There have been a number of news articles mentioning the increased competitiveness of Mexico as a low cost manufacturing solution and for some outsourced manufacturing that is definitely true. However, one of the reasons Spectrum Assembly, Inc. has been experiencing record growth is because there are also good reasons for some projects to stay in the U.S. What are some of the key issues to evaluate in determining which option is best? Here are seven good ones:
- Maturity of product – Crossing borders adds complexity to the outsourcing process in terms of communications and logistics. New products and products with significant engineering change order (ECO) activity may be better served in the U.S.
- Demand variability – Cross-border shipments add to logistics costs. In a program with predictable demand this is very manageable. In programs with variable demand, this can add logistics costs surprises. Variable demand programs with low-to-medium volumes are often better served with by a U.S. contractor since logistics costs spikes may eliminate any savings.
- Optimum volumes – Saving $1 per unit would justify the higher costs of working at distance on a program with hundreds of thousands of units annually, but the cost savings could be negligible annual volumes are in the 50,000 to 60,000 range.
- Touch time – The cost of automated placement of SMT components in the U.S. is typically very cost competitive with offshore options. While foreign operations may have lower labor costs those are often impacted by higher utility costs and less production efficiency.
- Regulatory considerations – Mexico’s cost competitiveness is largely driven by lower cost labor. That cost advantage can disappear when programs require specialized quality data collection or accounting processes. Projects with ITAR requirements have additional complexity. In short, if your program is mission critical and highly regulated, evaluate total costs carefully since required data collection activities may require the use more highly paid English-speaking personnel.
- Quality considerations – The increasing popularity of manufacturing in Mexico following the cost increases in China is increasing competition for skilled labor. Experienced workers and managers are willing to move frequently for pay increases. The end result can be variations in quality and frequent changes in key support personnel. This exacerbates the learning curve associated with new projects and/or projects with complex support requirements. Monthly turnover frequently runs in double digits, so when a company quotes its turnover numbers, be sure to ask if that is per month or annualized.
- Set up time – Crossing a border adds complexity to the project launch process. Lead-time must be set aside for Customs classification of the product, translation of production documentation and any necessary governmental approval processes. There can be issues with importation of consigned equipment, unplanned duties on material procured outside of NAFTA and a range of other unanticipated costs or delays. When all these factors are considered, lower volume projects or product requiring a rapid project transfer and ramp to volume may be better served by domestic contract manufacturers.
Interested in more on this topic? Read SAI’s recent article, “Does Reshoring Make Sense for Your Outsourcing Strategy?”