and for
televisions, it’s the competitive pressure of the marketplace: it’s a problem to have
your product in transit from China for 30 days since the price is dropping while the
goods are moving.

As logistics becomes more sophisticated, “doing OK” is no longer the benchmark.
If you want to find out how you’re doing and what you can do to lower your
logistics costs, call TOTALogistix at 800. 989.0054 x120, or visit us at
www.totalogistix.com.  There is something you can do about rising logistics costs.

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