A couple of years ago, ISM published an article in its Inside Supply Management publication entitled “Doing Business With Canada” (membership required) that was intended to influence US-based purchasers to outsource more business to suppliers in Canada instead of suppliers in Asia.

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Reviewing this article today scares me that purchasers may have taken this advice. It’s not that Canada doesn’t have a good supply base – they do – but the cost advantages of a US buyer buying from Canada have decreased, not increased, over the past couple of years.

Canada may have seemed like a low-cost alternative for US-based buyers at the time largely because of the exchange rate, which the author cites as being 0.85 US dollars per 1 Canadian dollar.

But exchange rates change. And the author even cited the appreciation of the Canadian dollar but didn’t let that become a deterrent to providing a glowing picture of Canada as a hotbed for outsourcing.

It is important to have a longer-term outlook when selecting a country from which to source. Consider this:

• The average hourly wage rate for a structural steel worker in Toronto, Canada was 37.36 Canadian dollars per hour in 2003 (source: International Cost Engineering Council)
• The average hourly wage rate for a structural steel worker in the United States of America was 40.32 US dollars per hour in 2003 (source: International Cost Engineering Council)
• In December 2003, the exchange rate for Canadian dollars to US dollars was 1.30. (source: oanda.com)
• In December 2007, the exchange rate for Canadian dollars to US dollars was 1.00 (source: oanda.com)
• Therefore, in 2003, a buyer in the US could buy structural steel labor services in Canada for 28.74 US dollars per hour (37.36 / 1.30 = 28.74) in contrast to buying structural steel labor services in the US for 40.32 per hour – a 29% “savings.”
• But, if wage rates stayed relatively the same or appreciated in both countries at approximately the same pace, the difference in 2007 would be much smaller: 37.36 vs. 40.32 – only 7%.

But not even those statistics tell the whole story.

According to the Organisation for Economic Co-ordination and Development, on average, Canadian workers’ productivity is only 80% of that of US workers.

So a job that would take a Canadian worker 10 hours and take a US worker 8 hours in 2007 would make keeping the work in the USA the lower-cost decision for the US buyer, without even mentioning the cost advantages of offshoring to Asia.

Again, this is not a knock against Canada. Canada has great companies and brilliant people.

But, from a US perspective, with a weakening dollar, you really need to look at where things are going economically if you need to achieve long term cost savings through a sourcing strategy.