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Management article
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Reference no. SMR46302
Published by: MIT Sloan School of Management
Published in: "MIT Sloan Management Review", 2005
Length: 4 pages

Abstract

The burgeoning trend of sending manufacturing to cheaper offshore locales often conflicts with increasing demands for speed and customisation. Companies with a niche in producing both mass-customised and standard model products may encounter a problem - while they need a domestic facility to respond to custom orders quickly, the lower costs of manufacturing abroad create an incentive to use an offshore facility for standard units - and such a division may generate diseconomies of scale. In particular, having a domestic facility solely devoted to filling custom orders may raise expenses and force producers to keep custom prices higher than desired. Do firms have an option to profitably retain domestic production? Must flexibility and speed be sacrificed for cost savings?

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Abstract

The burgeoning trend of sending manufacturing to cheaper offshore locales often conflicts with increasing demands for speed and customisation. Companies with a niche in producing both mass-customised and standard model products may encounter a problem - while they need a domestic facility to respond to custom orders quickly, the lower costs of manufacturing abroad create an incentive to use an offshore facility for standard units - and such a division may generate diseconomies of scale. In particular, having a domestic facility solely devoted to filling custom orders may raise expenses and force producers to keep custom prices higher than desired. Do firms have an option to profitably retain domestic production? Must flexibility and speed be sacrificed for cost savings?

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