Title: A system dynamics model for studying manufacturing outsourcing cost dynamics

Authors: Arjun Duvvuru; Ramaiya Balachandra; Abe Zeid; Sagar Kamarthi

Addresses: Department of Mechanical and Industrial Engineering, Northeastern University, Boston, MA 02115, USA. ' Department of Information, Operations and Analysis, College of Business Administration, Northeastern University, Boston, MA 02115, USA. ' Department of Mechanical and Industrial Engineering, Northeastern University, Boston, MA 02115, USA. ' Department of Mechanical and Industrial Engineering, Northeastern University, Boston, MA 02115, USA

Abstract: Historically companies considered outsourcing manufacturing operations to low-labour-cost regions as a winning formula to effectively compete domestically and globally. However, in the long run, outsourcing strategies may not always be beneficial. Economic growth in developing countries tends to raise labour wages. Increasing global demand for raw materials tends to increase their cost. Added to this, long distance suppliers may prolong lead time, build inventory levels, and reduce responsiveness to demand. To understand how various factors evolve and work together over time to influence the cost-benefit balance in outsourcing, this study presents a system dynamics model of manufacturing outsourcing. This model can map out a supplier's response to changes in demand and provide insights into how the behaviour of various cost elements changes over time. Outsourcers can use this model to evaluate potential suppliers and formulate outsourcing policies that can ensure sustained profitability.

Keywords: manufacturing outsourcing; system dynamics; strategic planning; manufacturing supply chains; supply chain management; SCM; outsourcing cost dynamics; modelling; simulation; supplier evaluation.

DOI: 10.1504/IJRAPIDM.2012.046573

International Journal of Rapid Manufacturing, 2012 Vol.3 No.1, pp.36 - 55

Available online: 25 Apr 2012 *

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