Supply Risk Management in Mexico: Tips and Analysis For Multinational Procurement Organizations

Editor’s note: This is a refresh of our 2015 briefing on supply risk management, which originally ran on Spend Matters PRO.

Supply risk management continues to be an important topic of not just debate but practice, too, within global procurement organizations. (See related coverage: here, here, here.) And on a more frequent basis, supply risk management efforts are extending “south of the border” for North American companies, as manufacturers continue to emphasize a more prominent role for Mexico and Mexican suppliers in their global supply chains. In this Spend Matters Plus analysis, we explore how Mexican companies are managing supply chain risk. We also share survey results from a study in the region and provide tips and lessons learned for multinational procurement organizations that are increasingly sourcing and manufacturing in the region as well as general supply chain risk management best practices.

Mexico: A Link in the Supply Chain of American (Multinational) Companies

Mexico has long been a hub in the Americas for companies with global supply chains, especially in markets such as automotive, industrial, energy and process and other industries that are constantly searching for both inexpensive and skilled sources of operational labor. American companies are no exception, and given the proximity to Mexico, suppliers across the border have become important business partners and links to the companies’ supply chains. In fact, in August 2014, Mexico and the United States were classified by Boston Consulting Group (BCG) as “rising stars” of global manufacturing, being 2 countries whose value chains are highly integrated and can greatly improve its structural costs to produce manufacturing; BCG included 25 of the largest exporters in the world in this study.

Mexico is a key exporter in its own right. For the US, Mexico stands as the third largest country for imports (topped only by China and Canada). Main exports include: land vehicles and parts, machinery and electrical equipment (TV and telephony), mechanical appliances (boilers, parts). For Mexico, these exports represent 80% of its total exported manufacturing products, and for importers, they represent critical links in the supply chain for finished parts, components and OEM products. But while the distance for Mexican supplier facilities from US warehouses, distribution facilities and plants might be measured in the hundreds of miles versus thousands (compared with China), companies cannot afford to ignore supply risk issues, even if proximity reduces select ones.

What Triggered the Interest in Controlling Supply Chain Risks?

Events like the earthquake in Japan, the tsunami in Thailand and the constant focus on operational efficiency, cost optimization and the search for suppliers in low-cost areas, often have increased the potential risk across many links in global supply chains. The combination of these events with internally and externally focused cost reduction efforts (e.g., inventory reduction) has revealed the importance of risk management within supply chains, forcing companies to implement new elements of vigilance to avoid disruptions.

That said, before exploring the situation in Mexico, specifically, I think it is important to highlight some of the points that my colleague Pierre Mitchell raises in his article Supply Risk Management 2015: Lessons from Leaders. His points capture the essence of supply risk management priorities today:

• Keep the supply lines flowing in a growth mode – especially in the face of global volatility (natural disasters, geo-political risks, etc.)
• Ensure product quality that impacts customer safety
• Protect innovation in terms of intellectual property protection and physical property protection
• Insulate your brand from damage due to adverse supplier behaviors
• Extend corporate sustainability efforts (that may stem partially from large consumer brand customers) out to the supply base
• Assess and track financial risk factors – ideally those that go beyond mere accounting (creative solution providers with supplier network data can deliver robust predictive scorecards based on metadata analysis)

To Pierre’s general points, I would add a couple more:

• Communicate clearly internally and externally – don’t underestimate the power of communication to make everyone aware of supply risk management efforts
• Maintain policies and procedures – adapt to situations but program management should be consistent
• Enable constant feedback from potential risks for all those involved in the supply chain based on mechanisms such as a virtual “risks mailbox” that sends alerts to a dashboard or email account

Another way to think about supply chain risk is to compare it to telecom, a category that I have spent time managing in the past. In telecom, I was taught that first of all, it is essential to insure there is always a “plan B.” Second, investigate whether the network has adequate availability and service levels (e.g., 99.99% or 99.9999%) and further invest in at-risk points to create redundancy. And third, have a disaster recovery plan.

Supply Risk and Mexico

Without over generalizing, it is important to gain a relative understanding of how Mexican companies stack up to others in terms of their practice of risk management activities and incidences in the supply chain. This information is the result of a research study conducted by APICS in Mexico (August 2014) through our colleague and Spend Matters contributor Jesus Campos. Please note, the findings are limited to manufacturers only. Within this group:

• 4% of companies have experienced an interruption in their supply chain in the past 24 months. 45.2% have not suffered an interruption and 4.4% do not know if they have or have not suffered an interruption
• Only 6.9% used internationally recognized methods (ISO 31000 – ISO 22301) to manage risk or related quality programs. 40.9% of companies do not use a methodology to manage risk in their supply chain. 52.2% of the companies use their own methodologies
• In the case of foreign trade security (storage and transfer), just 24.2% are certified by C-TPAT, and 13.9% are certified in NEEC – a certification program of the Mexican government that seeks to strengthen security in the supply chain of foreign trade
• Only 8% of companies ask lower-tier suppliers about their supply chain risk plans, and 50% of the companies (surveyed) are asked about their supply chain risk plans by their distribution network or customers
• Unplanned demand, supplier bankruptcies/failures and shortcomings in transportation and logistics are the major risks of disruption of supply chain manufacturing enterprises within Mexico
• In relation to areas within the company that are responsible for risk issues in the supply chain, the greatest overlap is within S&OP and production planning/buying

Reflecting on the Findings

Based on the survey data, it is clear that most Mexican companies still have a long way to go in managing supply risk. The fact that 70% of Mexican companies do not use a standard taxonomy or approach to facilitate the identification and classification of risks in their supply chain tells us that Mexican risk is lagging in the US, Europe and other regions.

Key Takeaway: US companies and multinational organizations working with Mexican suppliers should share their own risk methodologies.

One of the areas of greatest opportunity for Mexican manufacturing companies is to have a formal communication plan to respond to crises within the supply chain. The APICS study shows that 63% of companies do not have one. Formal plans can help minimize disruption and costs during a crisis, both within and outside of the organization (including the overall brand image of a company).

Key Takeaway No. 1: As part of supplier development efforts, multinational firms should work with Mexican suppliers to create formal supply risk communication and contingency plans. Do not assume they have them.

Finally, a topic that is not shown in this APICS study but should be important for US companies to consider, is how these companies are managing the risk of non-compliance with the Foreign Corrupt Practices Act (FCPA), a US law that imposes harsh penalties for bribing foreign officials (i.e., providing any type of benefits in exchange for obtaining or retaining business or other benefits).

Key Takeaway No. 2: Mexico (and Latin America) is a hotbed of FCPA enforcement. Any supply risk management program extending to Mexican operations and suppliers should include a provision for FCPA compliance.

To conclude this analysis, let me share a quote by Charles Darwin, who once noted, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

Change in Mexico is a given. But in my experience, few North American companies are ready to manage all of the potential supply chain risks in such a dynamic environment, especially considering the relatively low levels of preparedness by Mexican suppliers to manage their own supply chain risks.