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Things Manufacturers Should Think About Before Moving Manufacturing to Mexico

Interview of Jerry Bochin, President of Brochin & Company
Hosted by Doug Donahue, Vice President of Entrada Group

The Entrada Group is proud to bring you a series of informative interviews with leading authorities on some of the essential aspects of offshore operations. These free, educational programs, hosted by Doug Donahue, Vice President of the Entrada Group, cover current topics important to companies operating offshore or looking at moving operations.

Jerry Brochin, Entrada Consultant, former head of manufacturing for Sony – Mexico, shares his 40 years of experience in Mexico operations. He explains due diligence on planning a Mexican manufacturing operation. He discusses evaluation of cost savings, the important of location, and the differences of operating in a foreign country.

DOUG
Hello, My name is Doug Donahue and I’m Vice-president of the Entrada Group. The Entrada Group is a company specializing in shelter operations in Mexico, and shared service centers assisting international manufacturers with their manufacturing operations in Mexico. Today we have Jerry Brochin, the president of Brochin and Company; a consulting firm dedicated to assisting international manufacturers in their Mexico efforts. He is also the former president of Sony Mexico, in which he was responsible for the start up and management of Sony’s Mexican manufacturing operations. Jerry, thank you for joining us today.

JERRY
Glad to be with you, Doug.

DOUG
The nature of this podcast is that we wanted to talk about what international manufacturers should think about when they’re beginning to start manufacturing in Mexico. The first and most basic question is, what are the things a manufacturer should consider before moving an operation to Mexico?

JERRY
There are a lot of things to be considered, Doug, and every company has some different issues. First and foremost, you should do a very careful cost analysis. You can do this using a piece price or unit cost basis, or hourly rate comparison for labor. But this should always be the first step when you’re considering moving your manufacturing to Mexico.

DOUG
Okay. How do you evaluate the total cost savings and how can costs go up and down?

JERRY
Well, of course, you have to be sure you’re ‘apple to apples’, as they say. You basically use every expense that goes into your final cost number, both for the U.S. – or wherever you’re manufacturing – and also, the Mexican operation. You use that same format, plus any additional costs you may have, such as transportation and border crossings. At the same time you may have some fixed costs that you would not have in the Mexican operation. These costs could go up and down over time due to labor wage increases, raw materials, etc. This must be taken into consideration. One of the major factors in cost improvement is increased efficiency and the volume of output in Mexico versus other locations.

DOUG
A lot of people that I talk to when they first come to Mexico always want to compare labor productivity in Mexico versus labor productivity in the U.S. When I’m talking about labor productivity I’m talking about the employees themselves. Have you seen that they get to ‘apples to apples’? Is there a learning curve in there? What has been your experience with that?

JERRY
Well, Doug, I tell people of the first experiences I had when I brought Sony to Mexico back in the late 70s. After touring numerous plants in Japan for 3-4 weeks and time spent studying operations for our first pilot operation in Mexico, I came back and set as a standard on our floor 115% of the Japanese standard. Six months later I was wishing I’d set it at 130% or 140% because we went way beyond that in a very short period of time. The key factor is not only what the people can do but also how they’re motivated and how you can get the best out of the people who are working for you. Basically, the Mexican people are happy, honest, family-oriented people who love to work and I think any company that doesn’t take advantage of that when they’re in Mexico has missed the boat somehow!

DOUG
You alluded to efficiencies. Is it fairly standard for international companies to put in place many of the increased productivity programs that they’ve used in the U.S. as well as Europe and Asia? For example, the Six Sigma and the kaizens. Is the Mexico workforce accepting of that?

JERRY
Oh yes, very much. A lot of times it depends on how you’ve presented it, and the size of the operation and number of people you have involved. But basically, it’s just another way of getting the people involved; communicating to your people on the floor what you’re trying to do and why, to which the Mexican workers are usually very responsive individuals.

DOUG
One of the questions I get quite a bit is, “Can I use my same supply base, or can I switch my supply base?” Is there any effect to switching your supply base to Mexico or the southern U.S., for example?

JERRY
Some people mistakenly feel that a supply source in Mexico is automatically going to be less expensive. This is not normally the case and there’s seldom a savings just strictly based on the unit cost of a particular component. What you save in Mexico is time, delivery, just-in-time or hand-to-mouth concept, lower inventories. And yes, there is an advantage there, of course. And the larger the volume, the more advantage there is in that concept. But the cost of those items in Mexico just on face value is not necessarily cheaper.

DOUG
One of the questions I always get when somebody’s getting ready to change a supply base is that they’re worried about the quality: Can they get the same level quality that they’re getting in their North American market from a Mexican supplier?

JERRY
Well, the quality should be the same. You may have to work with your suppliers in the early stages; communicate with them very clearly what you expect. But normally once this step is taken and everybody understands each other the quality will be good. I may take this a step further and say that a lot of U.S. supply companies have moved into Mexico to be closer to their customers that are now manufacturing in Mexico, which has helped quite a bit. But, essentially, the same steps apply in terms of making sure your supplier know precisely what you expect from them.

DOUG
Mexico has become a big market for international manufacturers to set up. What are the advantages and disadvantages of the various models? For example, a stand-alone, a contract manufacturer, or, in Entrada’s case, a shelter operator.

JERRY
Well, of course, they all have their advantages and disadvantages, depending on your viewpoint and what you’re trying to accomplish. I think you must, first of all, determine your objective. Some may prefer to have a stand-alone operation, their own subsidiary in Mexico. Another company may benefit more from the contract manufacturer or the shelter concept. Stand-alone, obviously, would require more knowledge from within your company’s staff or outside counsel on how to set it up and operate in Mexico. Legal incorporations require decision-making, for example, on issues such as location, lease versus build, on the facilities, consignation of manufacturing equipment, import/export procedures, and the list goes on. That’s for a stand-alone subsidiary operation. With a contract manufacturer, in most cases a full-package concept is available, whereby the contractor would supply all the material and sell to the U.S. company FOB U.S. side of the border. There are a lot of variations to this also, that work for some companies. However, this model is not workable for some new product lines. For a start-up this may not be good. You many want to transfer an item that you’re presently manufacturing somewhere else and you can easily monitor and follow through on it.

Another very popular model is the shelter operation. There are a lot of variations of this concept, too; from just a basic shelter where the operator in Mexico would provide you with nothing more than labor and charge you an hourly wage for that labor, all the way to a full-expanded shelter which would provide the facility, labor, supervision, quality control, administrative functions, import/export and almost anything that would request of them. This has worked very successfully in Mexico. And for people who prefer not to have so much presence this may be the best way to go.

DOUG
Recently, there seems to be a growing movement of OEMs – and, I imagine, some suppliers – moving into the interior location. General Motors has opened up an operation in San Luis Potosi; Fleck-Bombardier, the aerospace company, has opened up in Queretaro. What is your view on locating in an interior versus a border location?

JERRY
There are numerous differences, obviously. Interior locations, generally speaking, tend to have a more stable and somewhat less expensive workforce. This is especially true and more impact is felt from this when you’re dealing with large numbers of employees, as opposed to a small operation. Freight costs can be greater though. There are larger distances and you must plan properly for that – consolidating shipments to minimize costs. Border fees are about the same, though, whether you have a large shipment or a small one. So all of these things have to be taken into consideration to control your costs, and are more important the farther you are into the interior. A border location may lend itself to a smaller operation where you have short lead times and numerous, frequent model changes and quick turnaround.

DOUG
When someone is entering into a venture into manufacturing in Mexico one of their number one concerns is, What additional home office support is going to be necessary to manage this overseas operation? Is it going to increase the home office overhead?

JERRY
The degree of the support that you’ll need from the home office would depend on the type of operation that you set up. Obviously, the stand-alone subsidiary would require the greatest amount of direction and support. In this case, I always recommend that at least one person from the home office – and preferably a bilingual English/Spanish individual – be assigned full-time to the new plant operation for at least one year. In my opinion that is absolutely necessary to ensure a smooth start up. The size of the operation, then, would dictate any other types of support that may be needed: technical, quality, procurement, and so forth. In the stand-alone, you can see, there’s more support required than would be in the case of a contract or shelter operation. With a contract manufacturer you would have some degree of support required, but with a full-blown shelter you could probably eliminate the need for much support, other than just some coordination.

DOUG
Over the last couple years transportation costs have become a growing concern. I’ve seen in a number of cases, many clients are starting to put cross-docking facilities at the border – whether the operation is at the border or the interior—as well as doing final distribution from the U.S. border directly to their client. Do you see this as a growing trend and what are some of the advantages of this?

JERRY
Well, Doug, if you can as a manufacturer plan your production volumes to take full advantage of your operating efficiencies and keep your costs at a minimum and then you can export to the U.S. from Mexico in truckload quantities, there are definitely potential savings there for any manufacturer who can fit that scenario. From there, if you can stockpile on the U.S. side and drop ship from there as needed, then, yes, this is a very practical scenario for a lot of people. I see this happening more and more. Although, some companies have started doing this kind of staging operation in Mexico and shipping directly from Mexico. But again, you have to have the volumes to keep this cost down due to this transportation increase and the costs of dray, which you have referred to and which I don’t think are going to improve in the near future.

DOUG
Let’s talk about some of the big changes you’ve seen in the maquiladora program.

JERRY
Well, one of the most interesting things that really grabs me as I walk through the plants around the country is the gradual switch from all – I’m talking workforce now, the operators on the floor – young ladies to older ladies and men. There’s quite a high percentage of men working on the floor in these plants; and ladies in the 30, 40, 50-year-old range. I’ve heard a lot of reasons for this change, but I think for the most part, it has been positive. In the last few years, in the sewing plant you and I discussed earlier, we are having extremely good success in terms of turnover, productivity – just really a pleasant change. Another thing that has changed is that Mexico overall seems to have, politically speaking, an improved, more acceptable idea of the U.S. industries in Mexico. I’m going back now quite a few years to where the assembly plants along the border were not looked at very highly by Mexico City. All of that is changing. There are several hundred thousand employees in Mexico today: the major autoworkers and electronics companies. I think Mexico has come to realize that this is a huge part of their national plan these days, which makes us all feel much better about it.

DOUG
In Mexico right now, the Fortune 500 all have well-established operations there. The growing market in Mexico right now is the smaller to medium sized companies. They could be smaller, first-tier suppliers; they could be larger, second-tier suppliers, who typically don’t have a lot of international operational experience on their staff. If you were sitting down and talking to one, what would be the top 3 things they should be thinking about when going into Mexico?

JERRY
We mentioned the first one, the cost issue, so we’ll skip over that one: Make sure you know what your cost advantages are going to be before you start out. But other than that, there are cultural and climatic differences and there are differences in just the way of doing business in Mexico that I think everyone needs to understand. To be able to do that we either go through the shelter operation where you’re shielded from most of these issues; or if you build the plant yourself and set up your own stand-alone operation, then you need some people on your staff that understand these things because there are some things that you do in Mexico that the people would see as quite offensive, where the opposite would be totally true in Ohio or Michigan. These are the types of things that could get you, very innocently, in bad standing with the Mexican community. So without someone on your staff who is in tune to this and who is bilingual who can handle these issues for you at the plant site, you’ll need to look to someone outside who can do it for you, or else go through the shelters.

DOUG
All right, Jerry. Thank you for joining us today.

JERRY
Glad to be with you, Doug.

If you would like to listen to the audio of this transcription, or listen to other interviews regarding topics related to offshore operations, please click here.

These programs are offered as a free service by the Entrada Group. If you have any questions on these or any other topics related to offshore operations, email Doug Donahue at ddonahue@entradagroup.com

The Entrada Group provides offshore manufacturing services for the ultimate in efficiency and effectiveness. Entrada supports companies in quickly launching and maintaining manufacturing operations in Mexico without establishing a legal presence. Through powerful economies of scale, Entrada’s on-site shared-services center offers clients exceptional production control with long and short-term cost reductions.

Learn more at www.EntradaGroup.com.