Extending landed cost models to improve offshore sourcing decisions

Purpose – The purpose of this paper is to identify the components required for more robust landed cost models given the now widespread interest in sourcing finished goods, components for assembly, and basic raw materials from global sources. This study also seeks to establish the need for broad‐based participation in operationalizing such models. Design/methodology/approach – Interviews are conducted with several major firms that import a range of merchandise into the USA to develop in‐depth case studies. A taxonomy of variables found in increasingly comprehensive forms of landed cost models is developed from the case studies. These variables are assembled into modules and analyzed with the use of an expert panel consisting of executives responsible for import activities at major firms. Findings – Most major firms are relatively unsophisticated in their approach to making offshore sourcing decisions. Few employ models that are sufficiently detailed and some do not even embrace the basic logistical elements of price, transportation, and inventory. The administrative overhead required for offshoring is seldom considered nor are the potential risks associated with sourcing globally that may result. Research limitations/implications – The study considered only imports into the USA. Even with a relatively broad range of industries represented and the in‐depth research design, there are very few data points. Hence, this is theory building research upon which a more broad‐based methodology will be found. Practical implications – With firms of all sizes and industries seeking to employ offshore sources of supply, a rational approach needs to be developed to support such decisions. Historically, such actions were taken on the basis of price alone; however, such an approach is clearly suboptimal. Many firms need to develop the ability to collect the requisite data, allow sufficient time to conduct proper analysis, and establish the cross‐functional mechanism for decision making. Originality/value – This paper provides a range of modules, the more sophisticated potentially useful for supporting effective offshore sourcing decisions. It also advances the idea that while cost advantages may be present, there may be certain risk factors that obviate offshore sourcing alternatives.