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Why Mexico is a viable supply chain option (despite the violence)

admin | 10.10.2011

Why Mexico is a viable supply chain option (despite the violence), learn more about it here. Follow The Qualified Group Insights section for more articles.

We feel this article is very well written and relevant to what many of our clients with operations in Mexico are experiencing. While we hear of violence between drug cartels in Mexico on a daily basis, the majority of QualiFind's clients continue their operations with minimal impact beyond taking extra security precautions. Rick clearly articulates the additional, and in many cases more important factors that companies need to consider before expanding or considering Mexico as an option. He brings considerable expertise on the topic with his background as a General Manager of an industry-leading operation in Guadalajara and currently in his role as a Managing Director of a business management and performance improvement consulting firm.

Anyone interested in our southern neighbor has to be shocked by the ongoing drug war violence in Juarez and other border cities. During the three years since the Juarez and Sinaloa drug cartels started their war, more than 7,600 people have been murdered in Juarez, the largest Mexican border town and home to a significant maquiladora manufacturing industry. Many others are victims of criminals, who, having limited employment opportunities in a struggling economy, turn to crime.

Yet the maquiladora industry is moving on. Juarez is recovering from a loss of about 60,000 maquiladora jobs (from 260,000) since 2008, with the recent total standing at about 218,000 workers.

Because of a weakening peso and a strengthening Chinese RMB, Mexico is an increasingly attractive alternative to China for low-cost manufacturing

. Local economic development officials report an increasing number of permit requests for expansions and new plants in Juarez. Yet even as they contemplate their options, companies are immediately faced with the violence issue. Should it turn them away?

Here’s the opinion of someone who spent five years as a plant manager and consultant in Juarez and still travels there frequently. Yes, the violence is a concern and a few companies have decided not to locate in Juarez but most are forging ahead.

In the end, economics, not fear, has been the determining factor for a company’s decision.

Life across the border

The first question I get about Mexico is what’s it like and how do I deal with the situation? There are some standard precautions I take that could be applied to many foreign locations. I spend the night in the closest safe and secure place possible – in this case, El Paso – and commute over the border daily. I don’t go out late at night and I stay away from the worst part of Juarez where most of the violence happens. I drive an ordinary car and advise others to leave the Escalade at home. I once heard shots outside of a restaurant I was in. It turned out to be a killing of two police officers who were involved in the drug trade. I don’t have a bodyguard and the only thing I worry about is waiting in lines to cross the border but my Sentri Homeland Security pass cuts down the wait to about 10 minutes. The factory workers try to ignore the violence because their livelihood is at stake. While there are incidents that involved workers being killed on a bus going to work, such events are rare. Nonetheless, security is a factor to consider for companies wanting to retain their employees, which is important in this resource retention competitive environment. Some companies are hiring security for employee buses and provide free cafeterias, in-plant stores, and recreation and medical facilities.

Decision criteria: What you need to analyze

Companies must consider cost reductions in order to compete. First, let’s define two main ways to do so by going to a foreign country. Outsourcing: Having another company manufacture your products. You can sell them your assets, machines and tooling, and require them to source from your approved vendors and buy product from them. Offshoring: Relocating your operations and opening a wholly-owned subsidiary abroad. Having said that, here are your decision criteria:

Time to market. When you compare Mexico with Eastern Europe or China, time – a key consideration of the supply chain – favors Mexico. You don’t need as much lead time for your products to arrive in your market. If a quality problem arises, you will have just a couple days of suspect inventory to quarantine from Mexico, versus three or more weeks from overseas. Supply chain and logistics cost. Most companies have to reform their whole supply chain when they outsource or offshore. It involves finding new suppliers of raw materials as well as qualifying and certifying them. It’s harder and more expensive to visit those suppliers overseas compared to Mexico. Logistics costs could also be higher from overseas, depending on the type and physical size of product. Centrally located in the U.S., El Paso makes an ideal distribution location. Labor. Labor rates in Mexico are about $4 an hour, and for simpler tasks such as processing agriculture products it can be as low as $1.50 per hour. Compare that to $30 fully loaded in the US. However, skilled labor in Mexico can be a challenge in some industries. In Juarez, we installed a sheet metal operation that had large transfer press tools. Two years later we were still struggling to find the highly skilled toolmakers to support the sheet metal dies. Supporting quality assurance and knowledge transfer costs. Travel budgets overseas to visit suppliers or off-shore subsidiaries are more expensive than going to Mexico. And you don’t go to China for a week and then come home. You stay longer. It’s sometimes a challenge to find employees willing to do that. Intellectual Property Security. People in Mexico would rather focus on just work, and intellectual property theft is not the problem that it is in China. Cultural fit. You have to get along with your new employees. Historically, Mexicans had a reputation for taking siestas and two-hour lunches. That’s in the past. Companies along the border are copies of U.S. companies, with sophisticated lean manufacturing and Six Sigma programs. Mexicans are very hard workers. New technology can sometimes be a challenge, but is improving all the time. All my staff spoke English in Mexico. This is night and day compared to Hungary or China. Analyze your overhead. What are you reducing and what are you adding to support your relocation or outsourcing effort? Labor law. You have to consider the pro-labor laws in Mexico, or any other country being considered, especially if you are in a highly seasonal business. If you lay someone off in Mexico, there’s a three months minimum severance, plus a month for every year of service. Value-added tax. At every key point in manufacturing a product in Mexico, there’s a value-added tax. Maquiladoras get a small break, paying 10 percent versus 15 percent, but it’s still a factor to consider. Under NAFTA rules, there’s no tax on raw materials shipped from the U.S., imported to Mexico for production, and exported back to the U.S. as a final product. Your customer’s reaction. What is your customer’s perception of you reducing costs by manufacturing in Mexico? The hurdle is to convince customers that quality will not be an issue. Management. You need skilled, competent managers running your factories. This is more of a concern in China than in Mexico. In many cases, companies will have senior U.S. managers running operations, especially where more complex products and processes exist.

The violence is having some economic impact on Juarez. Currently I’m working with a major appliance manufacturer to help establish a sheet metal operation in Juarez that will make washer and dryer parts, as they are closing their Iowa facility. The appliance manufacturer already has a large operation in Juarez, so they know what security issues to expect. On the other hand, LEGO built a 500,000 square-foot facility in Monterrey, Mexico last year rather than Juarez, even though the business was already in Juarez at a contract manufacturer. This was partly because of the violence, despite creating a slightly longer time-to-market. Much of the violent image has been blown out of proportion by the media, influencing peoples’ perceptions. The violence is not as bad as the image projects. Every analysis you read about the problems of Mexico culminates in the conclusion that the country needs more jobs. And, in the end, most companies are letting economics, not crime or policy, drive the decision on where they should locate to provide those jobs.

About the author: Rick Thompson, managing director for CRG Partners, has more than 25 years of experience in lean manufacturing and process improvement. He specializes in project management, supply chain management, operations metrics, strategic planning and P&L; management. He can be reached at rick.thompson@crgpartners.com or (972)702-7333.