Although more companies are planning to bring their manufacturing operations closer to the U.S. market, Mexico remains a more popular nearshoring destination than the U.S. itself.

Nearshoring — the practice of shifting business or production operations closer to a domestic market — is picking up momentum as more manufacturing companies are seeking ways to reduce logistics costs and bring products onto the market more quickly by operating closer to the United States. Despite the desire to be nearer to the U.S. market, however, new research shows that economic conditions have made Mexico a more favored nearshoring location among manufacturers than the U.S. itself.

According to a recent survey from global business-advisory firm AlixPartners, 63 percent of senior manufacturing executives selected Mexico as the most attractive country for re-sourcing manufacturing operations closer to the U.S., with only 19 percent citing the U.S. itself as the best location for getting closer to the U.S. market. Geographical proximity and improvements in Mexico’s transportation infrastructure are key factors in shaping manufacturers’ nearshoring opinions.

The survey results are based on responses from 80 C-level and other senior manufacturing executives across more than 15 industries earlier this year.

The top three advantages expected to be gained from nearshoring in Mexico are lower freight costs, faster time-to-market rates and lower inventory costs. Other benefits cited include “time-zone advantages,” which allow for easier coordination between U.S. and Mexico-based operations, and “cultural alignment” with North American managers.

“In-transit inventory, in particular, was a high priority among those interviewed,” Russ Dillion, a vice president in the Latin American manufacturing practice at AlixPartners, said. “Obviously, shipping products in from long distances eats up a lot of inventory expense, and that’s something companies would like to improve if possible.”

The survey also found that 9 percent of manufacturing executives have already taken steps to nearshore their company’s operations, while 33 percent plan to do so within the next three years. Mexico’s attractiveness among those planning to nearshore was more than seven times higher than Brazil’s and Central America’s combined.

“[T]he country has a lot of appeal right now because of its proximity to North American demand and the continuing need of many companies to improve their working-capital positions,” Chas Spence, a director in the Latin American Manufacturing Practice at AlixPartners, explained. “That appeal could grow if fuel prices continue to rise globally.”

Mexico remains a popular destination for offshoring. According to AlixPartners, 37 percent of survey respondents have completed or are in the process of offshoring, while 27 percent plan to offshore some U.S. operations within the next three years. Mexico topped the list as an offshoring site among both groups, narrowly beating China and surpassing India, Brazil and Eastern Europe by wide margins.

Despite Mexico’s growing reputation as a major nearshoring and offshoring location for the U.S. market, the country still faces numerous obstacles in providing a hospitable environment for overseas companies.

“Violent crime, as much as it may be isolated in the border areas and in ‘no go’ sections of large cities, still remains a major perception issue for the country,” Latin American outsourcing firm Nearshore Americas notes. “Other challenges include English proficiency, overall costs vs. India and working with existing labor laws.”

Violence is a particularly important issue in Mexican nearshoring. The AlixPartners survey found that 19 percent of respondents have experienced some form of supply-chain disruptions caused by security issues.

“Companies considering a nearshoring engagement in Mexico, or any area with political volatility or violence, should invest time upfront with their provider to validate business continuity and disaster recovery plans and develop special termination clauses and detailed transition plans,” Forbes.com’s CIO Central blog advises. “Companies should also ensure that provider technologies can seamlessly move work to another delivery location and insist upon offsite, secure storage of critical company data.”

Although it remains a highly attractive country for establishing — or re-establishing — manufacturing operations close to the U.S. market, the risks posed by crime may come to outweigh the economic advantages of working in Mexico unless concrete steps are taken to ensure stable conditions.

“Mexico’s proven role as an established and credible nearshoring locale may be in serious jeopardy if the upswing in violence does not fade quickly,” CIO Central adds. “The country offers many of the most sought-after outsourcing benefits, but the risks of continued violence may eclipse the rewards if the government is not able to restore a safe environment.”

Earlier

Sourcing Comes Back Home

Is Reshoring Still a Reality?

Offshoring: Today and Tomorrow

Top Supply Chain Challenges for 2009

Resources

Mexico Remains the Top Choice for Manufacturing ‘Near-Shoring’…
AlixPartners, April 20, 2011

Can Mexico Really Become Number Two in the World?
by Kirk Laughlin
Nearshore Americas, March 11, 2010

How Violence in Mexico Impacts Nearshoring
by David Rutchik
CIO Central (Forbes.com), Dec. 3, 2010