Known for its low labor costs, a vast reservoir of workers, and supply chains that are much shorter and cheaper than any Asian manufacturing site has to offer, Mexico is becoming an increasingly popular destination for near-shoring among American businesses.
A Kearney survey of 120 U.S. manufacturing executives found that no less than 41% of them are trying to reduce reliance on China. The majority of these companies are not moving manufacturing back to the U.S., but will near-shore production to Latin America, namely Mexico.
While Mexico offers plenty of opportunity to American companies of various industries — from medical technology to apparel — there are many pitfalls that hinder moving manufacturing to Mexico from the United States or, more commonly, from Asia.
Following are some key conditions for success.
Setting the Right KPIs
The first condition for success entails choosing the right objectives, and from that, selecting the right key performance indicators. While this might look academic at first sight, it's an important first step. Many businesses struggle to measure the success of their move, because they don't know how to define success in the first place.
There are various reasons why companies move manufacturing to Mexico. Aside from the obvious benefits of the geographical proximity of Mexico to the U.S. market, four of the most important drivers are cost of labor, unionization risk, threats to intellectual property, and the cost and ease of managerial operations. The latter two considerations are especially relevant to companies operating in China and other parts of Asia.
Once the business clearly defines what it wants to achieve, quantifiable objectives and KPIs will help it define success effectively.
Choosing the Location
A lot of factors come into play when choosing a location that is appropriate for the unique needs of any business.
More than anything else, the objectives that were set for the move will inform the decision on the location. One important question that needs to be asked first is whether the domestic market is one in which the company wants to sell its products. If that's not the case, it will often make sense to pick a location that is close to the U.S. border.
Other objectives can pertain to cutting costs or keeping the length of supply chains to a minimum. Whatever those objectives are, entrepreneurs should let them lead the decision on location.
Don't follow a herd mentality and be tempted by clusters of certain types of manufacturing units just because others are. The real added value of these manufacturing clusters is very limited.
Choosing the Right Resources
Some companies will choose to in-source near-shore manufacturing management capabilities, while others will want to outsource this support to specialized consulting firms.
Both approaches come with advantages and disadvantages. Two important advantages of outsourcing are flexibility and the breadth of expertise that hiring a consultant will afford. Recruiting someone to help accomplish the job in-house might be cheaper in some instances, but they will most likely not bring all the cultural, legal and business knowledge to the table that you need to start manufacturing in Mexico.
Consultants can be hired on the fly, and terminated as quickly if a project is stalled or when there is an important strategic shift. We live in a world of VUCA (Volatility, Uncertainty, Complexity, and Ambiguity), in which nothing is ever set in stone and those who adjust fast are best placed to survive and thrive.
Planning the Move
Management will often make a decision to avoid moving 100 % of production to Mexico all at once, but instead make incremental moves. If that is the case, a solid plan needs to be in place where different waves of manufacturing follow each other in a natural order. Importantly, the first wave must be given enough time to serve as a test where lessons learned can be fed into subsequent iterations.
A thorough understanding of lead times for different key processes will be necessary for the planning to correspond sufficiently with reality on the ground.
There are differing key conditions for success for companies who are moving their manufacturing capabilities to Mexico. Companies need to think clearly about the objectives they're aiming to achieve, choose their locations well, be adroit about insourcing or outsourcing specialized help, and conduct a data-informed planning that helps them move — where needed —in gradual steps, in an efficient way.
Jorge Gonzalez Henrichsen is head of business development and co-chief executive officer of The Nearshore Company.
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