Adapting Baumol's Inventory Theoretic to Landed Cost Decisions

By Brady, Stephan P.; Swan, Peter F. et al. | Journal of Transportation Management, Spring 2010 | Go to article overview

Adapting Baumol's Inventory Theoretic to Landed Cost Decisions


Brady, Stephan P., Swan, Peter F., Young, Richard R., Journal of Transportation Management


INTRODUCTION

Major U.S. corporations have been importers for over 200 years. Initially, the colonists interests were in importing manufactured goods, but as industries developed their interests turned to importing basic raw materials such as metallic ores and manufacturing machinery. After World War II the U.S. experienced great growth in imports of manufactured goods. Recent years have seen two significant shifts: the widespread practice of securing offshore sources for manufactured goods by firms of all sizes, and the purchase of a wide range of materials and products. The three principal drivers have been and continue to be 1) securing goods at a lower cost, 2) accessing materials not available in the U.S. market, and/or 3) seeking to establish a commercial presence in order to achieve subsequent entry to the foreign market. During the past 20 years growth in imports has been so aggressive that it has on average trebled the growth of U.S. gross domestic product (U.S. Dept. of Commerce).

Securing goods at a lower cost usually means using cheaper labor by locating production offshore or by purchasing goods from foreign producers. Access to raw materials not available in the U.S. could include but is not limited to Chinese tungsten, Jamaican or Australian bauxite, African cocoa beans, Brazilian tantalite and columbite, and coffee from a range of foreign locations. Manufacturers purchase a wide range of subassemblies and components ranging from plastic molds, to water pumps to motors, to electrical components (Anon n.d.). Walmart and other mass merchandisers have turned to China for consumer goods that include electronics, hand tools, appliances, footwear and clothing. From a more cynical perspective some firms source overseas because their archrivals are doing so. Relocating production offshore has the strategic benefit of providing better access to foreign markets, but is more difficult to establish than just purchasing from an existing producer.

There has been a growing disenchantment with sourcing goods overseas, especially when there may be viable domestic alternatives (Ferreira and Prokopets, 2009; Goel, Moussavi, and Srivatsan, 2008; Minter, 2009; Mulani, 2002). Moreover, many firms are willing to continue with offshore sources, but want to opt for those closer to home given the myriad problems they have encountered with the complexities involved, including (Anon, 2008; Berstein, 2007; Ferreira and Prokopets, 2009; Minter, 2009; Mulani, 2008; Norek and Isbell, 2005; Smyrlis, 2010; Stalk, 2006):

* Trade regulations including duty and export taxes

* Different languages, cultures, and legal systems

* Spotty product quality

* Problems with intellectual property

* Long and capacity constrained supply chains

* Rising costs

As a result, many businesses are looking at bringing manufacturing back onshore, "nearshoring," "splitshoring," or "peak-load manufacturing" as an alternative to now more expensive offshore manufacturing (Mulani, 2002)

Business needs tools to make informed decisions on 1) whether to proceed to source offshore (or to move onshore or near-shore), or 2) selecting between two or more alternative sources of supply perhaps located in different parts of the world. The problem, as further discussed in the following literature review, is that there has been but scant coverage of this in the research within an array of business disciplines including managerial accounting, marketing, as well as logistics and supply chain management.

LITERATURE REVIEW

The term landed cost was investigated within a multi-disciplinary context that included accounting and logistics or supply chain management. Bowersox et al (1968) considered an extensive array of costs within distribution but disregarded offshore purchases. In reviewing total cost concepts, Baumol and Vinod (1970) developed their inventory theoretic model that traded transportation off against inventory holding thus providing two key variables in offshore sourcing. …

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