One Company’s North American Near-Shore Supply Chain

I recently had a conversation with the Director of Logistics at a US-headquartered industrial manufacturing company that has several plants in Mexico, the US, and Canada. He had several interesting things to say about his company’s regional supply chain.

First, let’s talk about the basics of this integrated, regional supply chain that includes Mexico. Near-shoring in Mexico offers real labor arbitrage opportunities. In the case of this manufacturer, the cost of a fully-burdened worker in Mexico is only a fifth of the cost of a US worker. However, my source says these values vary greatly depending on the region, whether the workforce is unionized, and other factors.

Putting plants in Mexico is also facilitated by the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. This logistics director, however, says that there are substantial costs associated with avoiding these duties. If a manufacturer imports goods into Mexico, it must keep detailed records to show that those goods (often raw materials and other components) have been installed in the finished products and then exported out of Mexico within 36 months. If a company can’t show this, then it is subject to duties and value-added taxes. To lower its compliance costs and improve its documentation, this manufacturer recently implemented a Global Trade Management (GTM) system that the company projects will save it about $4 million over the next five years, after taking into account the cost of the software and implementation.

It is easy to underestimate the fully-landed costs of producing goods in Mexico. This executive used to manage some of the plants in Mexico and saw the business cases for near-shoring those factories. This company did get the projected savings from labor, but it underestimated the additional costs associated with inventory (because of longer lead times), trade compliance, and transportation.

On the logistics side, many trucks have to stop in Texas, unload, wait for the appropriate trade documents to be filed, and then reload goods into a Mexican truck before they can cross the border. Further, Mexico does not have a well-defined infrastructure for freight/logistics, such as less-than-truckload services. This results in more dedicated truck routes and milk-runs for regional pickups and deliveries.

This executive is hopeful those trucking inefficiencies can be gradually reduced. In July of this year, the US and Mexico signed an updated trucking agreement aimed at resolving a cross-border trucking dispute. Under the agreement, the US will reinstate a pilot program for Mexican truck certification. The accord requires all Mexican trucks operating in the US to comply with US DOT hours of operation and safety standards.

This logistician now thinks that between this agreement and his company’s’s new GTM, which will allow it to file the appropriate trade and entry documents prior to its trucks leaving cross-docking facilities in the Midwest, that his company will reduce inefficient transloading operations. American or Mexican drivers will be able to drive the same truck right through customs to their plants.

This brings us to another dimension to near-shoring in Mexico: drug cartels, transportation protection rackets, and violence. This director thinks US drivers will be willing to deliver to some of their plants right over the Mexican border, but they won’t be willing to risk their equipment, or their personal safety, by traveling to more distant plants.

In conclusion, the executive stressed that he would not want to discourage anyone from doing business in Mexico. But properly estimating total landed costs is a tricky business. This executive, as well as other C-Level executives at his company, think that they moved too many plants to Mexico. The plants producing products that required a good deal of manual labor clearly should have been moved. But more automated plants, with a lower proportion of labor costs to total costs, probably should not have moved. For example, they have two highly-automated plants producing very similar products. In these plants, having factory employees with the right technical skills is more important than labor savings. The US plant for these products is more profitable than the Mexican plant. Each business case is unique; a company should consider all the factors, including logistics costs, before making a decision to near-shore business to Mexico.