Manufacturing in Mexico, Part 3: Alternative Manufacturing Strategies

While politics are not the only factor in determining a manufacturing strategy, it does come into play, sometimes in a big way. Manufacturing in Mexico is the topic du jour, not just in Washington but also in weekly Ops meetings at OEMs across America. In Part 1 of our three-part series, we discussed Manufacturing Location Tradeoffs . In Part 2, we looked at Comparing Costs Between Regions. In our final installment today, Part 3, we consider Alternative Manufacturing Strategies .

At the risk of being trite, they call it a Supply Chain for a reason.  It’s not just a contract manufacturer, it’s not just a list of approved vendors, it’s how it all plays together. And like all chains, it’s only as strong as its weakest link.  In practice, the chain metaphor is imperfect, and professional supply chain folks actually try to weave a complex web, which introduces further complexities in return for eliminating single points of failure.

Some of the tools commonly used to address complex situations like this (whether the complexity comes from politics or other factors) include:

  • Second sourcing
  • Vendors with multiple locations
  • Supply chain optimization
  • Build vs buy for subsystems and subassemblies
  • Automation and technology
  • Gaming tariffs
  • Plan B

Second sourcing:

One time-honored technique for dealing with geopolitical and regulatory uncertainty, not to mention mitigating other supplier risks, is second sourcing. Basically, this means finding alternative vendors for as much of the supply chain as possible. This can apply at every tier of the supply chain, from raw materials to components to subassemblies to subsystems to system integration. There are several levels of second sourcing:

  • Having an alternative source identified but not qualified
  • Having an alternative source qualified but not actively buying
  • Actively buying from multiple qualified sources

There are downsides to this approach, including the time, effort and money to identify and qualify additional vendors.  Since all vendor offerings may not be the same, there could also be additional design compromises to allow for the lowest common denominator in terms of specs and capabilities (suppose Vendor A can hold 0.1% tolerances but vendor B can only hold 0.2%). And actively buying from two sources can mean lowered negotiating leverage, which might translate into higher prices or inferior terms.

If one of the second sourcing goals is de-risking regional issues, it is important to diversify the sources—it does not help de-risk Mexico by having two machine shops in Juarez, for example.

Note: because second sourcing de-risks so many other aspects of the supply chain, it is rare that the downsides outweigh the upsides for products with appreciable dollar volume. However, one doesn’t need to take this to extremes to reap benefits—a supply chain which only is 80% second-sourced overall, but which includes 99% of its highest-risk elements, is likely in good shape, statistically speaking.

Vendors with multiple locations:

Another time-honored technique is to choose vendors who can produce a part (or subassembly, or assembly, or even the entire product) in multiple locations spanning different regions.  For example, one might choose a contract manufacturer who can build a Printed Circuit Board Assembly (PCBA) in Mexico, China or the US.  Mexico might be the best option today, and there would be significant costs to move the production, but this would de-risk worst-case Mexico situations significantly.

And there can be other reasons to change region: shifts in end market demands, volume spikes (or slumps), and sub-supplier nuances. We’ve worked with vetting key multisite vendors for our customers to cover such situations over the years, and we’ve been saved from unanticipated occurrences by this more than once.

Supply chain optimization:

Without going into blatant gaming of tariffs (see below, it’s not our thing), setting up a well-thought-out supply chain that takes into account regional tradeoffs (see Part 1 of our series) can make a big difference. Some ideas include:

  • Shortening the supply chain length by choosing vendors in close proximity to the next step in the manufacturing chain.

o   For example, molding plastics and bending metals next door to the system integration facility

o   Or across the border—the maquiladora strategy is very valid

o   See above, this does trade off against second sourcing in some cases

  • Avoiding wrong-way supply chains

o   More common that one might think, but importing US made parts into Mexico, or worse, exporting Mexican parts to the US and re-importing, can have a negative impact on the supply chain

o   Which is not to say that it may not make sense to do so in special circumstances

  • Optimize value-add

o   Try to do as much manual labor in a low-cost region while keeping energy-intensive operations like smelting in a region with low energy costs

o   Some value-add operations may be cheaper in the US than Mexico or offshore

  • As mentioned in Part 2, work out logistics costs

o   Not just freight but also timing, risks etc.

A well-optimized supply chain is not just about cost, it’s also about quality, risk, flexibility, payment terms and the like.  A cheap Mexico source with no return privileges may actually be inferior to a more expensive US source who allows excess materials to be returned for credit.

Build vs buy for subsystems and subassemblies:

This is another area of optimization that larger companies have long taken advantage of, which can also benefit smaller companies, especially for larger, system level products. One of the side stories on the Mexico debate is about sophisticated companies who are already taking advantage of Mexico for low-cost subsystem manufacturing—think automotive transmissions—and shipping them across the border for system integration / final assembly in the US. Perhaps even multiple sources, but what if all of these sources perchance happen to be in Mexico? Oops, that’s a problem too.

Build vs buy does not just apply to the top level, rather it also plays at each subsystem or subassembly level. A sub-supplier of, say, an electric motor could buy gearboxes or build them. But this type of solution has to be looked at holistically, for now there is more of a need to second source the entire motor rather than second sourcing the gearbox. Such decisions need to also consider fallbacks, whether second sourcing the gearbox or the entire motor.

Automation and technology:

While there are many other issues involved with selecting a manufacturing site (see Part 1 of our series), labor cost is one significant factor, and labor cost can be minimized through the use of automation, robotics, and technology. This subject deserves a blog of its own (see our Blog, Automate That), but there are lots of options here, many of which don’t look like something from the Jetsons.

  • Assembly line automation can be low tech (think conveyors) or high tech (pick and place machines)
  • Automation can be partial—oftentimes simple subsystems like shakers can make a big difference
  • Full-scale robotics already exist for many high-volume tasks like welding, especially on larger systems
  • Better inventory management tools, from MRP systems to RFID tags to scanners, can reduce the labor needed to stock and feed an assembly line
  • And industrial engineering can be utilized to optimize the throughput of a line, again reducing the labor content

Unfortunately, or fortunately depending on one’s perspective, many of these techniques require substantial volumes to achieve a payback or ROI, and care must always be taken to make sure the business decision doesn’t become an afterthought to cool technology.

Gaming tariffs:

While this is beyond our expertise, there are legal strategies employed by the largest companies to game tariff rules and regulations to their advantage. For example, if a tariff is applied on a subassembly with less than 62% local content, make sure it’s 62.1%. Or setting up a final assembly step that adds the minimum value-add to qualify for Made in XYZ. And the like.

Plan B:

Always have a Plan B, typically a set of backup plans if things go south.  This is advisable in all circumstances—what if a key supplier goes bankrupt or loses the proverbial process recipe? We are working on a Plan B right now for a client worried about a what if contract negotiations with a key supplier fall apart scenario. Plan Bs typically include layers, incorporating elements of everything we talk about here: second sourcing, multiple locations, build vs buy, etc. And Plan Bs are very, very situation-specific, there is no generic answer.

Which is a good way to end this 3-part series: always have a Plan B. For everything.

Happy Manufacturing, everyone.

Chuck

 

Comments are closed.