Solutions to Saving with Tariffs
Why companies who are considering outsourcing their packaging and distribution to a 3PL should consider opening their own packaging, distribution and fulfillment centers in Mexico.
What are 3PL Providers?
Third-party logistics providers, most commonly referred to as a “3PL,” are used when a company outsources elements of their in-house logistics around packaging, distribution and fulfillment services to a third-party provider.
Companies find many benefits in shifting their packaging, distribution and fulfillment responsibilities to a 3PL provider. However, the core attraction of 3PL management is their access to multiple facilities that allow clients to be closer to their customers and save on supply chain costs, such as transportation costs and order fulfillment.
Companies that actively utilize the “pick, pack and ship” process find third-party logistics an integral part of their supply chain management. Outsourcing these duties allows the business to focus on core competencies and redirect resources to duties such as warehouse and inventory management. Other operational areas of a business that can capitalize on this type of logistics management solution include:
- E-Commerce fulfillment
- Amazon Prime fulfillment
- B2C sales warehousing
- B2B freight warehousing
- Inbound/outbound freight
- Sales support
- Import/export logistics
Using a 3PL provider is a strategy many corporations rely on due to its proven success rate. According to Armstrong & Associates, 80% of Fortune 500 companies, and 96% of Fortune 100 companies, use 3PL services. The positive impact such logistics services can provide for a company is reduced fixed costs, overall improvement of maximizing customer value, and maintaining a competitive advantage. The demand and use for 3PL solutions have grown quickly since 2014, and the market is expected to grow to $1.05 billion by 2024.
Cons of Using a 3PL Provider
While the benefits of outsourcing to a 3PL are attractive to companies looking for supply chain solutions to offer cost savings and ease their distribution and fulfillment needs, there are also some disadvantages to hiring an outsourced provider. Companies are at risk of losing control over the warehousing and distribution process when working with a 3PL. This shift of control can impact customers and their satisfaction with the product and confidence within the company.
For example, if there are any issues with fulfillment or on-time delivery, customers will be looking to the company for immediate solutions, not the 3PL who holds control. This can have a considerable negative impact on customer service. In addition, shifting control over shipments, and the loss of quality control and close proximity to the product can also become new risks. Lastly, not being near the product or its distribution could create a lack of market knowledge for a logistics team.
Companies who do not use third-party logistics companies, or only use them for strategic parts of their business, manage their own warehouse and distribution centers. While costs in the United States still remain high, an alternative location that holds the same standards but with more flexibility and potentially large financial benefits, is Mexico.
Mexico’s manufacturing sector has steadily grown over the past 25 years, but it has only been in the last 10 years that many of these companies have also moved their packaging, fulfillment and distribution centers to Mexico. One of the biggest advantages, and often most appealing aspect, of moving a business to Mexico is the low labor costs.
Additional benefits, however, are its close proximity to the U.S. border, talented labor pool and ability to take advantage of the multiple trade and duty-free agreements Mexico shares with other countries. The most common trade agreement, especially in today’s political climate, is the United States-Mexico-Canada Agreement (USMCA formerly known as NAFTA). In addition to the USCMA, manufacturing companies in Mexico are taking advantage of a program called Section 321.
Learn How to Manage Tariffs in the Manufacturing Environment
What is Section 321?
Section 321 is a U.S. shipment type. Shipment types, also known as release options or clearance types, are modes of transportation used by carriers crossing the U.S. borders. Shipment types fall under one of three categories:
- Formal Entries, which are deemed high-value goods. Shipments valued at more than $2,500.
- Informal ENtries, which are deemed low-value goods. Shipments valued between $801 – $2,500.
- Section 321, an informal entry that is free of duties and taxes on any shipment of merchandise having a fair retail value in the country of shipment not exceeding $800. The minimum value was raised from $200 to $800 on February 24, 2016 by the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA).
Restrictions to Section 321 are:
- One shipment per individual or company, per day
- The importer must provide evidence of the value
- Consolidated shipments addresses to one consignee shall be treated as one importation
Goods that may not exceed a total value of $800 but that do not qualify under Section 321 are:
- Alcoholic Beverages
- Perfume containing alcohol (unless the merchandise contained does not exceed $5)
- Goods that require inspection: anti-dumping
- Goods that are deemed high risk for a particular type of merchandise or class
- Lab sampling
- Foods (excluding ackees, puffer fish, raw clams, raw oysters, raw mussels, and food packed in airtight containers stored at room temperature)
Taking Advantage of Section 321
One of the reasons the U.S. increased the value of goods under Section 321 from $200 to $800 per shipment was to accommodate the increase in eCommerce or online store shipments from outside the United States. That said, companies who manufacture their goods outside of the U.S., such as in China, and who also have a large eCommerce business, can take advantage of Section 321 by having a packaging, distribution and fulfillment center along the Mexican border.
With Mexico’s continued relationship with the United States, taking advantage of trade agreements like NAFTA and Section 321 can be a significant competitive advantage, and easily implemented with the right guidance.
However, there are alternative solutions for U.S. manufacturers to remove, exempt or reconfigure certain goods and products to avoid these tariffs. While there is no end date to this duty, companies that import from China can file a request for a one-year tariff exemption with the U.S. Government. Another long-term solution would be to source away from China and look to outsourcing solutions in Mexico.
How North American Production Sharing, Inc. (NAPS) Can be Your Partner in Mexico
Partnering with an administration and compliance management company who specializes in Mexico, such as NAPS, can help your firm mitigate the risk of expanding to Mexico while still providing the benefits and flexibility of controlling your own operation. Whether it is manufacturing in Mexico, assembly, packaging, distribution or a combination of all four areas, NAPS can help you understand the benefits and costs associated with expanding to Mexico. With over 30 years of experience in the maquiladora industry in Mexico, contact NAPS to learn more about how we can help your organization be more successful.