The Scoop on Mexico Sourcing (Part 3)

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 third post in a three-part series. In this post, we'll attempt to answer a few question on everyone's minds about Mexico sourcing.

How much should labor cost in Mexico? Just like China, there's not one answer. There are three separate labor rates depending on the region. The Northern region, closest to the US border is, not surprisingly, the most expensive. Companies should plan that their suppliers are paying the average employee $5-$6 per day -- not counting medical, pension, social security and other expenses. Even factoring in the material benefits costs on top of this, wages in this range can offer a huge advantage over costs just across the border. But Mexico is not always the lowest cost option -- nor is it becoming cheaper or realizing productivity gains necessarily. German puts in succinctly: "It's not that Mexico is becoming more competitive, it is that China is becoming less competitive."

What type of payment terms do Mexican suppliers expect? Well, the answer should be music to the ears of many companies doing business in China. To wit, most Mexican suppliers do not expect to be paid with letters of credit -- even initially. They might ask for a letter of credit at first, but the good negotiator is usually able to do away with this demand.

Still, Mexican suppliers do like to get paid on 30 day terms (60 days at the most is possible, but not desirable, as most cannot afford this type of hit to cash flow since access to capital is not the same as the US). Mexican suppliers take particular offense when they feel that they're being treated as banks, financing their customer's supply chain. In fact, there are numerous suppliers that want to do business with large automotive OEMs and tier ones such as GM, Visteon and Delphi, but can't because they're payment terms -- or actual payment dates -- are over 60 days. In fact, this is the single reason that many suppliers have to decline work with larger OEMs and large industrial companies .

What can we divine about the future of Mexico sourcing? Chances are we'll continue to see an evolution and not a revolution. China's industrialization is happening at a furious pace by a centralized government that's hell-bent on creating a super economic, political and military power. Mexico is different in almost every way.

Culturally speaking, Mexican suppliers have more in common from a Western values perspective than many suppliers in different low-cost regions of the world. They're willingness to learn can be quite high and many take well to supplier development programs. Still, Mexico's growth will be driven by suppliers themselves and the invisible hand rather a centrally planned market force. This is the fundamental difference that supports the premise that "slow and steady" will win the Mexico sourcing race rather than rushing back to the region in a sourcing version of the gold rush (which was precisely how many global sourcing organizations treated China initially).

Spend Matters would like to thank German Dominguez for sharing his thoughts on Spend Matters.

- Jason Busch

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