21 Jul 2022 THE BENEFITS AND LIMITATIONS OF SHELTER OPERATIONS
Near Shoring Options in Mexico
By Jeffery Cartwright, Shoreview Advisors | 10 min read
Often when we start talking with a company that is looking to near shore their manufacturing, we’re asked about the options available and what makes the most sense. There are 3 different strategies for the near shoring of products in Mexico.
- The first strategy is with a fully qualified contract manufacturer who will provide the manufacturing expertise and equipment as well as manufacture and package the product per your specifications.
- The second major strategy is to operate a wholly owned manufacturing plant which many US companies have done for decades. In this scenario, the US company will establish a maquiladora and provide the leadership, workforce, expertise, and supply chain to manufacture the products for exports to the US. A detailed bill of material is needed that lists each component or part required to assemble the product.
- The third strategy is a shelter operation.
While all three of these strategies will provide globally competitive options for manufacturing products, not all companies will be able to successfully accomplish the latter two as they require manufacturing expertise, including operating the equipment and processes to produce a high-quality product. Contract manufacturing is the simplest and, many times, the only option for companies that do not have manufacturing expertise. The other two strategies require the importing company to provide the manufacturing expertise along with the equipment necessary for the manufacturing of the product. For these reasons, the rest of this article focuses on the shelter operation model.
Shelter Model
The shelter model is based upon manufacturing space. Most shelters are in industrial parks. They primarily are open space buildings that provide floor space for manufacturing, raw material, and finished goods storage with dock doors for receiving and shipping. Facilities management and physical site security are included in the space leased to the client.
The shelter company provides administrative and human resource services, as well as labor services. Labor services include workforce and supervisory activities, as well as regulatory and trade-related services.
Shelters will provide labor by hiring the workforce and providing payroll services including labor tracking, taxes, and benefits administration for the factory teammates and salaried positions. Additionally, the shelter company will handle any regulatory requirements, such as federal, state, and municipal permits. Utilities will also be provided. Management of local Mexican vendors, suppliers, and service providers is fully the shelter company’s responsibility.
Furthermore, shelter companies typically participate in the Manufacturing, Maquila and Export Services Industries (IMMEX) Program. The shelter company is allowed to import equipment, raw materials, and components into Mexico without being subject to the Value Added Tax (VAT) if all incoming materials and equipment are later exported or accounted for in great detail. Please note that if your company is not currently part of IMMEX (wholly-owned or supplier), it may take 18 months to get approved as a legal entity in Mexico.
Essentially, the shelter company oversees everything except the client company’s manufacturing, warehousing, logistical, and purchasing operations. This is highly advantageous as it relieves the importing company of the burdens of having to set up and legally comply with many aspects of the Mexican laws concerning the administration of the company and the workforce.
Client Responsibilities Within the Shelter
The US client company is responsible for the entire manufacturing process inside the shelter. This includes the:
- Equipment,
- Operation of the equipment,
- Workforce training,
- Scheduling,
- Equipment maintenance,
- Purchasing,
- Inventory control, and
- Quality assurance.
The shelter company will assist in sourcing candidates for salaried positions and the workforce, but it is the client’s responsibility to manage them. If you already have your own manufacturing operation or your current supplier in Asia is willing to set up a new operation in Mexico, this can be the simplest and fastest way to begin operations in Mexico.
The Missing Capabilities of Shelter Companies
Beyond the necessity of relocating equipment and directly managing the production process, sourcing and purchasing raw materials and components are functions that most shelter companies do not provide. That remains the responsibility of the US client. While some shelter companies do assist in the sourcing of materials, it is limited to supplies such as corrugated boxes and simple items available within their immediate area. It does not extend to thorough competitive sourcing of materials and components.
The importing US company will need to work with suppliers and factories for the materials and components necessary to manufacture the products. Additionally, it will need to manage the supply chain including ordering, transporting, and paying for materials to fuel the shelter operation.
From a total cost standpoint, most products have far more costs in materials than in labor. Companies relocating to Mexico need to address these inputs as well. Either the company needs to have a sourcing team deeply experienced in Mexico or needs to engage a partner to conduct the sourcing effort on its behalf.
Supply Chain Raw Materials Can Be Competitively Localized with Shoreview Management Advisors
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. Shoreview can assist you in competitively bidding on the supply chain and locating the appropriate contract manufacturer if you do not have the manufacturing know-how, equipment, and technical resources to start up an operation.
Additionally, we have relationships with the best shelter companies in Mexico. One that we highly recommend is NovaLink (https://novalinkmx.com/). They have additional services such as industrial engineering and expertise in a number of different manufacturing processes.
While there are differences between shelter companies, Shoreview can guide you through the process of selecting the shelter most suitable for your manufacturing operation. Shelter companies are specifically set up as the entry point for Mexican manufacturing. Many companies start with a small shelter, expand it over time, and when the operations are significant choose to establish their own operation (Maquiladora) where the companies operate the facility, including all the administrative functions the shelter has provided. The best shelter companies will assist in that transition.
Having built multi-billion-dollar supply chains in China and as well as 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 have twenty-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 complete analysis of the Total Delivered Cost, as well as an analysis of the reduction in working capital because of 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 will find you partners to assist in customs and duties, as well as the delivery of product to the customer warehouse in the United States. In short, we provide a complete sourcing alternative to China which almost always results in a lower delivered cost to your distribution centers. Contact us to learn more.
