Benefits of Contract Manufacturing in Mexico—and Alternatives to Explore

June 22, 2020

Companies looking for a low-cost way to speed a product idea through manufacturing often turn to offshore or nearshore manufacturing. By moving production to another country, companies are able to capitalize on cost savings for labor and sometimes real estate. 

But what if you’re looking for more than just cost savings? What about companies looking for a partner who can help them quickly ramp up manufacturing to quickly turn an idea into a product? 

In that case, many companies consider contract manufacturing. Contract manufacturing has a strong history in Mexico. Customers in the electronics, textiles, apparel, and medical device manufacturing industries have found success in partnering with contract manufacturers in Mexico. However, it’s not the only time- and cost-saving manufacturing model worth considering. 

Benefits of contract manufacturing in Mexico

So, what exactly is contract manufacturing? Working with a contract manufacturer in Mexico means the Mexico-based operation owns production assets, controls all aspects of manufacturing, and charges the foreign company for the goods it produces. The benefit here is that this model allows the foreign company or brand creator to focus its time—and capital—on the areas it knows best. This often includes ideation, product design, marketing, and sales for the brand. It also frees the brand from the fiscal burden of manufacturing, including the expense of routine equipment maintenance and hiring manufacturing labor. 

Contract manufacturing in Mexico allows even small companies to scale up rapidly and get products to market fast. This model also supports a high level of flexibility needed to respond to market trends. By working with a Mexico-based manufacturing partner, brands benefit from the low wages for the region’s experienced manufacturing labor. 

The challenge of quality control 

Quality Control in Contact Manufacturing Factory in Mexico

The most notable drawback to the contract manufacturing model is that the production company holds all responsibility for quality control. It can be tough and, at times, problematic trusting another entity to establish production processes and results that meet all relevant regulations, standards, and timeframes. 

However, this challenge is also one reason many U.S.-based manufacturers opt to partner with a contract manufacturer in Mexico rather than a low-cost manufacturer in China or Southeast Asia. It becomes much more cost-effective for brand executives to hop on a flight to visit a Mexico-based manufacturing facility for regular quality control checks rather than traveling halfway around the world. 

These visits are absolutely necessary. A factory inspection should always set the stage for a contract manufacturing agreement. Touring a facility can give a company owner an immediate impression of whether the contract manufacturer has the required technology, equipment, and staff in place to deliver on its promises. 

Of course, the best strategy for managing quality control is to partner with a contract manufacturer with a long history of proven quality excellence. Before formally contracting with a partner, take time to ensure this company has the ability to meet your standard requirements and can deliver product on your timeframe. Consider a trial period before signing an extended contract. 

Must Read: Everything you need to know about manufacturing in Mexico

An alternative model to Contract Manufacturing in Mexico

Manufacturing Community: Shelter Services plus Industrial Real Estate in Mexico

For companies that are reluctant to give up control over product quality but are tempted by the speed that the contract model offers, the shelter services manufacturing model may be an excellent alternative. 

In many ways, the shelter manufacturing model is a hybrid between the standalone and contract manufacturing models. By operating in Mexico under the umbrella of a shelter company, the foreign company owns and holds control of production assets and processes, quality control, and supply chain management. The shelter company, however, serves as the Mexican legal entity of record responsible for regulatory compliance and administrative functions like HR, Accounting, EH&S, and more. 

This shelter service model is recognized by the Mexican government as a time-tested mechanism for supporting the entry of foreign investors into Mexico. The Mexican government awards tax, permanent establishment and import/export benefits to shelter companies and, therefore to shelter company clients.

Of course, each shelter service provider offers its own distinct style. Many such companies provide human resources services and import/export administration. Some also provide access to industrial Class A real estate and advisory services that might further speed a company’s product to market. It’s important that companies looking for manufacturing help begin their search with a clear understanding of what tasks they’re willing to take on, and which areas would benefit from an experienced partner’s insight. 

 

Other options for Manufacturing in Mexico

Of course, there are other models available across a spectrum of manufacturing control. In addition to the options discussed above, some companies opt to merge or acquire a Mexican manufacturer to gain an established workforce, real estate, and manufacturing know-how. Others develop a joint venture in which each partner contributes to its specific strengths. 

No matter where you are in the process of selecting a manufacturing model, Tetakawi can help We tailor our consulting services to help potential foreign investors investigate and analyze their best options for manufacturing in Mexico. Whether you’re ready to work with an expert advisor or need help finding an experienced manufacturing partner, we can help. Reach out to Tetakawi today. 

 

 

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