What to Consider When Evaluating the Cost of Manufacturing
January 9, 2017
Cost is of the utmost importance to companies considering expanding or moving their manufacturing operations to another country. When analyzing the cost of manufacturing, many companies choose to relocate their manufacturing to Mexico for a number of reasons. These reasons vary from lower labor rates to the availability of qualified workers, but each reason is vital to consider in order to conduct a comprehensive analysis of what the costs of manufacturing are and whether Mexico is the best choice for your company.
Lower Wage Rates
When looking for the right place to move manufacturing operations, many companies first conduct a wage rate comparison between their home country and prospective candidate countries for offshoring the manufacturing operations. For companies looking to offshore manufacturing from the United States, it was once common to relocate the manufacturing processes to China due to the lower wage rate. However, in recent years Mexico has superseded China as the better option due in large part to the low wage rate of workers in Mexico and its proximity to the United States. As of January 14, 2016, it was noted by economists that the “real” hourly wage rate in Mexico was forty percent lower than that of China.
This is a drastic departure from only twelve years’ prior when the hourly wage in Mexico was one hundred and eighty-three percent higher than in China. This drastic shift has motivated many companies to choose Mexico over China when analyzing the most cost-effective location to manufacture. When compared to hourly wage rates in the United States, those in Mexico are upward of 70% lower than loaded United States labor rates, making the potential cost savings significant for companies. In addition to the cost savings provided by lower hourly wage rates, there is also the foreign exchange rate to consider when deciding to relocate manufacturing operations to another country.
Foreign Exchange Rates
When analyzing the cost of manufacturing a product in another country, it is vital to research and understand the foreign exchange rates to make the most cost-effective decision. Even small shifts in foreign exchange rates can have a tremendous impact on business success. For many years, China had a much lower foreign exchange rate. However, in recent years the Chinese Yuan has become increasingly more expensive in relation to both the Mexican Peso and the United States Dollar.
Over the last ten years, the Chinese Yuan has become 26% more expensive in relation to the United States dollar. In contrast, over the last ten years, the Mexican Peso has become 27% cheaper when compared to the United States dollar. Economists predict that this trend will continue, making Mexico the most financially beneficial location for offshoring manufacturing operations to reduce costs. Another factor to consider when analyzing the cost of manufacturing is the availability of qualified workers.
Availability of Qualified Workers
The cost of manufacturing in another country is greatly affected by the availability of skilled workers to perform the necessary operational tasks to output a quality product and increase sales revenue. Due to the lower birth rate in China, there is a downward trend in future labor force availability. However, in Mexico, the implementation of the Maquiladora program has led to a workforce that has become increasingly skilled. Also, the sophistication of the products being produced in Mexico has catalyzed workers to continually develop their skills in conjunction with technological advancements. In addition to the skill of the workforce, the steady birth rate in Mexico has made the availability of the labor force stable and is forecasted to continue to remain consistent in the future.
How NAPS Can Help
When analyzing the cost of manufacturing, many companies select Mexico as the most beneficial option. To make this decision, companies must analyze a number of influential factors to ensure their decision is well-founded and will drive the cost of manufacturing their product down, while still maintaining a high-quality product and functional operation. Some of the most important factors to consider when conducting a cost analysis of manufacturing in another country is the wage rate of workers, the foreign currency exchange rates and the availability of a qualified workforce.
In recent years, these factors have driven more and more companies to nearshore their manufacturing operations to Mexico. For companies wishing to make this transition, North American Product Sharing, Inc. (NAPS) specializes in assisting companies to ensure long-term success manufacturing in Mexico by outsourcing their administrative and compliance management services.