South-Western College Publishing - Economics  
Just-in-time manufacturing may become just-as-soon-as-I-can manufacturing
Subject Firms face the logistical problems of global trade and outsourcing.
Topic Production and Costs; Profit maximization and the firm
Key Words

global trade, production, logistics, costs, transportation

News Story

As U.S. firms move more and more production abroad in the search for ever-cheaper labor and other inputs, one factor is becoming increasingly expensive: getting the goods back to the US.

Firms are discovering that getting the goods back to U.S. markets is becoming increasingly difficult. Global shipping is at nearly 100% capacity, forcing firms to resort to quicker, but more expensive, forms of transport, such as air freight. Further, some firms must resort to keeping buffer stocks to offset delivery delays--but maintaining inventories is also costly. Security issues are also becoming more expensive, both from beefing up security at production facilities, or having the shipped goods subjected to time-consuming inspections as they re-enter the country.

Adding to those costs, rising fuel prices are not helping firms as transportation firms try to maximize their own profits. The National Industrial Transportation League in Virginia estimates that transport costs this year have risen 5 to 15 percent over last year.

To compensate, some firms are setting up distribution centers next to their production facilities abroad. Not only do these centers house finished goods until they are ready for shipment; they also coordinate shipment to the end customer, rather than sending finished goods back into the country to domestic distribution sites first. Other firms hire logistical experts to help them determine which U.S. ports to use during a given week for its distribution. Schneider Electric hired just such an expert, and expects in the long term to reduce its costs by 10% to 30%, although the shipping advice was extremely expensive in the short term.

This increase in costs seems to have had a perverse impact on a social equilibrium. When no one engaged in global transportation of goods, a single firm had an incentive to move production abroad and take advantage of the cheap foreign inputs, passing the costs savings on to the consumer. When everyone engages in global transportation of goods, it's bad for consumers who must pay higher prices, even if the initial reason for the outsourcing was greater competitiveness.


Questions
1.

Ultimately, firms will have to counter such cost increases either in terms of higher consumer prices or reduced profit. Given the reasons that firms have mentioned for moving production abroad, which result is more likely? Why?

2. Illustrate the impact of a rise in transportation costs with a supply and demand graph.
3. Typically, we think of individuals acting in their own best interests, rather than in the best interests of society. But as firms look toward reducing their costs by moving labor overseas, why would that actually be harmful under these circumstances? In other words, why does the summary argue that the impact on society is perverse?
Source Timothy Aeppel. "Manufacturers cope with costs of strained global supply lines." The Wall Street Journal.. 8 December 2004. A1.

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