The Cost of Manufacturing in Mexico with a Shelter Company

Many companies consider expanding into Mexico based on cost advantages. To get a complete cost picture, manufacturers considering the shelter program will want to consider how this decision could impact their overall costs.

In general, shelter providers’ knowledge of local markets can provide manufacturers with useful cost comparisons and insight into regional compensation averages. However, these providers also come with their own set of fees. By knowing what to look out for, manufacturers can ensure they’re making the most cost-effective decision for their operational needs.

For more comprehensive insight, listen to our podcast, How to Choose a Shelter Service Provider in Mexico: 

Shelter providers are your best resource for estimating manufacturing costs in Mexico

Experienced shelter providers can serve as an excellent resource for cost estimation. This is because they have access to real-time operating cost data from clients across a range of industries and company sizes. Some even have sophisticated cost models backed by their own proprietary databases.

As a result, you should be able to get a sense of your potential operating costs from a shelter provider. This insight can be invaluable in selecting from several potential sites. These costs should be presented without any added shelter program fees so that you can better compare the cost differential of operating in Mexico under the shelter program or as a standalone operation. 

Costs to estimate include:

• Employee costs: This may include payroll costs, employee transportation costs, and severance costs. Because severance applies any time you terminate an employee without cause, without any basis in performance, this should be included in your cost model.
• Rent and utilities: Rent: In addition to local averages, a shelter company may also be able to provide Class A industrial real estate themselves. Either way, your shelter provider can provide insight into real estate rates and utility costs, including electricity, telecommunications, gas, and water.
• Logistics costs: Most shelters can help with logistics costs. That may be something you don't need their assistance on because perhaps you have a logistics provider that's able to do that.

While shelter companies may be able to help identify suppliers and local raw material sources, they are unlikely to be able to estimate the cost of raw materials. That’s because shelter companies are not directly involved in manufacturing. They don't see raw material costs, and they won’t know their client’s revenue. For many foreign companies, this lack of manufacturing involvement is one of the biggest benefits of the shelter program.

Four shelter program fees to know

Shelter providers may charge in different ways, so it's important when comparing providers to ask questions and identify those differences up front. A few things to manufacturers should keep in mind about shelter fees in Mexico include:

1. They may charge on a sliding scale: Most full-service shelter companies will charge either per head or per payroll hour. Typically, they'll use a sliding scale so that the larger your organization is, the lower the per-head or per-hour rate they apply.

2. They may require certain positions to be on your payroll: Some shelter providers may include heads on your payroll that they require you to have. If a shelter requires you to have an employee on your payroll, that employee will probably be included in the headcount or payroll hour calculation. As a result, their shelter fee might be a little lower, but it will be on top of a higher base. If another shelter provides a quote in which that employee is on their payroll, their shelter rate per hour might be a little higher, but the base they use for calculation is a little lower.

3. They may add transaction fees: Not all shelters will add transaction fees. Some shelters will pass through the operational cost, meaning there is no additional markup. Those providers' fee is a single item. However, some shelter companies will spread their fee out by applying a percentage to every purchase that their clients make or every payroll that they run. That said, this transactional cost approach becomes more common in a soft landing or transition model, where the tasks the shelter company manages change rapidly. With the base rate changing, it makes sense to apply a transactional approach, but it’s best to account for this in advance.

4. There may be startup or cancellation fees:  Most shelter companies will charge a fee to cover the cost of setting up an organization and doing the initial recruiting. That’s because the initial recruiting tends to be more onerous than an ongoing retention program. These fees can vary and may be higher for shelters providing third-party real estate support and soft-landing services. Early cancellation fees are typical of most contracts. Terminating a shelter contract will also incur a severance cost paid through to the individuals hired by the shelter company to work on an organization’s behalf in their facility. In addition, some shelter companies will include a windup fee that goes into effect regardless of when the client terminates – even if it's at the end of the contract term.

Get more for your money with the right shelter provider

Manufacturers will find that the right shelter company can help them realize the cost advantages of manufacturing in Mexico. Experienced service providers will be able to help build strong recruitment and retention programs that lower costly turnover. They’ll be able to provide guidance on real estate and utilities that can guide decision-making and budgeting. And they’ll provide transparency within their contract that will help organizations trust that you’re getting a good value for their investment.

To learn more about finding the right shelter company for your needs, listen to this full podcast or download our Buyers Guide to Choosing a Shelter Service Provider in Mexico.