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Mexico Logistics Costs Challenge Chinese Manufacturing: Part II

11 Apr 2012

More companies manufacturing in China are weighing the options of moving manufacturing operations to Mexico – a choice made attractive not just because of rising Chinese labor costs, but also mounting freight bills and excessive shipping time.

There also is the issue of “contained parts” to consider, says Bill Golden, retired president of International Logistic Solutions. (ILS specializes in international freight forwarding, third-party warehousing and import/export services for its clients.)

The phrase “contained parts” generally refers to the situation occurring when a manufacturing plant creates a defective part discovered after said part has reached its destination. At this point, Golden says, the entire supply chain is suspect – with the result that manufactured items are confined indefinitely.

In last week’s discussion on freight costs and shipping issues, Golden noted a typical shipment from a Chinese manufacturing plant to its final destination in the States could take two to three weeks. Now – in this scenario with defective materials identified – everything in the supply chain is quarantined.

“Nothing is allowed to be used, as everything needs to be sorted and tested to confirm that none of the other parts are defective,” he notes. “Typically, this is an issue difficult to quantify in terms of overall logistics costs. Many of our clients, especially the uninitiated, are surprised and grievously hurt.”

Sorting out suspect manufactured material is costly and time-consuming. The end customer usually asks the manufacturer to replace contained parts immediately; otherwise, production lines will collapse while waiting on new materials, Golden explains.

A contained-parts situation usually involves a costly response. First, the manufacturing plant that produced the faulty parts must immediately increase production and ship new products via air to make up for lost time.

Additionally, because the supply chain between China and the States is so long, the new goods in transit have to be sorted or inspected – and “the value of parts found in that supply chain increase in logistics costs when a defect is found,” Golden says. “This kind of situation is hard to quantify in terms of cost. It could occur once a year or it could happen multiple times a year.” The risk of quality defects in manufactured parts places a huge financial burden on a company, he adds.

Logistics costs, volatility and risk are three factors that come into play when an American company relies on parts manufactured in China. And, while there is no guarantee that a contained-parts issue will not arise in a Mexico manufacturing plant, Golden points out that a shortened supply chain from Mexico means costs concerning this matter decrease exponentially as well.

Now, many second- and third-tier industry suppliers who originally did not thoroughly estimate logistics and other implications of locating manufacturing plants in China “are coming to the conclusion that having stayed close to home, conducting manufacturing operations in Mexico, would have been a better and less costly strategy.”

While the CIA World Fact Book places China at No. 1 in sheer volume of workers, with a staggering 819.5 million, Mexico's labor force of 78 million has been ranked among the hardest-working in the world both by the World Trade Organization and the Organisation for Economic Co-operation and Development (in terms of hours worked annually).

Additionally, Mexico has more stable employee-safety practices in place, along with reasonable health-and-safety monitoring, and its strong child-labor laws trump the well-documented news reports of “sweat-shop” conditions in China.

And for larger global companies?

Golden says some of ILS’ customers “did a better job of recognizing the implications of an extended supply chain” by following the examples of companies like Siemens, Bosch and General Motors, which determined that Mexico would provide manufacturing for their North-American consumers while production for the Far East would occur in China.