Proposed Project for the MSU Industrial Math Students

Developing a Full Cost Comparison of Offshore Sourcing versus Onshore Sourcing for the Automotive Industry.

In the last twenty years, the U.S.-based automotive industry (assemblers and suppliers) has undergone a fundamental restructuring that continues to this day. The arrival of foreign-based automobile assembly firms in North America in the early 1980s ushered in an era of competitiveness previously unheard of in the U.S. automobile industry. These foreign-based firms, for a variety of reasons, have been able to produce and sell motor vehicles for less cost than their domestic rivals. This has lead to a dwindling market share and severe cost-cutting measures among the U.S. based companies, in order to remain competitive. One of the major consequences of this cost-cutting has been the movement of manufacturing facilities-and jobs-to overseas locations where labor is cheaper. This has been a predictable transition for an industry facing increasing competition, especially for companies producing a low value-add product and where labor is a substantial percentage of their costs. However, in this rush to cheaper labor markets, some companies with higher value-added products also went overseas at the request, or demand, of their major customers. This has lead to the exponential growth of logistics and premium freight companies whose responsibility is ensuring an effective supply chain and an uninterrupted supply of parts for the assembly firms. Furthermore, this has added substantial costs to the parts delivery equation, for tracking freight across the globe and emergency deliveries of parts, due to interruptions in the supply chain from problems at ports, or defective parts.

This study will examine whether, when considering all landed costs and a risk factor, it is indeed cheaper to ship parts from overseas, or produce and ship these parts domestically. A variety of factors will be considered including the complexity and shipability of the parts, traditional cost categories, the true value of risk to each manufacturer, and the impact public policy incentives have on the decision to produce offshore or onshore.