Rethinking Outsourcing as Energy Costs Rise

According to a June 13th article in The Wall Street Journal, some companies are starting to reexamine their decision to outsource production to China — because rising oil costs make the transportation of goods across the globe more expensive.

That’s a phenomenon Michael J. Mol might call a shift of the outsourcing curve. Mol, a senior lecturer at the University of Reading Business School, suggests in his book Outsourcing: Design, Process and Performance (discussed in the forthcoming Summer 2008 issue of MIT Sloan Management Review) that, if you could graph the relationship between a company’s possible outsourcing levels (on a horizontal axis) and the resulting business performance (on a vertical axis), the graph would look something like an upside-down U — at some optimum point the organization is outsourcing an ideal amount, at the high point of the curve, where the performance benefits are maximized. Outsource too much or too little — and the company’s resulting performance is farther down the curve and less than optimal.

But, Mol notes in his book, things like changes in transportation costs can shift a company’s outsourcing curve. And, when a company’s outsourcing curve shifts the business’s optimal level of outsourcing will change.