What to Consider When Looking for New Sourcing Partners; Latin America vs Asia
You want to move your supply base closer to lower shipping costs. Or maybe you’re expanding your manufacturing because you need more capacity. We know deciding on a new vendor can get overwhelming. There is a lot to consider. Where do you begin? Should you outsource internationally? If so, where?
We’re here to help answer your questions. We have experience in helping businesses establish new supply bases and have developed relationships with both domestic and global vendors. Here’s what you should consider when you are moving or expanding your supply base.
Should You Outsource Internationally?
So, you are looking to expand your supply base and you don’t know where’s best. There are plenty of benefits to expanding your supply base internationally. But it isn’t your only option. If you are a small to medium-size business with low order volume, expanding your supply base internationally likely won’t yield the savings you were looking for.
Instead, sourcing your manufacturing domestically is likely the safest option for your business. Domestic outsourcing avoids outside costs (like tariffs and shipping) and problems (like communication errors, reputational risks, and complex logistics). Because of the proximity, lead times are shorter and you have more control over the manufacturing. Also, consumers generally prefer locally sourced products because they’re more assured of quality.
But with the right vendors, you can avoid the risks associated with outsourcing internationally and reap the benefits. International outsourcing often means much lower labor and production costs, more availability of resources, and more capacity. Outsourcing internationally is a great option if your business is growing, you have high order volumes, or need access to specific resources. You will be more flexible to growth and the potential total cost savings can be significant.
Clearly, there are benefits to both domestic and international manufacturing. A domestic supply base gives you more control over your operations and more security. On the other hand, expanding internationally can support your growing business and save you money on labor. At the end of the day, the decision process comes down to two things. You have to review your supply chain strategy and weigh your vendor options in order to find the best fit for your business.
The more options you consider, the better. Expanding your search to Asia and Latin America could help you find vendors that will meet your expected quality, lead times, and budget. We vet and established relationships with all our sourcing vendors, domestic and international, to ensure our clients have the best options. When manufacturing internationally, where do we recommend? Read on to find out.
Outsourcing internationally: China or Mexico?Everyone right now is feeling the pain of increased shipping costs, material costs, and tariffs. China and many other Asian countries (Malaysia, Indonesia, Thailand) have long been established as outsourcing hubs. However, businesses are considering alternatives to manufacturing in Asia in hopes of avoiding these rising costs. More and more US businesses are outsourcing their manufacturing to Latin America instead of Asia or the US. Here are the main reasons why:
What started back in 2018 as a trade war between the US and China over unfair economic policies is now a cold war of differing ideologies. The price of imports is on the rise thanks to increasing tariffs and freight costs. U.S. businesses are taking the fallout. In reaction to these conflicts, businesses are turning their attention to Mexico and other Latin American countries.
Mexico, for instance, has numerous relationships with other countries. It also has more free trade agreements than any country. The most important of these agreements is the United States Mexico Canada Agreement (USMCA). The USMCA allows you to transport your products tariff-free to and from the US. The trade war in China isn’t going to change any time soon. Neither is the USMCA. US and Mexican governments and cultures are too closely aligned.
Along with tariffs from China increasing, so are freight costs and porting issues. Partnering with our neighbors in the south avoids the current shipping disruption. Transport of goods is more cost-effective and easier because it can be done so by land. As of April 2022, it costs around $20,077 and takes 30-50 days to ship a 40-foot container from China to the US (source: freightos.com). It costs $3,398 and 5-7 days to ship from Mexico (source: movehub.com).
If you are looking for same-day delivery, Mexico is a great option too. Manufacturing facilities in Mexico are positioning themselves next to the border. Additionally, Latin America has the same time zones as the US. You can have more immediate control over your operations than if your supply base was in Asia. Latin America is almost like the goldilocks of sourcing: international but not too far away.
Intellectual property (IP) laws are another major reason for US companies moving their manufacturing to Latin America. Mexico, in specific, is dedicated to strengthening its IP protection measures. They already outperform China. Copyrights, trademarks, and patents in particular are more protected in Mexico than in China. IP theft is a rampant problem in China. It costs US companies billions of dollars a year.
Manufacturing labor costs are slightly lower in most Latin American countries than in Asia and much lower than in the US. According to Statista, from 2019 to 2020, the manufacturing labor rate per hour in China increased from $5.78 to $6.50, and from $4.66 to $4.82 in Mexico. At the same time, US wages in manufacturing rose from $22.01 to $22.58 (source: tradingeconomics.com).
Though you are paying less for your manufacturing, Mexico has just as skilled a workforce as China and the US. Mexico’s economy is growing, it has been a hub for manufacturing for over a decade, and it invests in educating its people. The result is a workforce that covers enough industries and areas of expertise to meet your needs.
Our currents vendors in Mexico are particularly skilled in these industries:
- Precision Metal Fabrication
- Construction and Mobile
- Medical Devices
- Steel and Foundry
As mentioned, it is important to have a strong process to ensure the vendors you select are second to none.
Here are the steps we take:
- Identify suppliers (paying attention to sales, capacity, and process)
- Summarize supplier capabilities (paying attention to place in the market)
- Tour the plant (paying attention to capabilities, technology, capacity, and people)
- Get alignment on supplier’s future vision and growth potential
- Ensure a mutually beneficial fit for long term relationship
- Sign agreements
- Get project/product documentation and samples to supplier’s engineering team
- PPAP (first assembly)
- Client final approval / revisions
- Verify forecast and production schedule
- Determine how orders will be handled
- Discuss best forecasting approach (firm vs. variable 6, 10, 12-week changes)
- Receive PO’s
Ready to Source your ManufacturingWe’re here to help. Our Operations Experts at The Next Step Inc. can save you time. We’ll help you move or expand your supply base, wherever you have in mind. With our close vendor relationships and years of experience, we can move your supply base quickly and with minimal risk. Whether you want to stay domestic or look internationally, we have the ability to find you the best partner for your situation. Let’s get started. Chat with our outsourcing experts today!
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