Guest Commentary: From Offshoring to Nearshoring: Understanding the Shifting Sourcing Dynamic

While Asia remains the Mecca for low-priced goods, many companies are discovering the hidden costs and risks associated with offshore manufacturing. Volatile shipping rates and capacity, uncertain forecasts, limited alternatives and overall speed-to-market needs have businesses looking for viable alternatives. Many are turning no further than our neighbor to the south – Mexico.

Rising Costs, Sinking Capacity

The Asian shipping market was hit hard in late 2008 and 2009 as the recession bore down on the global economy. Ships sat empty at docks and many were removed from lanes all together. As the economy began regaining momentum, many carriers have chosen to continue to run limited fleets, creating an artificial limit to available space in an effort to recoup lost costs, causing demand to outpace supply. The result has been a sharp increase in shipping rates – up mid-year by a whopping 183 percent over the same time last year, according to Drewry Shipping Consultants.

Even with the dramatic rise in costs, businesses willing to pay the price are still struggling to find space on vessels, despite carrier contracts. In many cases, companies have no choice but to use planes to get goods to U.S. – a costly alternative that quickly negates Asia’s low-priced production.

By sourcing goods from Mexico, companies open themselves up to the low cost and flexibility that comes from multi-modal transportation. The ability to choose between truck, air, rail, or even LTL shipments becomes physically and economically possible with nearshoring. It is usually not cost effective to ship a partial load from Asia when the shipping costs are so high and lead times so long, but the close proximity of Mexico gives companies this option.

According to a June 2010 report from the American Chamber of Commerce of Mexico (AMCHAM), “in the manufacturing sector, the list of projects is extensive including Nissan’s plans to invest $600 million in a new assembly plant for the new Micra; the Chrysler/Fiat investment of $550 million; Procter & Gamble’s decision to build a $250 million razor blade plant in Guanajuato; and the new $445 million Freightliner truck plant in Saltillo.”

In fact, many companies are moving to a more effective model for inventory control of delivering less freight more frequently. Costly warehouses and distribution centers are also eliminated as shippers bypass these costs and go straight to their client’s door. Additionally, even in the case of an urgent shipping need, a plane from Mexico is both faster and much less expensive than having to air freight goods from Asia.

Greater Forecasting Flexibility

Perhaps the biggest sourcing challenge facing companies today is the overall economic uncertainty. In the height of offshoring, during the economic boom, companies could confidently create long-term forecasts. Consumers were readily spending and companies were rapidly producing. But, with the economy in such flux, it is increasingly difficult for companies to know what customers’ demands will be two or three months down the road. Because shipping times from Asia range from 22-23 days, there is no choice – companies are forced to place orders 60-90 in advance in order to ensure delivery.

With all of the economic uncertainties, companies outsourcing to Asia run the risk of having to carry excess inventory or failing to have enough product to meet consumer demands. Either case presents economic challenges that can be damaging to a company’s bottom line.

With lead times from 24-72 hours, Mexico presents a much more palatable sourcing option. Companies can save up to 30 plus days in the forecasting cycle, allowing them to refine forecasts to be more in line with demand. They also gain more flexibility to react in real-time, cancelling or increasing/decreasing order capacity depending on market needs. It is not possible to stop a container ship half way across the Pacific Ocean to change an order. But, cancelling, re-routing or scaling back a truckload order in order to minimize any negative business impact is possible when sourcing from a country that is just across the border.

Due to its proximity to the U.S., Mexico is ideal for products that require quick speed to market. Its proximity to the U.S. is important to companies for a variety of companies. For example, computers – which have a 30-60 day window to hit the market – cannot sit on a ship for 21 days. Likewise, companies that ship consumer goods off for repair would likely face some very unhappy customers if it took months to return a repaired item. Many of these items can be effectively replaced or repaired in 48-72 hour cycles, providing clear advantages for companies versus many of their competitors.

Mexico: The New Asia?

What once appeared as a clear-cut, low cost alternative now has many companies re-evaluating their sourcing decisions. The fluctuations in shipping rates, limited shipping capacity, long lead times and lack of flexibility associated with outsourcing to Asia are causing companies to look for alternatives. Despite its higher production costs, Mexico is proving to be a fierce sourcing competitor.

The same AMCHAM report cites an industry analyst study that said, “Buyers will increase their near-shore sourcing and manufacturing activities by a ratio of 5 to 1. The report goes on to state that: ‘Mexico is the preferred near-shoring destination, with 84% of the respondents choosing it as a place for sourcing or manufacturing.”

Once known for complex and lengthy import/export processes and documentation, the Mexican government has taken steps to simplify these processes, reducing paperwork and limiting lengthy customs evaluations. Combined with the flexibility, reduced transit times and lower logistics costs it offers, Mexico is quickly becoming a business-friendly alternative to offshoring.

Troy Ryley is the Managing Director for Transplace Mexico. Mr. Ryley has been involved in Mexico and Latin America logistics since 1993. Shortly after graduating with his MBA from The American Graduate School of International Business (Thunderbird), he was relocated to Mexico City where he worked and lived for more than 12 years. Troy has managed the Mexico operations for Distribution Services Ltd. (now Maersk Logistics) and Expeditors International. In addition, he spent several years working throughout Latin America as a Business Development Manager for TNT Express Worldwide. Now located in Laredo, Texas, Troy has a unique view of the extensive development and changing trade practices of America’s southern neighbor.

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