Outsource Regionally Instead of Nationally

The whole concept of “offshoring” is based on the premise that manufacturing can be done more cheaply in a different place. What if that same logic was applied not to other shores, but to other regions between our own two shores?

Art Whelan is a senior vice president with Logistics Plus, a shipping and transportation management firm headquartered in Erie, Pennsylvania. Because the cost to produce differs significantly in different regions, he says the most cost-effective outsourcing often occurs within the United States. In fact, outsourcing often makes much more sense when there isn’t any ocean involved.

Take his own region, for example. In Erie, the fully burdened hourly labor cost (including plant, property and equipment) can be significantly less than the corresponding cost in the vicinity of Detroit or Chicago. A lower cost of living and lower real estate prices are among the reasons why.

But just as significantly, for a company headquartered in Detroit or Chicago, this in-country outsourcing makes certain other outsourcing costs go away. Ten hours is the magic distance, he says. An overseas manufacturer imposes extra costs because of the customers’ requirements for extra inventory, as well as the extra engineering challenges resulting from distance and communication difficulty. But when a manufacturer is no more than ten hours’ journey away, the extra costs such as these are unnecessary.

Mr. Whelan’s own business is international. His firm helps companies with both outsourcing and offshoring, and the latter choice is the right one in many instances. However, he sees the labor costs in China rising. Further, he believes many companies offshored too quickly in recent years, without considering all the costs that potentially flow from this decision.