Whether or Not to Prepare for Offshoring: A Simulation Study

A consequence of offshoring is increased coordination costs. To counter this, firms can strive to identify a cost reducing organizational configuration either ex ante or ex post to the offshoring implementation. In this paper, we investigate the performance implications of these contrasting strategies through a computational model of offshoring. We find that a proactive approach to offshoring is largely beneficial if the impact of geographic distance and coordination costs relative to production costs is sufficiently high, but that this changes more towards the reactive approach if this diminishes. Thus, we explicate important contingencies in the paradox that firms face when balancing between strategic rationales such as lower production costs in foreign locations and the changing costs of coordination when implementing such strategic rationales.