The Migration of Manufacturing to Mexico
There is a common mistaken belief that Lemmings hurl themselves off of cliffs in an act of mass suicide to control their population. Actually, the Lemmings are participating in a mass migration. The fortunate land in the water and complete their migration; the unfortunate land on the rocks below.
Similar to Lemmings, manufacturers have participated in mass global migrations as business opportunities were identified in Brazil (1980’s and 1990’s), China and to a lesser degree India (2000’s and 2010’s) and Mexico (on and off from the 1980’s but very intense now).
Some manufacturers complete the migration successfully; some end up on the rocks below.
As many companies are now migrating manufacturing operations to Mexico we thought it would be beneficial to provide some of the steps we have seen companies take to ensure a successful transition.
Manufacturing companies should prepare:
Expand into Mexico only as a part of a comprehensive strategy. Successful migrations have input from all disciplines in all phases from strategy development to fully established/proven performance business entities.
Understand the regional markets within Mexico. Cost structures, labor and management availability, material cost and availability countries can vary widely from region to region.
Only rely on export markets for the short term. Ability to profitably export from Mexico will be impacted over time by currency, inflation and productivity in Mexico and consuming counties. So, what looks like a good export opportunity today may not be in as few as 3-5 years. Successful long-term migrations have a plan to utilize the majority of their production capacity in the new location markets.
Develop a plan for independence. An independent location has the ability to grow and improve with limited support from corporate. Ongoing support from extensive travel and Foreign Service can wreck the profit and loss statement of the new entity and/or the corporation.
Steps to prepare your purchasing organization:
Understand the cost structures of the current, local supply bases. Understanding supplier pricing is not the same as understanding the costs that go into the items being purchased. Purchasing organizations who have accurate should-be cost models can modify the models for different geographic regions and establish better local pricing from the start.
Conduct a thorough assessment of raw material and purchased components availability. We were engaged by a client who had already started migration from Mexico to India before conducting a thorough review of raw material and components availability. The result: importing key components from the US and raw materials from China incurred customs and transportation costs, and, foreign exchange risks that doomed the financial viability of the India location.
Import from Mexico in advance of establishing manufacturing there. By buying from the new region first, purchasing can prove out supplier capabilities on existing, stable production processes and reduce risk for the new entity. It is also a good way to ensure common purchasing practices are established on a global basis.
If you are interested in learning how APD helps companies find and qualify suppliers in Mexico, take a look at the following: