How to save costs by manufacturing in Mexico, or, is the shelter model for you?

Published Categorized as Manufacturing, Business in Mexico, Logistics, Shelter model, TMEC

Let’s say that you want to start manufacturing in Mexico because you want to save costs, or you want to be closer to your target market in the US.

How would you go about it? 

Perhaps if you have the capital, you can buy an existing business operation. Another option is to manufacture yourself with your own sales office through representatives, and then the next step would be having a distribution centre. Also, if the volume is there, then joint venture partnering with a company can be complementing. 

Or, you can carry out a standalone manufacturing operation.  

Which basically means that you start your own manufacturing from scratch. You get yourself incorporated, you buy the land or rent it, you hire your people, you establish a customer service operation, you work on a supply chain model, you go on your site selection process, you involve your people in the process and so on and so forth. That’s a very common way of expanding your business to Mexico. It’s also expensive and risky. 

You can also do contract manufacturing, which is very common. You have somebody that does manufacturing with several processes mastered and you ask them to do some pieces with your specs. But in the end of the day, it’s their company and you’re just subcontracting somebody. Granted it gives you a certain level of control but it’s really not for everybody. 

And finally, we have the shelter model.  

Most Canadian companies don’t know what a shelter operation is.

After years of doing business in Mexico we’re very used to the term. Everybody in the manufacturing ecosystem knows what a shelter operation is; but we found that in Canada, the term is not as known as it is in the US or other countries. 

In a nutshell, the shelter is a model where a company is manufacturing for you; but you still have the control of everything. It’s like a turnkey process where you arrive to Mexico and you don’t need to get incorporated if you don’t need to. But to decide what kind of shelter you are going to get you must ask yourself: “Am I going to be selling in Mexico or not?”  

Because remember that today Mexico is one of the world’s leading markets, boasting a potential market of 126 million inhabitants. So, think very carefully about your answer, eh! 

Whatever you decide will determine what kind of legal structure you are going to require if you need to get incorporated in Mexico. It could be a cost model when you’re not selling in Mexico, so it’s just a cost operation since you’re going to work on the bottom line of your company off the cost of your manufacturing of your goods. 

Or it can be profit centre which yes; implies manufacturing and being a cost centre as well. But with the difference that you’re going to be incorporated in Mexico for tax purposes. So that’s the first part that you have to question yourself. 

And then after that normally you have four big questions in terms of how to determine once you you’ve decided that yes; Expanding to Mexico is an option to reduce risk, or to lower cost, or to attack the US market, or to get into a new market like Mexico, or even accessing the larger market of Latin America through Mexico.  

The first question is about selling and invoicing. “Am I going to be selling and invoicing from USA or Canada, or abroad from Mexico?”  

The second question has to do with your manufacturing process. “What am I going to be doing? Am I going to sell products already manufactured to Mexico just to incorporate it into our distribution centre, or to get them packaged with the Mexican regulations and norms and whatnot? Or I’m going to be manufacturing and processing in Mexico?” To reiterate, that can be done in a standalone JV acquisition, through contract-manufacturing, or with a shelter model.  

The third question is about distribution logistics. “What if you are not selling in Mexico?” If this is the case, you’re going to have import and export of LTL. Or, fully loaded trucks, normally to-and-fro your main operations abroad and your operations in Mexico. 

Also, you have to consider if you’re manufacturing Mexico; and some part is going to be shipped back to US, and some other part is going to stay in Mexico to be sold; then you’re going to have a lot of virtual import and export to be done. 

That’s the logistic part.  

Now what happens if you start getting orders from Mexico, and you want to start distributing and delivering to your customers in Mexico? You have three options: Distribution centre, third party logistics or vendor management inventory. 

With third party logistics you give orders to a distribution centre that doesn’t belong to you so you must be very careful about it. 

However, you don’t need to start with the whole “enchilada” as we say. 

You can start commercially, you know, by testing the waters in terms of; Is there a market for you?  

If that’s the case, a distribution centre can help you start by sending some of your products, and protect you from engaging in a strong commitment like having your own full-on operation. 

And finally, if you have the volumes, you can get the most value out of locally manufacturing in Mexico. Because even if you’re just interested in selling to the US, you can combine manufacturing in Canada and Mexico. With your operation in Canada, you attack the north of the US, while with operation in Mexico you attack the south.  

There are a lot of business opportunities, and we are here to help you determine precisely, what’s the best business model, for you to start manufacturing in Mexico and start doing business within our two countries.

If you are interested in reducing your costs without compromising control, quality and capital then shoot us an email.

We’ll be happy to accompany you in expanding your business to Mexico.