Correspondence: Sameer Kumar, Department of Decision Sciences, Opus College of Business, University of St. Thomas, 1000 LaSalle Avenue, Minneapolis, Minnesota 55403-2005, USA. E-mail: skumar@stthomas.edu

¹is currently a Professor of Decision Sciences and Qwest Endowed Chair in Global Communications and Technology Management in the Opus College of Business, University of St. Thomas. His major areas of research interests include optimisation concepts applied to various aspects of global supply chain management, information systems, technology management, product and process innovation, quality engineering and capital investment justifications.

²is a Senior Strategic Financial Analyst with Dorsey & Whitney LLP in Minneapolis, Minnesota – one of the largest law firms in the country. Before joining Dorsey & Whitney, he worked for Piper Jaffray, working on both institutional trade support and middle-market banking marketing and analytics. Nicholas has an undergrad in finance and is currently working towards his MBA from the University of St. Thomas.

³is a Fixed Income Trader at Ameriprise Financial in Minneapolis, Minnesota. Before his current position, he worked for the same company as a Financial Consultant and has been in finance for 8 years. Lewis graduated from St. Cloud State University with a degree in Elementary Education and is currently working towards his MBA from University of St. Thomas.

Received 8 December 2008; Revised 8 December 2008; Published online 20 March 2009.

Abstract

With companies spending trillions of dollars annually, accounting for the majority of revenues, it is easy to understand why companies are constantly seeking ways to cut costs in manufacturing and procurement. It is widely believed in the financial arena that increasing revenues by 30 per cent has about the same effect as cutting costs by 10 per cent. This paper will attempt to look at trends in the marketplace of some of the major components of variable cost and their effects on total product cost and revenues by outsourcing of consumer products manufacturing in China from a strategic manufacturing perspective. Four major cost component trends that the study will specifically focus on will be the following: the rate of rising wages in the United States and in China; material cost (specifically steel); the costs of shipping goods from China to the United States; and the risk of profit loss due to recalls, quality issues, loss or damage of goods and/or potential loss of customers. The study outlines a way to examine the chosen variable cost trends to project cost savings, resulting in enhanced revenues using a simple decision modelling framework to analyse outsourcing of manufacturing operations.