How to Compete in a Shifting Global Supply Chain
November 03, 2021
The global supply chain is facing unprecedented challenges, and that is encouraging manufacturers around the world to rethink how they source materials and deliver goods to customers. Nearshoring is emerging as one practical solution to this challenge. Nearshoring is about moving manufacturing operations closer to customers to create a more balanced, and resilient global operation.
For U.S. and Canadian manufacturers, Mexico offers the strong balance of cost-effective operations with rapid delivery times that makes a nearshoring strategy worthwhile.
How Covid 19 is affecting the global supply chains
The COVID-19 pandemic began to derail global supply chains back in early 2020 as factories shut down, product demand shifted and grew in new areas, and workers became harder to find. However, these problems have far from disappeared and experts are now predicting global supply chain challenges may continue well into 2022.
Credit rating agency Moody’s Analytics has warned that supply chain disruptions will continue to worsen before we see improvements, pointing to transportation logistic delays that include congested U.S. ports and a national labor shortage.
One potential strategy to help alleviate logistics challenges may be a localized manufacturing footprint. By nearshoring goods in Mexico, manufacturers gain flexibility in a number of ways, including more ways to transport goods to U.S. customers.
What is supply chain nearshoring?
Supply chain nearshoring is a practice that moves manufacturing from overseas locations (offshoring) to nearby low-cost manufacturing countries. Unlike outsourcing, nearshoring is about developing a manufacturing site that operates as part of the original company, rather than utilizing a subcontracted manufacturing team working to its own defined levels of quality.
For U.S. manufacturers and consumers, Mexico is an ideal location from which to produce goods. The U.S.-Mexico-Canada Agreement puts in place a host of protections and cost incentives for U.S. and Canadian manufacturers to locate factories in Mexico. The country’s well-developed industrial clusters offer strong infrastructure for training workers and supporting factories.
Why are companies nearshoring?
Manufacturing companies are nearshoring for a range of reasons. For many companies, nearshoring is one part of a global supply chain strategy, in which manufacturing operations are located at regional sites close to target markets. This affords two key benefits:
- Proximity to local markets: Nearshoring shortens the time to deliver goods to market, an increasingly critical differentiator in today’s global marketplace.
- More resilient operations: Manufacturing resilience is defined by a company’s ability to recover after a large disruption and return to normal levels of performance. Many companies are recognizing that the redundancy of having regional manufacturing facilities provides a sound strategy for shifting production in challenge times.
An example of nearshoring in Mexico
A State of North American Manufacturing Industry report released by Thomas, the industrial sourcing platform, points to Boeing as an example of the value of nearshoring. The airline manufacturer had increased outsourced production of critical components for its 787 airliner from 5% to up to 30%, relying largely on suppliers in Europe and Asia. However, a lack of effective risk mitigation of these offshore processes cost the manufacturer significantly.
By 2014, the company had begun shifting production back to North America to reduce risk by more effectively managing production issues close to home. This strategy has included work with Mexico-based suppliers that benefit from easy access to Boeing’s U.S. headquarters. A flight from the Chihuahua-based Safran’s facility, where the interiors of Boeing passenger planes are manufactured, reach Boeing’s Chicago headquarters within six hours.
How is Mexico encouraging global supply chains to move to North America?
According to an Oct. 2021 report from the Peterson Institute for International Economics (PIIE) and the Center for Strategic and International Studies (CSIS), manufacturers have had concerns about Mexico’s viability as a nearshoring location due to a range of impediments including trade barriers, regulatory rigidities, and inadequate intellectual property protection. However, each of these factors have been addressed in the still relatively new USMCA agreement, and are reflective of long-held perceptions of Mexico manufacturing that are challenged by the hundreds of successful foreign direct investors operating in Mexico today.
For example, the PIEE/CSIS report highlights the fact that Mexico’s credit market, labor and business regulations rank lower on international scales when compared to such factors in the U.S. and Canada. However, this reporting overlooks a key differentiator that Mexico offers manufacturers. The country’s IMMEX program ensures that manufacturers do not have to wade through Mexico’s regulatory burden on their own. Instead, companies can operate under the umbrella of a shelter service provider that serves as the legal entity of record in Mexico. Shelter service providers may take on a range of administrative support tasks, ranging from start up assistance to HR and import/export management, among other activities. Manufacturers have full control over all production processes.
A more important driver of nearshoring in Mexico may be in renewed collaboration between the U.S. and Mexican governments. Leaders from the two countries have renewed Cabinet-level High Level Economic Dialogue (HLED) last held in 2017. The HLED is aimed at pursuing economic opportunities beyond the trade issues covered in the USMCA, according to the PIIE/CSIS report, with a focus on better managing global supply chains and trade, addressing cyber threats to trade, and strengthening investment in workers. Its leading initiatives include efforts to modernize the U.S.-Mexico border to improve the flow of goods.
Early HLED discussions have focused on making semiconductor supply chains more resilient by encouraging supply chain investments in Mexico. Supply chains for electric vehicles, medical devices, and pharmaceuticals were also discussed as possibilities for focusing nearshoring investment.
How to compete in the global supply chain
While Moody’s forecast may be right, that global supply chains will face more challenges before constraints ease, this market tightening may be reflective of manufacturers’ shifting strategies. It’s become clear that current approaches are not sufficient and nearshoring may provide the resiliency that manufacturers and their customers need. Those companies that take steps to adapt today can emerge as stronger leaders in the global supply chain.
Fortunately, you don’t have to make these changes alone. Tetakawi has helped thousands of companies just like yours reach their potential in Mexico by leveraging our world class infrastructure, services, and know-how. If you’re ready to reach your potential in Mexico, contact us today.