Last week, I had the chance to catch up with German Dominguez in Chicago. German, who is based in Mexico but has worked extensively in the United States as well, is an expert on sourcing in his native country. We had the chance to connect over a bunch of issues, ranging from categories which are best suited to the manufacturing environment in Mexico through to tips on supplier development in the region. This is the first post in a three-part series.
When I first spoke to German about getting an update on the latest on Mexico sourcing, I was most interested in which categories were seeing the most activity and interest, especially in the context of the rising costs of China sourcing. According to German, in the direct materials areas, machined components and metal fabrication (light sheet metal fabrication especially) are two categories with increasing volume levels. Companies should expect 25% savings, on average, compared with US prices (but they’re not always getting it these days). But the key for Mexico when it comes to achieving savings, in part, is to insure the forming, bending, stamping molding, etc. processes are applied to commercially available material. And that's because specialty metals must be imported into the region. In other words, there's not a ready-made local supply market yet.
This is one of the reasons that the A&D market in Mexico is still very much in its infancy. Honeywell, Boeing and others are sourcing from the region (e.g., the F-14 wire harnesses are from Mexico, as are various components in the Boeing 777 and 787). But the material to build these parts and components are typically shipped to Mexico via the US or another country. In addition, some large suppliers do not want to get into the industry -- and are content serving automotive and diversified manufacturers -- because of their unfamiliarity with the materials (when it comes to both the ability to source it and the expertise needed to work with it).
In addition, the quantities are not the same. Mexican manufacturers still prefer repetitive, production runs. As such, many are not used to low volume production. Still the major challenge for Mexican suppliers as they look to bid on new business which involves metals outside of what they're used to (e.g., steel sheet, copper, aluminum, stainless, etc.) is that they're not as familiar with the metallurgical properties and nuances of working with titanium and other more exotic materials that require more expertise on behalf of the welder, machinist, etc. Compounding the challenges are service centers which are just coming up to speed on learning to source the material and hold stock for the budding industries that require it (which is a large contrast to China and Eastern/Central Europe, which have significantly more experience in A&D and highly skilled precision applications).
In A&D and other industries, US manufacturers are increasingly demanding that suppliers develop capabilities to serve cross-border JIT (just-in-time) and VMI (vendor managed inventory) programs. But in general, many suppliers are unprepared from an operational perspective to meet these types of needs (which require holding inventory state-side across the border). Still, they're willing to learn. Check back for the second post in this series later in the week when we investigate supplier development in Mexico, among other topics.
Spend Matters would like to thank German Dominguez for offering up his insights into the sourcing environment in Mexico.
- Jason Busch