More companies manufacturing in China are weighing the options of moving manufacturing operations to Mexico – a choice made attractive not just because of rising Chinese labor costs, but also mounting freight bills and excessive shipping time.
Shipping and Freight
Costs from China to North America
Labor in Mexico out performs labor in China providing more productivity, quality, and overall value. Bill Golden, former president of International Logistic Solutions (ILS), a third-party logistics company that specializes in international freight forwarding, warehousing, and import/export services, noted how labor is not the main issue driving companies from China to Mexico, it’s the shipping costs from China that are extremely high compared to Mexico.
Golden states, ““Typically, it costs about $3,000 to move a freight container from China to Long Beach,” and noted how other factors can add to costs including Peak Season Adjustments (PSA) and constant adjustments to fuel costs. The added costs are typically hard to forecast, but trend to bring in higher costs annually.
Companies that hold long-term, regular shipment agreements with end customers are affected by the constantly changing costs that come with freight shipments from China to North America. The instability of the market affects the way companies do business with the country and its suppliers.
Time from China to North America
Time is another important factor in the world of manufacturing. The time it takes to ship goods from China to the end destination in North America takes a few weeks. For example, inland freight from the Chinese manufacturer to port can remain at the Chinese port for a day or two before freight transit resumes, the next destination being a U.S. port. This can take between two and three weeks, depending upon how goods are routed or the cost structure utilized. From the U.S. port, inland freight transports goods to their final location.
Sometimes the journey of goods can take months because of common issues that persist. For instance, Chinese shipping lines sometimes overbook shipment dates during peak seasons. In this case, the shipments go out based on the highest rates instead of scheduled times. In contrast, a company shipping from one of the northern states in Mexico to the Midwest can expect a “worst-case total transit time” of four days.
For the manufacturing industry time is money, and longer shipping times hurt a company’s profitability, productivity, and overall value. When looking at Mexico vs China, shipment times to the North American market are incomparable. Mexico provides a faster and more cost effective solution to transporting goods.
Damaged and Defective Goods
Parts that travel to their destination and end up being defective are generally referred to as “contained parts” and can make an entire supply batch suspect to the quality of the good. A contained-parts situation usually involves a costly response. The manufacturing plant that produced the faulty parts must immediately increase production and ship new products via air to make up for lost time.
This also results in confining the manufacturing items indefinitely. In this scenario the defective materials can quarantine the whole supply shipment to make sure the other parts work well. Sorting out suspect material is costly and time-consuming. The end customer usually asks the manufacturer to replace contained parts immediately; otherwise, production lines will collapse while waiting on new materials. The new materials have to be sorted or inspected which increase costs. Defective goods can happen once a year, or multiple times a year.
Nearshoring to Mexico cuts the response time of contained parts and enables a less costly strategy for these situations. Mexico also has a better quality control because of stable employee-safety practices, reasonable health-and-safety monitoring, and strong child-labor laws that enable a better work environment and valued productivity.