The Costs of Increased Localization for a Multiple-Product Food Supply Chain: Dairy in the United States
Nicholson, Charles F.; Gomez, Miguel I.; Gao, Oliver H.
There is increased interest in greater localization of food supply chains but little evidence about the effects of localization on supply chain costs. Assessing these effects is complex in multiple-product, multi-process supply chains such as the dairy industry. In this study, we develop a spatially-disaggregated transshipment model for the US dairy sector that minimizes total supply chain costs, including assembly, processing, interplant transportation and final product distribution. We employ the cost-minimizing solution as benchmark to compare alternative scenarios of increased supply chain localization. Our results indicate: 1) short-run limits to increased localization, 2) modest impacts on overall supply-chain costs, and 3) large cost reallocations across supply chain segments, regions and products. We find that increased localization reduces assembly costs while increase processing and distribution costs. Cost increases are larger in regions with smaller raw milk supplies and during the season when less raw milk is produced. Minimizing distances traveled by all dairy products results in tradeoffs across products in terms of cost and distance traveled. The relationship between increased localization and costs appears to be nonlinear.
WP 2010-14 July 2010
Charles H. Dyson School of Applied Economics and Management, Cornell University