Sourcing in Mexico has improved greatly over the last few years. This is due to an increased adoption of international standards for the different verticalswhich are industry groupings like retail, aerospace, car, infrastructure areas and a reduction of trade tariffs that, force the local manufacturer to compete with product made elsewhere, principally China.
Part of the benefit for increasing Mexican imports is due to the Chinese success story. The fact that the economy has grown so quickly has also increase their labor rate 20-30% each year over the last few years. At this point the labor rate is now higher in some regions of China than in Mexico, this means the cost difference is now due principally due to a higher productivity rate in China per man-hour, which is quickly closing as well.
I do think there is still a ways to go in some manufacturing sectors but it is quickly moving along. I do think that if the US decides to fully embrace the “total cost” concept in purchasing instead of the “first cost” concept, it will further increase Mexican exports to the US.
I think it is worth explaining this briefly. Total cost is when a fully loaded quote is performed of the all in costs to have the product bought from origin country, have it transported, fully understand the duties and all other costs involved up until it is unloaded at the warehouse dock. In many industries buyers still look at the only initial product cost in the country of origin (many call them first costs) when making a decision and this can impact costs negatively since we are not looking at the whole picture. In the future I do foresee more labels that say “Made in Mexico” and/or “Manufactured in XX country (like China) and Assembled in Mexico” The future model will use the total cost instead of the first cost which will allow companies to take advantage of the best cost for parts of the final unit to be sold. An example of this would be buying a consumer fan motor in China and importing it into Mexico where other processes are as efficient or more efficient than China and in the end the total cost of the product which was finished in Mexico has a lower cost when imported into the US paying any duties, etc that may apply.
In the aerospace and car manufacturing industries we are seeing these tendencies being executed and I believe that many other products which are sold in big box retailers will do the same due to two factors: shipping efficiencies lost when shipping finished product to the Americas from Asia and the lower labor costs for assembly lines in Mexico. This isn’t a turnkey opportunity yet in Mexico due to differences from the US and China in things like: working culture, unions, languages, Mexican tax system, Mexican indirect labor costs, instability in exchange rates. Find the right partner for your vertical is essential because they may have the contacts to make it happen or one may even be able to find a manufacturer that can make the product.
I have worked in sourcing for retailers and for US companies looking for consumer products, machinery, specialty vehicles, etc. in Mexico and I think the opportunities exist when the “total cost” model is used. and the person looking for the product understands how to lower the transaction risk and avoid losing the value in the transaction if best practices in supply chain are not applied. Some of these best practices are reduced transit times, the ability to assure the quality of key components used in the manufacturing that are purchased from a third party and purchasing a product regionally to assure spare parts will be available in the destination as well as the motor working with the type of gas sold at the destination. On the financial side it is how to assure a fixed price when it may take months to produce where more than one currency is involved.
Further on in the article, I will look to provide greater detail with examples to better show the value in sourcing in Mexico for both consumable and non-consumable products.
Ideas On How To Retain The Value Of What You Source In Mexico
I will do a four part article on sourcing in Mexico to try to provide you best practices to conserve the value of what you source so that the total cost can remain low avoiding the ¨potholes¨ in the process of sourcing an item.
Part 1 Negotiating With The Factories In Mexico – Finding a factory and requesting a transparent quote
Mexico, like many other countries, will be a country of two worlds, those companies that export and those that prefer not to. In many cases, you will find businesses that give you better prices that prefer not export the product.
Mexico has very large companies that are quite efficient in exporting products but many times these companies are expensive since they understand the prices abroad and they want to maximize their margins. It will be important to know where they get their raw material from so that if they are importing it one could understand that they will quote you in US dollars but if most of the raw material is bought and manufactured locally then you should request your pricing in Mexican pesos and benefit from the exchange rates.
There are many factories in Mexico that are too small or just don’t want to be bothered with exporting their product. I have personally found great manufacturers for products ranging from soap and toilet tissue to specialty vehicles (like ambulances, fire trucks, stainless steel tankers for trailers, etc.) that use US or International standards to produce their product but want someone else to manage the transactional risk and the export paperwork. It is important that you find an entity that you can trust that can do the exporting of the product and that the prices those companies give you are in local currency, the Mexican peso. Also, that party should be transparent and provide you options that they could export and other factories that would export themselves and your agreement with them should cover both fee-based sourcing as well as them exporting the product with an understanding of what their profit will be so that you can decide from a total cost, quality, transactional risk, etc. which of the suppliers you prefer to buy from.
It is also important to have a directional view. Is this is going to be a one shot purchase or a repetitive purchase? Mexico can offer some great prices since the population overall is gifted in metalworking, pottery, weaving, art, etc. with a rich history in handicrafts and art. After all, organized civilization is much older in Mexico than that of the US. Like most things, there are usually pros and cons. In general terms, I have found that consumer product packaging is weak in Mexico compared to China. It is important to be clear on both the specs on the product and the packaging so that if need be they can import the packaging from elsewhere. Many times packaging isn’t available at a competitive price in Mexico. This, of course, should become evident through the factory quote after having received a detailed specification from you, which should include both the technical aspects of the product as well as the tests or certifications that the product may need to pass in the market it will be exported to. A simple example of this could be liquid soap. Excellent liquid soap is available in Mexico but attractive bottles are not. If a US Company wants to buy the product in Mexico it may be necessary to transfer the mold from China if it is owned by the US Company or have the mold made or transferred to Mexico since buying the bottles from China would be expensive and the sea freight is expensive considering the amount of air you are transferring in the container.
In short, I would suggest you always request an ex-works quote (Incoterms 2000) which is another way to say a quote where the buyer picks up the product at the factory and that, where possible, it be in local currency. If possible in the sourcing process request 3-5 quotes that are a mix of small and large factories, that both export themselves and others that would require export services. In the upcoming sections, I will go into the supply chain costs that can affect the value proposition of the ex-works quotes if they are not mitigated properly.
Part 2 -The Cultural Aspect Of Sourcing In Mexico – The importance of a relationship with your supplier
Early in the article I discussed how to get a competitive quote and now I would like to explain probable opportunities to further improve it.
American and some European cultures are not known for having an interest in have a relationship, only business transactions. I know this because I grew up in the State and it is a bias I’ve had to overcome in the onset of any new relationship I have in Mexico or other countries. Mexico is still a very relationship based country where value is placed on that relationship (trust) and it can have a real impact on your ability to improve the quote. After you have chosen the factory that you want to work with and have had 3-5 business transactions with them and all is working well and they are meeting your needs, it may be worthwhile to take a trip to visit the factory and get to know your supplier. This should be possible whether you are dealing with them directly or working through a middleman. If the middleman is reluctant than it is probably worth having a contract with them that was mentioned above so that they do not feel they will be cut out of the transaction. If you do go to meet the supplier you should be sure to request to meet with someone at the Director level or above. If you are unable to meet with a contact at that level you’re going to have a difficult time developing a stronger relationship with the company.
As in any relationship it is give and take so that it is a “win-win” for the involved parties. In going to meet the supplier it is important to take the time to first get to know them, whether they are single or married, if they are from the local area or moved there from another place. Be sure to take an interest in the local culture or food so that you can show some true empathy for their culture and well-being….. It took me some time to understand this coming from a transactional culture in the U.S. but it truly does help to develop a very constructive business relationship in Mexico. I would suggest that you ask them how their dealings have been with your company, are the payments coming in on time, etc. The cost of capital compared to the US and European countries can be 3-5 times more in Mexico so taking interest in assuring a healthy cash flow with help you to avoid many issues down the line. After taking the time to get to know them and their wants and needs, you can ask the question “what can I do for you?” You may get an expression that conveys they don’t quite understand. Dig deeper, there may be issues that are costing them money that may not be affecting your transactions now, but to fix will alleviate cost increases later. The following is an example: While speaking to a sea freight company and I asked several questions and found that they were paying hefty fines for wait times to unload containers. It was a simple fix for me and clearly benefitted me in freight negotiations in the future. Then the final question in the search for “value nuggets” or “golden nuggets” to improve the price is “what do you think we can do to improve the cost that doesn’t affect your profitability?”. Usually for someone to be able to answer this meaningfully they need to be a Director or of greater administrative level of authority since it can involve information that could be sensitive for the company.
In short, when you know the Mexican supplier is a “keeper” than you should consider developing a relationship with them which can reap benefits for the company at a minimum in risk management and can also benefit on a value creation level in the business relationship.
Part 3 – Sourcing in Mexico- Potholes to avoid in the Value Proposition –Transportation from factory to the US
In sourcing and managing supply chains in Mexico I have found that the hidden supply chain costs can be very expensive if you do not have them broken out to differentiate them from the cost of the product so that they can be mitigated….so much so that you can come to think that the product cost is more expensive than other markets. The cost per mile for both land transportation and package delivery is more expensive than the US by 20-50% per mile depending on the routes you are travelling within Mexico. Furthermore some routes are also dangerous so it is important to know how to mitigate theft, etc. of the cargo on those routes. It is a critical to source cost effective, low risk freight and take advantage of those services as much as possible.
It is important to delineate on the quotes and during shipping of the product that you have the product shipped on as few pallets as possible and be sure that the product has enough shrink wrap to avoid the product from falling or leaning over on the trip and that your freight negotiation is very clear on what other fees will be charged. It is also important to know enough about the cost of transportation to know if the costs are competitive or not.
Here are a few ideas-
- If you do use a broker/forwarder to export the product ask the broker to provide you freight rate comparisons.
- If the manufacturing company will be exporting the product directly ask them for a freight rate comparison as well to avoid paying more than necessary.
- A third alternative would be to quote via your freight brokers. There is a lot of value in Mexico that gets lost due to inadequate and expensive land transportation.
Unfortunately, Mexico still requires a market consolidation in that industry to get to the level of efficiencies that are found in the US, Asia and other markets…. The positive side of this is that you can find excellent rates with reliable companies if you know where to look…just beware of multiple layers of middlemen and get references you trust on the carriers to avoid to mitigate issues.
If you are going to be importing product into the US via train do not clear your containers at the US border in Laredo, Texas (it is the point where most product is imported into the US from Mexico). Currently this US border import point and others do not have enough manpower to inspect the containers on the train being imported at that port of entry so if it is sent into “inspection review” the costs can run as high as $2,000 USD per container or more.
I would suggest one of three options-
- Customs clear your product in an interior/inland port if it is travelling via train
- Use a trailer which is authorized to be used in the US
- Use a container or just have it travel on a flatbed to cross the border and have it put on the train in the US.
Depending on where it is you’re shipping to and how far it is from the border there are cost effective solutions available which can avoid well known border issues to process freight travelling in specific modes. The other freight mode to avoid is shipping to the border in a trailer that cannot circulate in the US and transferring the cargo onto a trailer that can circulate in the US…This can cost your between $300 USD and $800 USD to have it done as well as increase the risk that the cargo can be stolen or shrink can occur. The US brokers at those border points are well aware of which modes have these risks so I would suggest it be reviewed before defining how transport your good to the US and at what geographical point it will be imported.
In short do not underestimate the importance of assuring competitive rates for freight transportation to the US and having these costs broken out from the ex-works price to assure competitive low-risk pricing/transactions at each node of the supply chain.
Part 4 – Sourcing in Mexico – Sourcing in Mexico – Practice makes perfect
After having worked for the largest retailer in the US and for both the first and the second largest retailers in Mexico I do believe in pre-shipment customs classifications of the product and to assure compliance with C-TPAT (The Customs-Trade Partnership Against Terrorism)compliance. When living in emerging markets I find that things we take for granted in the US or Europe cannot be taken for granted in other markets.
I would suggest that for important transactions time is taken to define the specifications for the quote, then request a sample and testing being done on the sample to assure it meets the specification and/or local safety, traceability or other regulations that may have been omitted by accident on the initial specification. There are still issues with product being sold, like colorants long since prohibited by the FDA in the states still being used in Mexico. For cost efficiencies sake sometimes in manufacturing a higher recycling rate of the product is used for a certain product even though in other markets it wouldn’t be accepted due to its impact on the material strength. I think this is a common sourcing rule, the better the detail in the quote or “RFQ” on what is acceptable and not the better the result will be for all parties involved in the transaction.
I do believe that there is an enormous opportunity for the US and other markets in the Americas and Europe to find an excellent product in Mexico at competitive rates but there is still less information available to find those suppliers in Mexico versus its competitors in Asia. I do think that the Mexican tax reform that happened in early 2014 has also complicated this a bit since it increased taxes on legitimate businesses instead of affecting the market in an equal manner so these small companies are as hungry as ever to find parties interest in their product but now have less cash flow to invest to promote their business.
There are industry associations to promote their member businesses, although some regions of the country are more organized than others. Government organizations are quickly improving this work in some industries like Aerospace, Automobiles, and Fast Moving consumer products. Local suppliers are still somewhat inefficient many times in promoting themselves due to the local cost of capital and little e-commerce business in Mexico as a % of GDP versus the US.
This site will look to develop in future articles reliable sourcing data by industry verticals starting with consumer products, dry grocery, specialty vehicles and auto parts for Mexico as well as provide links to other sites which may be of use to help find the products and/or services you require to facilitate business with Mexico. This will be possible due to well over two decades of accumulated experience in manufacturing, retail and executive business experience in Mexico.
The conservation of the competitive ex-works costs in factories are important to separate from the indirect costs when looking at the “total cost” of the product to land it in your warehouse when comparing it to a product from other markets. After only a few transactions with Mexico I believe it becomes very clear how to minimize the indirect product costs and Mexico will quickly become more competitive than Asian markets when analyzing it on a total cost basis due to the skyrocketing Chinese labor costs as well as the unpredictability in the shipping costs from those markets as well as the lead times from order to product arrival.
The other benefit that we will discuss in another article is the ease of travel to Mexico to develop suppliers versus overseas, I do think that this will support the market growth and quickly close the gaps that have stunted the economic growth in Mexico as a sourcing alternative versus other markets.
Please feel free to email me with your questions and I will be happy to answer them to support your interest in developing business in Mexico.