International trade/Sourcing Discussion Points.

Objective: Discover and implement best cost-to-produce formula and location for your products.

Assumptions:

Cost (approximate) per man/hour of shop labor in the U.S. is no less than $10, in Mexico $1.40, in China $0.25 in Taiwan $1.00.

A U.S. or Canadian company could be fully automated at the core level of production such as multicavity injection molding, rotary die-casting and the like. But the moment a part is picked up the price advantage of automation diminishes every second the part is being touched.

Second operations such as grinding sprues and edges, drilling, taping, polishing, plating, finishing, packaging are all labor intensive.

Inventory costs must be considered for container lot sizes on trucks or on the ship crossing the Pacific. Three days plus one for customs paperwork for a Canada to Mexico delivery, three weeks for a Hong Kong to Los Angeles, then truck to Tijuana.

China quality is never predictable. Inspecting and accounting costs will be high. (Attempting to issue and collect on credit memos on junked merchandise or rework make for sizzling bookkeepers. Some companies simply buy 15% more than required and toss non-conforming merchandise in the dumpster)

Options:

1. Shelter

Production in Mexico at $4.50 an hour labor rates could begin within two to four weeks. There are several shelter operators with available space and employees along the Mexican border from Rosarito to Mexicali and beyond. Usually a minimum of 10 employees is required, ramping from a few people to 10 to 15 by year end for an average of 10. For the fee the shelter handles all hiring, firing, Social Security payments, taxes, vacation, aguinaldo and the rest. Customs paperwork is usually included for a once or twice a week shipment. Typical is $60 for merchandise going in, and $100 coming out. Some shelters include trucking to the U.S. custom’s site or customer site if on the border.

2. Shelter with divorce clause

Because shelters derive their profit from a percentage of the $4.50 paid by the client, many clients will want to become independent sometime in the future. If this is discussed up-front, most shelter operators will make it possible for a smooth transition by helping train client personnel in management under Mexican law. Many U.S. clients prefer to continue with the well-oiled relationship of a well run shelter rather than assume the additional risk and management costs. Others may elect to use the shelter’s accounting services as they break away from other management activities.

3. Pitex, on the border (Pitex is a form of Maquiladora with certain advantages and would be your own company in Mexico.)

A Pitex is the equivalent of a maquiladora, only it allows the company owners to do more business in Mexico. A U.S. individual or group can form a Pitex, import material in-bond, export the finished product but also sell more than the 10% in Mexico allowed under a maquiladora permit. With Mexico’s efforts and successes in opening trade with other nations this would allow the U.S. company to take advantage of these trade deals as though they were Mexicans.

4. Canadian automation containerloads to Pitex

It may be possible to drive costs into the basement through a combination of cost effective high-volume manufacturing through automation in Canada or the U.S., followed by second operations in a facility along the Mexican border.

5. Buy from Mexican manufacturer - help with production technology

Find a Mexican manufacturer willing to enter into long-term contracts where you would provide high-volume, low-cost manufacturing technology (as in the case of Sanyo) along with some machinery and tooling. Then simply operate as buyers and sellers through purchase orders and MRP scheduling parameters via the Internet.

6. Pitex on the border, job shops from the interior, a la Sanyo

Another option would be to establish a final assembly shop in Tijuana or Mexicali then perform an extensive search and contract mission to locate and help establish Mexican job shops capable of producing punched parts, molded components, other ‘build-to-print’ items and finishing. This was the Sanyo secret to success.

7. Source China at rock bottom, inspect and rework in Mexico. Several companies in Tijuana are doing this very thing. Some have discovered the cost of raw material in the United States, Canada or Mexico is more than the cost of finished goods from China. But quality is the missing ingredient so rework and scrap is done and even then there are substantial cost benefits when done right. (People are given the right tooling, training and working conditions.)

8. Set up tooling operation in Mexico with state of the art technology. There is a CAST (High-tech training center) in Tijuana where CAD/CAM, mechatronics, automation technology, EDM, 5 axes machining and other equipment is available to train technologists. When I helped Caterpillar’s Solar Turbine Division establish a rework operation in Tijuana we hired workers and paid them to go to school while the building was being erected.

9. Where is raw material found at cheapest price?

10. Teach Chinese production technology and SPC just as the Japanese have done using Deming’s methods along with Taguchi and other innovators.

11. International sales direct to end user from Mexico warehouse.

12. Mexico as center of distribution to a world-wide market?

I recommend the creation of a spreadsheet analysis where each of the above options would be entered along with relevant cost factors such as start-up costs, running costs, freight, inventory, transactions and the like could be analyzed with dollar amounts. A shelter, for example, would require almost no start-up costs except for tooling, machines and training. Your own Mexican company would cost about $5,000 to set-up if you use a Notary Public or $25,000 if you use a lawyer and the result is the same except you will have the lawyer as an albatross around your neck forever-more if you elect to use one. Dealing with an established company would require one of your manufacturing engineers to spend some time with them. So consider some travel costs. A hotel in Mexico will cost $100 a night, a translator $200 a day, air travel to and from Mexico about $300 economy to $1,200 first class. Meals cost as much as they do in California.

Hotels next to the border in Chula Vista and San Ysidro can come as low as $35 a day, Denny’s and the like abound. There are excellent eateries in Tijuana and it’s fun to do business in Mexico if you approach it with the right attitude. Being patient and enjoying life is of major importance. A two to three hour lunch is to be expected.