THE CONDUIT

The Hidden Costs of Outsourcing to Mexico

Posted by Scott Hanstedt on September 27, 2017

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Some OEMs are enticed by the potential cost savings that may result from outsourcing their electrical and mechanical assembly components to Mexico. The promise of cheap labor combined with the country’s close proximity often convince purchasing managers it’s the right move.

There are many reasons “Made in America” continues to be the best decision for OEMs, however, especially when taking more than price into consideration. Quality control, product safety, lead times and the ability to promote American-made quality are among the more familiar benefits of relying on domestic supply chains, but there are other potentially deeper issues that should be considered if you’re contemplating moving some of your production to Mexico.

Corruption

Organized crime and corruption has continued to plague the people of Mexico, and is a significant risk for companies that operate there. Widespread bribery and collusion negatively influence the country’s legal system, impacting a company’s ability to efficiently implement registration permits and licenses and causing excessive unexpected costs and delays. Despite continued efforts by some governmental entities to crack down on bribery and extortion, anti-corruption laws are rarely enforced, and public officials typically aren’t held liable for illegal acts.

Companies considering doing business in Mexico need to have the wherewithal, discernment and savvy to navigate this contentious atmosphere and go in with a plan for upholding their organization’s integrity and addressing such challenges should they arise.

Labor Practices

Let’s face it; the price of labor in Mexico is cheap. Compared with Chinese labor, which has steadily increased over the last decade and priced many of its suppliers out of the market, wages in Mexico have remained stable. From a cost standpoint, this sounds great at first.

However, manufacturers should consider the ethical dilemma this presents and whether it aligns with their culture, mission and brand. Despite working full time on fast-paced assembly lines for many notable manufacturers of automobiles, electronics, appliances and more, millions of workers and their families continue to live in abject poverty. A company’s leadership needs to ask itself, “Is outsourcing our product across the border furthering the risk of potential corruption and is it helping or hurting those impacted? Bottom line: will it mean compromising our core values?”

Unforeseen Costs

Part of any successful product launch involves accurately forecasting budgets. When working with a supplier across the border, issues such as currency exchange rates, tax implications, freight charges, broker fees, insurance, travel expenses and more can fluctuate significantly and add up. Also consider that the legal and fiscal systems in Mexico are unfamiliar and considerably more complex, so you’ll need to employ qualified legal help and find a reputable representative that knows the system inside-out and has your best interest in mind — a challenge considering the aforementioned widespread corruption.

And don’t overlook the future of the North American Free Trade Agreement (NAFTA) and its impact on Mexico’s suppliers. Manufacturers that rely on Mexico’s supply chain should expect changes on the horizon and extended periods of uncertainty. Without a doubt, uncertainty and business are not suitable partners.

These unknowns can derail a project, exposing a company to costly risks and delaying time to market. When considering where to outsource your electrical assembly parts, go beyond the per-unit price quote — which can sound attractive at the time — and be sure to do a total cost analysis that takes all the factors into consideration.

Yes, price is important, and many American electrical assembly suppliers are surprisingly competitive. But determining the true cost of doing business across the border should be based on more than price. Building a brand based on integrity, strong ethics and how the people directly and indirectly employed are cared for must play an equal or greater role in their decisions.

At MCL, our company is dedicated to upholding a culture of caring, innovation and collaboration, and our strong Midwest work ethic and quality has proven valuable to countless customers. Get to know us and our people, and contact us today to discuss your electrical and mechanical assembly needs.

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Topics: Supply Chain


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