10 Jun 2021 OVERCOMING SUPPLY CHAIN DISRUPTION: An Update on Sourcing in Mexico as the Alternative to China
Major Shifts Have Occurred Over the Last Several Years with Sourcing from China
Editor’s note: The following is an updated version of an article we ran in March 2020. Much of this story is even more relevant today, with the global pandemic, continued shipping delays, ongoing supply chain disruptions, and the new administration’s signal of continued tariffs. These issues are here to stay, and we argue that all executives that have been outsourcing their supply chain to China need to re-evaluate their business case.
By Jeffrey Cartwright, Managing Partner |
Supply chains have experienced unprecedented disruption as companies have been negatively impacted by tariff increases from the trade war with China and COVID-19. As the novel coronavirus outbreak rapidly expanded over the past year to almost every part of the world, it brought to light the excessive reliance and overexposure that many companies’ supply chains have on China. While industry experts have warned about these issues for 2 decades, we’re now living the reality of this situation.
The failure of China to honor previous agreements on intellectual property protection and the large subsidies of export businesses by the Chinese government are not likely to change. Tariffs will be here for the foreseeable future, even with Biden now in office.
Labor costs in China have been increasing at 25 to 30% per year for the last 2 decades. The result is that the bargain that products have been in China, is no longer true for many products. The official minimum wage in China is 257% higher than in Mexico today. Products with a high labor content can oftentimes be less expensive in Mexico.
Clearly, alternatives are needed immediately. Nearby countries in Asia have experienced significant manufacturing growth and are many times no longer realistic alternatives. Costs are not necessarily lower than China, supply chains are no shorter, and in many cases lead times have been extended as capacity has been strained.
Mexico as an Alternative to China
Mexico currently has many advantages relative to China, which makes doing business with Mexico even more appealing.
Time Zone and Language – Operating in the same time zone and speaking the same language (many Mexican executives study in the United States) make communication much easier than with China. Mexico’s business culture and protocol are also far more Westernized and in line with the United States when compared to such practices in China.
Location – Proximity to the US., coupled with sound transportation and infrastructure, greatly reduces supply chain inventory and increases responsiveness to changes in product demand. The reality of such a nimble supply chain from Mexico is the dream of many chief executives in the US.
Education – Mexico boasts a strong university system with an emphasis on engineering degrees to support manufacturing. Currently Mexico graduates more engineers as a percentage of its population than does the United States.
Cost – Mexico possesses a very favorable labor cost for manufacturing and other disciplines.
Complexity in Dealing with Mexico
The advantages listed above suggest that Mexico would be a great and easy alternative to China. However, there are large differences that companies must be prepared to face.
US companies have been spoiled by the ease of doing business in China. The primary example is that for finished goods, Chinese factories provide a turn-key solution. They will build out the supply chain, and there is a high level of vertical integration. Many US companies, having moved to China many years ago, have outsourced many manufacturing capabilities to China and no longer have engineers capable of full product design because the Chinese factories provide that service.
In fact, in many companies, sourcing is now in marketing, which means there is little knowledge in the discipline of manufacturing and product engineering. Marketing has design input in functionality and aesthetics, but not in how a product is physically made. In many cases, product selection is done at a large trade show such as the Canton Fair or the Shanghai Hardware Show. Minor changes are directed by marketing, and the product is launched in the United States with minimal design except for packaging designed for the retail shelf. Additionally, the Chinese now believe that they own the intellectual property, the design, the drawings, and many times, the tooling that was paid for by the US company.
The Mexican manufacturing ecosystem is tied closely to the production of intermediate goods and aligned with the US automobile industry. As such, many manufacturers are not vertically integrated. Their suppliers sometimes are pre-determined by the US importer. Their product designs are more industrial and less consumer oriented. Many of them strictly quote from drawings, not samples. The obstacle that needs to be overcome is that the US company has samples and sometimes assembly drawings. Oftentimes, they do not have, nor will the Chinese company share with them, the detailed parts drawings of fully costed bills of materials as the Chinese company considers that proprietary to them. Therefore, these need to be created for many Mexican manufacturing companies.
The implications of the above limitations are that some things need to be bridged in order to receive a competitive cost. First, a competitive bidding process conducted by Mexican project managers is mandatory, or a company will receive what I inappropriately term “the Gringo Price” which is slightly under the US price and not competitive with China.
Second, key cost factors must be challenged, such as cost of raw materials. The manufacturers typically have a base of existing suppliers. However, they may not be globally competitive. The scale of volume with China has typically been substantially higher than what the Mexican factory is accustomed to.
Third, value engineering needs to occur to reduce the cost due to over-engineering or to introduce more competitive methods of production. Further, these Mexican companies need to be provided with drawings and many times with a packaging supplier of high-level printing quality, as they are not accustomed to the requirements required by US marketers.
Shoreview Management Advisors and the Mexico Strategic Sourcing Alliance
Having built multi-billion-dollar supply chains in China and having built and operated manufacturing plants in Mexico for major US marketing and distribution companies, Shoreview Management Advisors is uniquely positioned to bridge this divide culturally and close the gap in capabilities and execution.
- We have assembled a strategic alliance of companies that provide an engineering-based approach to sourcing and has 20+ years of transferring products competitively to Mexico.
- We develop a thorough understanding with the client of the specifications and required performance of the product.
- We perform market research in Mexico to add to our list of highly qualified manufacturers. If necessary, we will reverse engineer the detailed product design from samples and create detailed bills of materials.
- We work with Mexican manufacturing companies in multiple ways to reduce their client costs and achieve competitive pricing. As part of this, the Alliance can provide a full analysis of the Total Delivered Cost to your distribution center, as well as an analysis on the reduction in working capital by being closer to the factory. If necessary, we source components from Asia and import them into Mexico as part of the total supply chain.
- We can handle customs and duties, in addition to delivery of product to the customer warehouse in the United States. In short, we provide a complete sourcing alternative to China which nearly always results in a lower delivery cost to your distribution centers.
If you are interested in making the move from China to Mexico, contact us today to learn more about our expertise, and how we can help you make the decision that is best for your bottom line.
