Director of Operations
The Offshore Group
When contemplating all the issues that surround the start-up of manufacturing operations in Mexico, cost items are those that are top of mind. Manufacturing cost reduction considerations generally top the list of factors that motivate companies to investigate and initiate production in low-cost countries.
In a competitive marketplace, during challenging economic times, end users of manufactured products, like all consumers, are seeking the best products at the best prices that are delivered efficiently and on-time. In order to set itself up as being the supplier of choice that meets buyers cost and quality criteria, manufacturers must place themselves on firm footing from the beginning of their efforts by considering all the manufacturing costs that they will encounter at the various sites that they may be considering. Below is a laundry list of items related to some of the costs associated with opening a new manufacturing facility in Mexico. As this is not an exhaustive list, there may be others that manufacturers may encounter and should include in their projections and calculations:
• Installation costs of air, power, water lines, pits, louvers, stacks, machine floor isolation, water treatment etc.
• Installation cost of equipment—transport and riggers if needed
• Office equipment
• Computers. software and other IT infrastructure
• Installation costs associated with telephone for office and factory.
• The cost of incorporation and possibly a transfer pricing study. This can be avoided if a firm chooses to manufacture using The Offshore Group’s Mexico Shelter Program services.
• Training time for them to reach the production standard. If Managers are trained in the States, salary, housing, food and lodging costs involved.
• Turnover is a cost as retraining required
• Labor cost projections as well as fringe benefits
• Electrical connection fee. Under the Offshore Group’s manufacturing in Mexico services, if power Is more than 500 KVA transformer for a 35,000 square feet building, then an additional transformer will be required including equipment to hook it up, cabling and electrical panel.
• Extra inventory and carrying costs associated with starting the Mexico operation
• Shipping costs to and from Mexico of equipment, raw materials and parts
• Special tools, hand tools and test equipment. Also hand tools for equipment installation.
• Costs associated with meeting quality standards during Mexico manufacturing startup.
• Scrap costs
• Rework cost
• Travel and entertainment for USA personnel during the training period in Mexico
• Translation of bills of materials, routings and QC procedures for members of the Mexican workforce
The following expenditures are explicitly excluded herein from the definition of start-up costs but can be treated as any company wants, and, thus, should be taken into consideration prior to starting up a manufacturing operation in Mexico.
• Actual cost for units produced prior to the first good units manufactured in Mexico –this is usually an R&D expense.
• All production costs and associated expenses incurred in preparing for and producing the first production units subsequent to good units produced
• The excess over frozen standard cost of purchased raw materials (PPV) and manufactured parts produced during the Mexico manufacturing start-up period, but scheduled for use in production of other than test production units. These are frequently recorded as manufacturing variances.
• Note: The frozen standard cost of purchased raw materials and manufactured parts produced during the start-up, but scheduled for use in production of other than test production units, is inventoried and flows to inventorial cost of revenue as regular production.
• Costs associated with the introduction of new models to the Mexican production facility, features, etc., applicable to current products.
• Costs associated with the introduction of replacement products in Mexico, i.e., those product lines that are the result of the normal product evolution.
• Perishable tools and production supplies purchased and manufactured.
• AII expenditures that meet capitalization criteria.
• Expenses normally charged to Research and Development in accordance with the policies covering Research and Development.
• Competitive studies and related equipment analysis.
Chuck Yahn is the Director for Operations for The Offshore Group. He can be reached at email@example.com to answer questions that interested parties may have related to issues concerning manufacturing in Mexico.