Success south of the border

When Mexico makes headlines these days, it’s usually for rare but shocking drug-related violence. Unfortunately, this dark spot has blocked an expanding bright spot that is helping many U.S.-based global manufacturers to stay competitive. A variety of companies have set up plants south of the border and are counting on Mexico’s proximity to the United States, cultural similarities, and highly skilled and motivated workforce to fuel growth plans that support domestic job security.

According to the manufacturing trade journal IndustryWeek, foreign direct investment in Mexico rose 9.7 percent in 2011 compared with 2010 to reach $19.44 billion. After a 5.5 percent growth rate in 2011, the Mexican economy is expected to grow 4.5 percent in 2012. Mexico is still considered a lower-cost option compared with the United States, but increasingly, manufacturers are putting production in Mexico for other competitive advantages that benefit the entire company, including U.S. operations.

One such company is Santa Fe Springs, Calif.-based Phillips Industries, which makes customized and off-the-shelf electronics for the transportation industry and has operated a plant in Saltillo, Coahuila, Mexico, since 2007.

Phillips Industries manufactures customized trailer harnesses at its Saltillo plant, which accounts for about 25 percent of the company’s volume. Phillips Industries became interested in Mexico in 2006 when attending an open house at a Mexican plant operated by one of its customers. The customer was encouraging its suppliers to site facilities in Mexico. Simultaneously, Phillips was dealing with performance problems at a Dallas plant that seemed to have a low probability of quick resolution.

Rob Phillips, vice president of global operations, said the decision was made to shut down the Dallas plant and move production to Mexico, and the company opted for a “shelter model” to set up and run the operation.

Fundamentally, this model mimics outsourcing, but the manufacturer maintains control of critical functions such as business processes, strategy planning, hiring decisions and product-specific parts and materials procurement. The shelter company handles the administrative side of setting up and managing a plant: permitting and regulation, the importing and set-up of production machinery, utilities relationships and even employment.

Beyond cost savings, the biggest benefits of a shelter model are that manufacturers can launch production much faster, the entire process of setting up a foreign site is simplified and handled by experts, and the producer can devote resources to core competencies and serving customers.

Phillips chose The Offshore Group, which runs two industrial parks in addition to Saltillo, at Guaymas/Empalme, Sonora, and Guadalajara, Jalisco. Rob Phillips said the speed with which the Saltillo plant was set up and began production provided a huge advantage over going it alone.

“We began negotiating in a meeting September; we signed a contract on Halloween day; and we were up and running by the beginning of the next year,” he said. “The decision to move production was a quick decision, and The Offshore Group kept pace with us. We were a company with no experience operating in Mexico, and we were able to set up a world-class facility in a short period of time.”

Phillips said going with the shelter model shortened set-up time because The Offshore Group winnowed job applications to those that matched Phillips’ criteria and needs, imported and set up production machinery and handled all other “localized” aspects of setting up shop in Mexico.

When companies such as Phillips Industries can shorten set-up time for a new facility, it can begin fulfilling customer orders sooner, which in turn shortens the return-on-investment period for up-front costs. As a result, the new operation begins contributing to profitability and cash flow sooner.

Having a shelter facility in Mexico shortens cycle time on other key metrics compared with locating a facility in an overseas location, such as Asia. For example, Rob Phillips said the lead time for Phillips’ customized trailer harnesses that are made in Saltillo is four to five times shorter than competitors’ lead times. Both the shorter shipment route (no ocean to cross for North America) and similarity of time zones, language and cultural factors play into that advantage.

Additionally, Rob Phillips said he has had no problem finding enough properly trained and educated employees. In fact, they are more educated than U.S. professionals in some ways.

“We’ve hired several people right out of college who have been directly educated on lean purchasing for the automotive industry, and I’ve never seen that anywhere else in the world,” Phillips said. “If I need to hire someone, I have an incredible pool of people who are interested and have the experience we need. I’m not having to look for a production manager for six months. I look maybe for a week and a half. I might get four or five very qualified resumes of English-speaking people who really understand lean and are what I am looking for.”

In some cases employees work directly for the manufacturer, while in others they work for the shelter company. Phillips’ employees work for The Offshore Group on paper, but Rob Phillips said they are just like his own employees.

“The shelter actually employs them, but for all intents and purposes, they are Phillips employees. They get a check from the shelter, but they are very loyal to our company and invested in the business.”

Ideally, manufacturers searching for a shelter partner should look for a complete, turnkey solution that allows them to focus on their products and not plant maintenance. For example, Phillips has been able to concentrate on building a pool of local strategic suppliers for materials and components—those that add to customer value—while The Offshore Group handles less-strategic MRO procurement.

“We have had so much success in Mexico that we are constantly looking at what products can we move there,” said Rob Phillips. “There are discussions of moving some of our products for European customers from Shanghai to Mexico because it cuts lead time in half.”