Q&A with IntermexIndustrial Parks

Sourcing Challenges and Solutionsfor Manufacturers in North America

Sourcing can involve risk due to transitions that are new to thecompany. If, when outsourcing, you use new suppliers from yourlocation, there’s the risk of delivery failure, supplier quality risks,etc. And, with every risk comes vulnerability.

When a company expands into different parts of the world, theygain a competitive advantage, but also risk becoming vulnerable tocultural misalignments or miscommunications.

Financial vulnerabilities can also occur when gaining a new supplycase through delivery, in the case of bankruptcy or financialdistress.

If North American manufacturers want to outsource, leadershave to change their mindset to adapt to a worldwide view anduse geographic diversity to their advantage. When a company isdoing well and the idea of change comes up, it may be difficult toallow that in a culture of complacency.

What are a few of the main sourcing challengesmanufacturers face in North America?

Culture ofComplacency

Risk

1

Culture of Complacency

Risk

Due to many companies being vertically integrated, their costsmay increase during sourcing because of margin payment.

Cost

Logistic services can come with different challenges includingcosts and complexity. When sourcing in an area that you areparticularly familiar with, freight and logistic services may becomecomplex, which can lead to costly decisions.

Logistics

In today’s world, we are facing a large manufacturing skills gap.As companies have migrated overseas, those jobs have beeneliminated in the US. Therefore, there is a shortage ofmanufacturing work within North America. Though, thisproblem does not currently exist in Mexico.

Setting up in city clusters, you find tremendous talent that hasbeen created by Fortune 500 organizations located in thosemaquiladora cities. And, you have immediate availability of thattalent, whereas, in the United States (specific aerospace,automotive, etc.), talent can be hard to find.

ManufacturingSkills Gap

2

Cost

Logistics

Manufacturing Skills Gap

Inventory

When sourcing to countries that are far from your point of origin,inventory must increase. For example, sourcing in China iscomplex, start-up takes a good amount of time, and the delivery ofthe product can take longer due to the distance.

Structure

Small to medium sized companies have a disadvantage whenthinking about sourcing because they can face the challenge oflacking the internal capabilities and structure to outsource in aproductive manner. There is a program called “Shelter” that canaid in these types of situations.

3

Inventory

Structure

One way that manufacturers can save on production costs is byoutsourcing to countries or places with lower labor costs. If we’respeaking about North America, companies based in the North canmove to the South where the minimum wage is reduced.

If companies are based in the South, they can move to Mexico,where the minimum wage is low enough to really make a difference.

In today’s low-margin and demanding market,how can manufacturers save in production costs?

Become a lean organization! Implementing and deploying leanmethodologies and quality management programs, like Six Sigma,help manufacturers in many ways, one of them being saving inproduction costs. These programs are designed to reduce defects inorder to help lower costs, save time, and improve customersatisfaction.

While implementing a program like Six Sigma can be a hugecommitment, it can provide benefits that will make the disciplineworth it.

4

Outsourcing to Countries or Places with Low Labor Costs

Become a Lean Organization

In order to save in production costs, companies should be effectiveand precise at the level of vertical integration that they can afford.

Cost improvement initiatives such as foot print rationalizationsand account rationalization can change an organization.

Pay attention to the exchange rate. One of the biggest advantages ofgoing to countries such as Mexico is the exchange rate. Companiesenjoy the benefit of a strong US dollar, therefore continuouslybenefit from foreign money devaluation reducing their costseffectively.

For, example, in the last three years, the Mexican Peso has devalued30% of our USD. Therefore American companies manufacturing inMexico can benefit from that exchange rate.

5

Be Effective & Precise

Foot Print Rationalizations/Account Rationalization

Pay Attention to the Exchange Rate

One of the challenges to remain competitive in today’s market iskeeping up with innovation and product development. It is vital formanufacturers to stay relevant in order to stay competitive. Thereis a big advantage to being the first to market new concepts orproducts.

Why are manufacturers struggling to remaincompetitive in the market today?

There is a lot of competitive pressure to keep costs low.Low-cost manufacturing is a priority if you want to stay inthe fight.

Fast-PacedWorld

Cost

6

Fast-Paced World

Cost

Afraid of Change

There is the possibility that manufacturers are afraid of change andof going overseas where they could find better costs, better deals,and better quality. Or they are unaware that there are excellentsources in places like Mexico, where Shelter providers can aid infinding the level of quality and delivery at a much lower costwithout having to go the distance, as in going overseas.

Afraid of Change

Lack of awareness that sourcing is an option can cause a strain incompetitiveness. Deciding to establish in Mexico can resolvesome of the most urgent financial and delivery needs.

Lack ofAwareness

We know that costs are a key aspect of maintaining a competitiveadvantage. American companies are full of punitive costs created bya legacy of employee benefits such as high salaries, health benefits,pensions, etc.

But, when you outsource to Mexico, you cut all of those costs. Plus,as American health coverage costs skyrocket, other countries retainthe same low medical costs.Medical Costs

7

Lack of Awareness

Medical Costs

One of the most common misconceptions about strategic sourcing isthat the focus is on finding the cheapest product and disregardingquality.

In reality, maintaining or even enhancing quality is a priority in moststrategic sourcing operations. The focus isn’t only on cost, but morespecifically on the TCO (Total Cost of Ownership) that takes intoaccount the customer needs, the state of the market, and the goalsof the organization.

Traditional sourcing focuses on finding the lowest-cost suppliers,but the aim of strategic sourcing is to build long-term relationshipswith suppliers that offer quality, value, a willingness to collaborate,and the flexibility to meet changing supply requirements.

What are common misconceptions surroundingstrategic sourcing?

“Strategic sourcing is a one-time project”. Actually, this is a processthat involves continuous improvement and cycles through manycontact iterations.

8

Finding the Cheapest Product & Disregarding Quality

"Strategic Sourcing Is a One-Time Project"

A common misconception is when the cost is taken into consideration,but quality and inventory are not. Companies minimize the effect ofincreased inventory. It’s important to evaluate inventory and the riskof excess and obsolesce created by outsourcing overseas.

Strategic sourcing is not just a task dedicated to the “sourcingguys”. In fact, it affects the entire organization. When a companyhas new product design, if you are outsourcing, you could berequired to share your intellectual property because of thedistance.

“Treats every country equally”. This is a common misconceptionbecause it doesn’t consider the political state of the country. Arethey US allies? Are they hostile to US interests? This is vital whenbeing strategic about your sourcing. Outsourcing tends to be along-term decision, so taking governmental factors intoconsideration can be beneficial.

9

Cost is Most Important

Strategic Sourcing Is a Job for the "Sourcing Guys"

"Treats Every Country Equally"

For example, if a Texan companyis sourcing to Mexico, they

wouldn’t have the necessity ofsharing their intellectual property

because they could set upsourcing engineers on the US side

to work with the Mexico side,without having to disclose every

spec of information. Thecloseness is where that

advantage comes in because yourUS personnel can manage your IP

protection function moreeffectively. Mexico is more

conscious about IP protectionthan China and international laws

are easily enforced in Mexicoinstead of countries such as

China and Malaysia.

First, manufacturers should be aware of exactly what is on the listof tentative strategic products they intended to outsource.

When looking at strategic sourcing, what aresolutions or best practices manufacturers should beaware of?

Manufacturers should be aware of the importance of establishingalliances with key suppliers. When supplier relationshipmanagement is a high priority, there tends to be much success forboth the supplier and the buyer.

10

List of Tentative Strategic Products

Alliances with Key Suppliers

There are very effective sourcing resources in other countries that, ina very short time, can provide feedback to the organization on if thereare existing suppliers and what the targeted costs are.

Sourcing Resources

Be aware that the process of outsourcing is much simpler thanthey think. They will be engaging with foreigners but will find thatthe productivity level, work ethic, and environment, is that ofAmericans. The further they move from North America, the moreprominent that foreign business relationship and performancewill be.

Move from North America

When manufacturers use adequate channels of sourcing, theresult is excellent.

In your experience, when manufacturers usestrategic sourcing solutions, what has theoutcome been?

One advantage that comes from strategic sourcing is theunderstanding of category buying and management processesso that you can identify improvement opportunities.

11

The Result is Excellent

You Begin Identifying Improvement Opportunities

Two main results that come from applying strategic sourcingoperations are savings and risk reduction while maintainingtotal control of the near-shored operation.

Savings and Risk Reduction

Strategic sourcing and planning process must be donecorrectly. Products need to be acceptable for the sourcingenvironment.

Products Need to Be Acceptable

"Intermex has been part of the success of over 200 multi-nationalcompanies manufacturing and distributing in Mexico. The processof combining foreign capital and technology with Mexican labor,industrial facilities, and our community, has been the core value ofIntermex for over 40 years. Our integrity and commitment toservice are reflected in the structure of our company and thedifferent solutions we offer. Let Intermex provide the competitiveedge for success and profitability of your operations in Mexico."

Think Mexico, Think Intermex.

www.intermex.com

Join Intermex on December 6th, 2016 at the American Aerospace & Defense Summit inScottsdale, Arizona on December 6-7, as Sergio Almada will be hosting a Lunch & LearnRound-Table Discussion on "Strategic Sourcing for Manufacturing Services."

www.aadsummit.com