08 May 2020 RETURNING FROM MAJOR SUPPLY CHAIN DISRUPTIONS: Sourcing in Mexico as the Alternative to China
safeguarding the supply chain by shifting to mexico has added benefits of lower delivery costs
Frustration and disappointment are prevalent today with China and the major disruptions to our daily lives and supply chains. There is strong sentiment to bring back manufacturing to North America. This will, no doubt, be constrained by the shortage of skilled labor that we experienced even before the COVID-19 pandemic. However, bringing manufacturing to North America by shifting from China to Mexico will help decrease tensions and provide a far more secure supply chain with potentially lower costs.
The refusal of China to honor previous agreements on intellectual property protection, the large subsidies for export businesses, and the Chinese government’s undervaluation of the Renminbi are not likely to change. This situation nearly guarantees tariffs will be here for the foreseeable future.
China has been, and is still, perceived as the bargain for manufactured products. The economic costs of these massive supply chain disruptions, however, have more than offset these previous bargains. Beyond that, in many cases, the product manufactured in China is no longer always the cheapest. Factory labor has been increasing from 25% to 30% annually for the last two decades. The official minimum wage in China is 257% higher than in Mexico today. Products with a high labor content are often less expensive when sourced from Mexico. Combine that with shorter lead times, zero duties due to USMCA, competitive transportation costs, reduced cultural differences, and a nation that views itself as an ally and friend of the United States, Mexico may be the clear, strategic choice.
Despite Mexico having many advantages relative to China, finding a qualified factory and obtaining a globally competitive price is difficult and requires an up-front investment in time and money. Here are some of the challenges that a company must be prepared to address.
Directory of Manufacturing Plants – The process of identifying a potential manufacturer is far more difficult in Mexico than what many experience in China. It’s not that there aren’t highly qualified options but rather that Mexican manufacturers are much more relationship driven. Thus, they are difficult to locate without prior operating experience in Mexico. Many Mexican companies do not invest in marketing, and very few have SEO-friendly websites in English that will come up in a US-based Google search, nor is there a directory of manufacturing plants such as Thomas.net in the United States or Alibaba in China. Competitive bidding also needs to be considered, as we all know it works better when there are more factories competing for the business. Only about 20% of the small to medium manufacturing businesses in Mexico have a Sales Manager (let alone a bilingual one), and the notion of a manufacturer’s representative is non-existent.
Dependence on Detailed Parts Drawings – Many companies that source in China do not have detailed parts drawings because they were developed by the factory and considered proprietary. Although Mexico has a long, 60-year old manufacturing know-how heritage from the US, this is mostly in final assembly (Maquiladora model), not in New Product Development. A whopping 98%+ of Mexican factories are unable to work from samples and will not provide price quotes without them. This severely limits the number of available factories to less than 2%. Reverse engineering and creating these drawings from physical samples is oftentimes necessary.
Proximity to the United States – Many Mexican factories believe that their proximity to the United States and the relatively high cost of factory labor in the US allow them to charge a price slightly lower than the cost of US production. This has worked well for maquiladora operations such as the automobile industry. In most cases, companies unfamiliar with Mexico will have an unfavorable experience because they don’t know how to successfully work with Mexican manufactures. Since U.S. companies often don’t have internal resources to work with Mexican factories on supplier development initiatives, they believe that Mexico is not competitive with China. It is customary for Mexican business owners to initially quote a profit margin of at least 50% or more since they believe that if they quote a more competitive price, they will be “leaving money on the table.”
Internal Cost Estimating Systems – Mexico has a manufacturing base which has focused on wider assortments and specialty, lower run-size manufacturing to avoid competing directly with China (where they lost heavily in the late 1990s and early 2000s). When faced with larger volumes necessary to supply a US company, they sometimes do not think through how their costs will shift as they engage in this production (project-based mentality). However, many of them are quick to learn when working with our experienced engineers and project managers (mass production-based mentality).
Tiered Supplier Network – Mexico is a very relationship-oriented culture. For most manufacturing companies, they have their network of suppliers with whom they have worked with for many years. In preparing their quotations, they obtain raw material and component prices from this network (better known as a single source for raw materials). However, for them to be competitive, these prices must be challenged, and many times new, globally competitive suppliers need to be introduced to the final factories.
Industrial or Intermediate Goods Focus – Many factories in Mexico manufacture similar products to what has been sourced from China. However, some products can be over-engineered and more suitable for an industrial market than the US consumer market. Additionally, since many factories are required to follow product specifications, there may be little creativity in delivering on performance at a competitive cost. Oftentimes, our project managers will suggest alternative processes or materials that achieve the same performance at significantly lower costs by using the formal Value Analysis/Value Engineering (VA/VE) methodology. This cost management approach yields significant reduction in factory pricing.
recent successes in Mexico
While the challenges above may seem daunting, they still pale in comparison to the experience many companies have operating in China. Add on the competitive cost structure, and the benefits of working through the Mexican production system become very attractive.
In our experience, our best clients are those that have attempted to source in Mexico and were disappointed by their results. This is mostly due to their inability to spend sufficient time in developing a list of qualified factories, having to accept the price offered, not having the ability to competitively bid with multiple factories, or most significantly, not being able to develop the factory and its supplier base into a globally competitive manufacturer.
Here are a few recent examples of price reduction:
- An initial price of $31 per unit was reduced to $23 through supplier development and value engineering.
- An initial price of $55 for a metal fabrication assembly was reduced to $17 by educating the client that stocked metric-sized raw materials in China are custom materials in Mexico. By changing the specifications to stocked-imperial sized materials, combined with value engineering and competitive bidding, the lower price was achieved.
- Another example involved expanding the potential supplier base to 42 factories with multiple visits to the finalist factories. The result was that the final production cost in Mexico was 18% lower than China.
All of the above companies achieved lower costs than they would with China, not counting the added benefit of avoiding the 301 tariffs imposed upon these products.
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.
