Annual Fall Conference
Retailer Open Forum
Supplier Open Forum
SAVE THE DATE!
2014 Spring Conference
Sanibel Harbour Marriott Resort & Spa
Mexico is the New China
Katherine Doherty, Yusen Logistics (Americas) Inc.
As the cost of manufacturing in China continues to rise, businesses have set their sights on Mexico as they rethink their global supply chain strategies. A growing number are turning to nearshoring - the shifting of production from China to Mexico and the United States - to reduce manufacturing costs.
Over the past decade, many of the financial benefits that China once offered, including cheap labor, tax incentives, currency stability and low inventory carrying costs, have started to disappear. China's labor costs have significantly increased in recent years, with minimum wage rates increasing 15 to 20 percent annually, according to a recent study by Cost & Capital1, and that trend is expected to continue. Recent changes to China's Value Added Tax (VAT) system have increased the overall VAT burden on international air and sea transportation providers and those costs are passed on to their customers.
With fuel prices escalating and companies looking to shorten their supply chain in order to get product to market faster, Mexico is becoming an attractive alternative for many. Reducing transit time from up to 40 days down to two or three days, as well as the fuel expense associated with the shorter journey, allows companies to better respond to their customer demands and hold less inventory.
These savings offset the higher cost of Mexico's labor, which, unlike China, has remained stable. Average hourly wages are now 19.6 percent lower in Mexico than in China, whereas in 2003 they were 188 percent more costly according to a recent Bank of America Merrill Lynch study2. Mexico can maintain that competitive advantage for at least five years thanks to a growing labor market that puts downward pressure on wages.
Energy has also made a huge impact. Oil prices have skyrocketed over the past decade, as has the cost of shipping ocean freight from China to the U.S. ports. Nearshoring initiatives can result in a five to ten percent reduction in total landed costs, which include taxes, tariffs and regulatory compliance as well as transportation and storage at all points along the supply chain. The full landed cost of Chinese production rose from 2005 to 2010 to 87 percent of U.S. costs, according to a study by AlixPartners, while Mexican costs fell to 75 percent of U.S. costs3.
Plus, the close proximity to Mexico enables companies to take advantage of the low cost and flexibility that comes from multi-modal transportation. They can choose between truck, air, rail or even LTL shipments - which they can't do if they're sourcing from China.
In addition to significant labor and transportation savings, nearshoring offers many advantages, including:
- Faster speed to market: Reduces transit times and enables manufacturers to respond more rapidly to fluctuating consumer demand.
- Flexibility: Gives manufacturers the ability to postpone final configuration and differentiation the sales cycle to a point closer to consumption.
- Better communication: Similar time zones and holiday schedules make it easier to communicate and Mexico's proximity to the U.S. makes it faster and less expensive to meet fact-to-face with customers.
- Fewer supply chain disruptions: A shorter supply chain helps reduce risks.
- Less inventory: A shorter lead time reduces the amount of inventory held in storage.
- Less environmental impact: Creates a greener supply chain and allows customers to know where their product is sourced for safety and environmental reasons.
With all these benefits, it's no wonder that more companies are nearsourcing to Mexico. If it's in your future, it's important to understand the process of moving product across the border. One way is to partner with a capable and experienced third-party logistics provider (3PL) with expertise in cross-border distribution. The right 3PL partner can leverage their existing knowledge of the infrastructure, people and customs and ensure that goods move efficiently through the supply chain. For example, importing goods into Mexico calls for working with both U.S. and Mexican customs and there are 3PL's that can help expedite the required border crossing paperwork. Some 3PL's also offer bonded warehouses and Free Trade Zones (FTZ), which can help reduce costs and transportation times. Look for 3PL's that offer flexible, multi-modal transportation options, modern warehouses and operations both in Mexico and the U.S. for better communication as well as visibility throughout the supply chain.
Mexico has proven to be a better, more effective option for many companies due to its advantages in logistics, quality, transportation and communication. Thanks to speed, flexibility and cost, more companies are nearshoring - and reaping the benefits.
Katherine Doherty is the Marketing Communications Analyst for Yusen Logistics (Americas). The former Editor-in-Chief of Food Logistics magazine, she has been writing about logistics and related topics for more than 15 years.