Nearshoring: Why Now? - Warnings

As we covered in Nearshoring: Why Now?, outsourcing production operations to Mexico (or nearshoring) offers a number of tangible and intangible benefits over traditional “low-cost” country sourcing. Take China as a prime example: with labor rates in China, on average, exceeding those in Mexico since approximately 2013 and holding an advantage in productivity per worker, Mexico is increasingly becoming a hub for U.S.-based companies looking to transplant their supply chain operations. In moving operations closer to home, many companies are either fully or partially outsourcing manufacturing to suppliers in Mexico and in some cases, even placing full production facilities in that country. Sourcing suppliers in Mexico, however, is not without its obstacles: challenges that can quickly halt nearshoring operations for unprepared companies.

One of the biggest nearshoring challenges is raw material availability. Depending on your organization’s needs, raw material availability will be a major factor in deciding which region in Mexico (if in Mexico at all) makes the most fiscal sense for nearshoring. The ideal solution, of course, is to place production in a region with an abundant source of local raw materials to reduce freight costs and hedge against material shortages. However, if the primary materials you require for production are much cheaper and more readily available in China (fabrics for example) you may want to consider importing foreign materials to your ‘nearshored’ supplier in Mexico. Doing so may limit supply chain disruption by maintaining your access to the materials your product needs while still allowing you to reap the benefits of shorter lead times and lower labor costs in full production. If you do plan on acquiring materials from a foreign source, you should require your manufacturer in Mexico to warehouse 6-8 months of production materials. Oftentimes, the carrying costs of the inventory are exceeded by the savings gained through the lower cost materials when compared to more expensive, locally sourced materials. None the less, when considering a nearshoring model, conduct a comprehensive raw material analysis to determine price and availability prior to diving right into a full nearshoring engagement as this could actually offset the cost advantage of nearshoring your company’s production operations.

Another major hurdle of nearshoring is Supplier Identification in Mexico. This ongoing challenge stems from poor advertising practices rooted in a relatively primitive marketing infrastructure as compared to the U.S. Today, when looking for a supplier (or anything really) our first instinct is usually to look online. A simple Google search may render you little help as many smaller firms in Mexico who may be capable of providing the goods and services needed to support your organization lack an online presence. And in the cases where a website is available, typically only the larger and more mature suppliers will have their website translated to English or other languages.

Although finding suitable suppliers and being able to communicate with them are inherent challenges of doing business in any foreign country, there are work-arounds that make supplier identification fast and exchanging information more efficient.  Luckily for me, working in a consulting company with an entire nearshoring practice, internal databases and catalogues of past projects are at my disposal for mining. For those without a database at their fingertips, however, there is always the fun option of cold calling, but also shelter companies (designed to help external companies establish manufacturing operations in Mexico) or utilizing local agencies who support and foster foreign trade and investment in Mexico, such as ProMéxico.

If your organization is new to the nearshoring process, these local resources will quickly become your best friend. Aside from their familiarity with the local laws and regulations such as tax regimes, trade and other technological development incentive programs, they provide an extra pair of boots on the ground for identifying suppliers that have a limited marketing presence and matching resources and skill-sets needed by companies looking to move production to Mexico. Shelter companies and trade agencies not only help initiate supplier relationships, they also foster financial and regulatory compliance and help companies realize the various economic incentives of bringing capital to Mexico.

After you’ve identified the ideal suppliers for your organization, you’ll likely experience challenges around ongoing supplier engagement. According to the Geert Hofstede theory of national values in the workplace, Mexico scores extremely high on one specific dimension included in the study: Uncertainty Avoidance. According to this widely accepted study, this means that, by nature, Mexican organizations and the people within prefer to avoid uncertain, or unorthodox/new ideas and beliefs and instead maintain inflexible codes of belief. They generally feel that normalcy and security are important in the workplace, creating some side-effects when considering this new idea of nearshoring. When it comes to communication, suppliers are hesitant to give information to outside parties due to an unfamiliarity with the process of dealing with foreign business units. A way U.S. companies can adapt to this behavior is to meet face-to-face with their Mexican counterparts. Having a physical presence in any culture helps to alleviate the uncertainty associated with new ideas and methods. Face-to-face meetings coupled with providing detailed context to the initiative your company is undertaking provides a level of comfort for the Mexican supplier which results in enhanced responsiveness – an issue that plagues many smaller Mexican companies.

As with any sourcing engagement, the key to successfully nearshoring manufacturing operations to Mexico is understanding the market landscape. Unfortunately, finding the right suppliers isn’t as easy as conducting a quick Google search. You’ll need to thoroughly identify your supplier requirements and do extensive research and quoting to identify the best fit supplier for your organization. Even finding the right supplier doesn’t guarantee that they’ll be enthused by the idea of working with you. Don’t let the seemingly daunting process discourage you from experiencing the benefits of closer-to-home supply chain operations. Keep in mind cultural differences and utilize local organizations designed to help companies like yours partner with manufacturers in Mexico.