31 Mar 2020 OVERCOMING SUPPLY CHAIN DISRUPTION: Sourcing in Mexico as The Alternative to China
Major Shifts Have Occurred over the Last Several Years with Sourcing from China
Supply chains have experienced unprecedented disruption as companies have been negatively impacted by tariff increases from the trade war with China and now with COVID-19. As the novel coronavirus outbreak has rapidly expanded over multiple geographic regions, this global pandemic has raised serious concerns about the current and potential future disruptions which are seeming to become more prevalent over the last 2 decades.
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. Any new administration has many other challenges before any serious negotiations will occur with China which would roll back these tariffs.
SARS, H1N1 Swine Flu, and now COVID-19. These have been major disruptions. Perhaps, they will all soon be behind us and never occur again. Output from factories in China has not yet been fully restored. Many supply chain executives have been diligently trying to solve these supply issues for the last few months.
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 currently has many advantages over 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 U.S., 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 U.S.
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 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, the differences between China and Mexico are huge.
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 U.S. companies that 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, for 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 U.S. company.
The Mexican manufacturing ecosystem is tied closely to the production of intermediate goods and aligned with the U.S. automobile industry. As such, many manufacturers are not vertically integrated. Their suppliers are sometimes pre-determined by the U.S. 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 U.S. 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 them their propriety. Therefore, these need to be created for many Mexican manufacturing companies.
The implications of these 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 U.S. price and not competitive with China.
Second, key cost factors must be challenged, such as the 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 that to which the Mexican factory has become accustomed.
Third, value engineering needs to occur to reduce the cost due to over-engineering, or to introduce more competitive methods of production. Furthermore, 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 U.S. 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 plus 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, as well as, 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 delivered cost to your distribution centers.