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Mexico Manufacturing Costs Analyzed

06 Apr 2012

Eduardo Saavedra
Vice President of Business Development
The Offshore Group
eduardo.saavedra@offshoregroup.com

A consideration of manufacturing costs has consistently been the dominant factor that companies take into account when deciding whether or not initiate and operate a manufacturing facility in Mexico. This has been a fact over the course of the twenty plus years during which The Offshore Group has been leading provider of manufacturing support, or what are known as “shelter services” in Mexico.

Knowing this, The Offshore Group has formulated a cost model that satisfies 3 fundamental requirements: First of all, it fulfills the imperative of including every cost that will or can be incurred while manufacturing in Mexico. Secondly, the model complies with the need to be based upon highly reliable figures, and lastly, The Offshore Group’s Mexico manufacturing cost model must be a reliable analytical tool through which “what-if” scenarios can be conducted as the process of deciding whether or not to commence operations in Mexico moves along.

The Offshore Group’s cost model fulfills these requirements not only for companies that are new to manufacturing in Mexico but also for those who have well established production facilities in Mexico, and are looking to expand their presence using The Offshore Group shelter plan business model as competitive alternative to other means of establishing a manufacturing plant south of the border.

To populate the cost model, Offshore Group experts require 2 hours of collaboration between themselves and prospective clients. During this sit down session, which most commonly takes place at one of The Offshore Group’s industrial sites in Mexico, we move through 3 areas of cost. The first is direct labor costs in, the second is indirect and salaried labor, and the third is manufacturing overhead. Within these cost areas there is sufficient detail to cover every operating cost incurred in Mexico. Most importantly however, the cost model allows Offshore Group analysts to benchmark costs against like operations that are manufacturing products in Mexico today in one of the company’s four venues. This unique feature is available to Offshore Group prospects because our shelter company pays every bill for 61 clients that work with us as of today. Therefore our assessment of Mexican manufacturing costs is actual, not theoretical, and is not sourced from third parties like government or trade associations

For example, when Offshore Group analysts are modeling labor costs they include possible overtime pay, performance bonuses, shift differentials, and the Mexico cost of every benefit that an employee is entitled to. This depends upon the region in which they are working. Our analysts also have a discussion and cost estimation on employee severance, which in Mexico is a cost incurred at the time of terminating a person who is a permanent hire, and a cost that is a challenge to accrue.

Another important feature of the cost model is the ability to forecast logistics costs in Mexico. The model requires specific information on the size and frequency of shipments, takes into consideration fuel surcharges as well as all possible modes of transportation, such as less-than-truckload and expedited shipments. To calculate Mexican Customs costs, the types of goods to be imported into Mexico are discussed and duties are assessed depending on the country of origin and classification of the goods. Once all figures are entered or calculated, The Offshore Group can benchmark these figures against similar operations, so that a reliable number results. The extra level of detail in this section of the Mexico manufacturing cost model is necessary because logistics costs can significantly offset labor savings if shipments are not carefully planned, and goods not carefully classified.

Finally, the Mexico cost model, which is built on an Excel Spreadsheet with multiple worksheets, can be easily navigated through to conduct “what-if” scenarios such as “what if the peso to dollar exchange rate increases or decreases; or “what-if” the Mexico manufacturing operation grows by 50 or 100 people within a year or two, or “what-if” more or less manufacturing space or people are needed to accommodate adjustments due to seasonality of production”

In summary, the usefulness of a tool such as The Offshore Group’s Mexico manufacturing cost model to support decision making cannot be matched by those that may be available through consulting firms at a cost of many thousands of dollars. The only requirement for having such analysis done is that companies’ have the cost modeling session performed at an Offshore Group manufacturing location. In exchange for taking the time to see first-hand what can be accomplished in Mexico, participants are able to take home valuable information and strategic decision-making software for what amounts to the price of a round trip ticket.