ADAPTING BAUMOL'S INVENTORY THEORETIC TO LANDED COST DECISIONS

Abstract

Major U.S. corporations have been importers for over 200 years. A significant impetus for “offshoring” has been reducing costs—usually labor costs. Often, other costs were overlooked. There has been a growing disenchantment with sourcing goods overseas, especially when there may be domestic alternatives as other costs begin to dominate. Baumol and Vinod’s Inventory Theoretic model was useful in adding transportation considerations. However, Baumol leaves out several important costs that unless considered in offshoring decisions can lead to suboptimal solutions. This paper extends that model, providing a prescriptive model that could be operationalized by firms to evaluate offshore sourcing decisions.