How Offshoring Can Increase Your Bottom Line
December 9, 2019
As a business grows, evolves, and optimizes, it must seek cost-savings and competitive advantages by utilizing both internal and external economies of scale. Eventually, it reaches a point where it becomes efficient to specialize by breaking up certain processes and passing them along to other specialists who can perform them with greater expertise or at a lower cost. Doing so allows a business to increase production, reduce costs, and continue increasing profits as new clients are introduced into the mix.
One of the primary ways that American manufacturers achieve economies of scale is via offshoring. Thanks to recent developments such as the Congressional authorization of the USMCA, the mecca for offshoring has become Mexico. Below, we’ll discuss what the benefits of offshoring and outsourcing are and delve into the reasons why you should consider making the move to start manufacturing in Mexico.
What is Offshoring?
To understand what is offshoring, you must think about the big picture. You are likely aware that products made in the West tend to be exorbitantly more expensive than those produced in China or developing countries. But why is that?
One of the primary factors is labor costs. Simply put, if you have to pay an American worker a relatively high hourly wage to perform a business process, you then have to set the product’s price at a high enough figure to recoup costs. The underlying concept of offshoring essentially states that the same process could be done in a fast-growing foreign market at a quarter of the cost for labor. The Balance writes:
Ultimately, the conglomerates began to collapse under the weight of the acquired companies. Profits started falling, and companies began to retract to their “core” businesses. Next, they discovered that they could shed even core functions by hiring them out to companies that could do them more efficiently and, thus, less expensively. Payroll processing was subcontracted; shipping was farmed out; so was manufacturing; companies were hired for collections, customer call centers, and employee benefits.
When companies offshore, they relocate their factories from expensive locations to cheaper economies in order to sell their goods back to Westerners at a cheaper price. Decades of strategy development, combined with technological innovation are the primary factors as to why consumer goods like electronics and clothing are far cheaper now than they once were.
That said, according to Harvard Business Review, the value proposition of offshoring isn’t simply limited to labor arbitrage. Their studies concluded that it also allows a business to:
- Rapidly scale up and establish business decision support capabilities (e.g., pricing, consumer analytics).
- Realign operating priorities to own and manage end-to-end processes in order to deliver superior end-customer service that will ultimately improve the customer’s experience.
- Identify opportunities in the operations that impact top-line growth by extending services to new segments or building new services for the enterprise.
- Push the envelope on cost efficiencies and productivity.
Knowing this, it becomes crucial for decision makers to thoroughly analyze each aspect of the supply chain and then decide which processes would be best served by offshoring (to both capture value as well as create value for customers).
Cost-Savings Benefits of Offshoring
If you’re strongly thinking about offshoring a part of your operation, or the entire thing, there are several cost-savings benefits to such a decision, particularly if you plan on doing so in Mexico.
Pros of offshoring include:
- No need to hire employees – When you offshore, you’re paying laborers as contractors as opposed to employees. And, hiring an employee costs a business in more ways than simply their wages. Per Investopedia:
The obvious cost of a new employee – the salary – comes with its own bundle of side items, as well. Benefits range from the minor – free coffee – to the major such as gym memberships, life insurance, disability coverage, dental plans, tuition reimbursement… the list goes on.
The question comes down to whether or not there is a cost advantage of hiring an employee.
- Decreased labor costs – Offshoring allows businesses to pay less for labor-intensive processes, especially those that are product-related. Typically, Mexican labor wages are some of the most affordable in the developing world. According to Area Development:
Fully fringed labor rates for skilled trades in Mexico are often only 20 to 30 percent of the same salary levels paid in the U.S. and Europe. Non-skilled assembly workers can be sourced for $2 to $2.50 per hour with all benefits, as compared with fully loaded rates exceeding $12 to $13 in the U.S.
- A large educated and highly skilled labor force – As part of its focus on becoming a competitive manufacturing-based economy, the Mexican government has made a concerted effort to stoke interest in manufacturing work. By incentivizing manufactory work and creating several education, training, and specialization programs, they generated an educated and highly skilled labor force. From management to labor, you have a strong pool of candidates who’ve been trained and have extensive hands-on experience working or running a factory.
- Business Growth – By paying less for various processes or components of production, you can take the cost-savings and strategically reinvest them. Per My Business:
Because of reduced labor costs, offshoring allows business owners to free up allotted labor funds to be reinvested into their business—expanding their services and offerings. Companies that offshore their businesses center their overall decisions on free trade and globalization.
A significant portion of revenue that’s earned abroad comes back in one form or another, including investment in research and development, employees, taxes, and shareholder profits. All of these allow you to continue growing your business in a calculated manner.
- Better fulfillment – When you offshore, you have specialized labor force groups that can crank out processes at a much faster, more efficient rate and can work around the clock. When this is done in Mexico, the proximity to the states allows for shortened turnaround times, which in turn makes it easier to meet sudden demands or express fulfillments.
- Supply chain reduction – Lengthening of the supply chain is one of the costs that businesses have to weigh when they decide to engage in offshoring productions. For example, for it to be worth it to offshore in China, the costs-savings of production must outweigh the increased costs by transportation and a longer, more decentralized supply chain.
Due to geographical proximity, offshoring in Mexico allows you to reap the benefits without many of the associated costs of a longer supply chain. Heavy capital investment in transportation, roads, and rails has simplified the process of moving your goods to warehouses in the states.
- Decreased risk – By decentralizing the supply chain, you lower overall risk. In such a situation, a hitch or problem is less likely to derail your entire operations. Or, if the government threatens restrictions, they have less of an impact on your production and profits.
- Minimized import and export tariffs – Offshoring in Mexico allows a business to enjoy several reduced or lifted import and export tariffs, notably IMMEX. Per Industry week, “The IMMEX program is defined as an instrument to temporarily import goods and services that will be manufactured, transformed or repaired, and then re-exported without payment of taxes, compensatory quotas, and other specific benefits.”
Maquiladoras are able to import the following goods duty-free so long as they’re assembled or manufactured and then subsequently exported:
- Raw materials
- Replacement parts
Furthermore, Mexico has more than 40 free-trade agreements with other nations, which provide additional cost-savings advantages.
- Greater control over operations – By offshoring, you maintain control over the various processes. You have a dedicated staff that is working at your behest. You give them direction, training, and everything is performed as you’d have it. This increases accountability and ensures that quality is maintained across the board.
Offshoring in Mexico
In an increasingly complex global economy, businesses must find avenues for cost-savings in order to compete and thrive. One of the best ways this can be achieved is via offshoring. Such a decision provides a host of benefits including but not limited to:
- Lower labor costs
- Business growth
- Decreased risk
- Shortened supply chains
All of these offshore outsourcing advantages result in higher profits. So, if you’re considering making the move by offshoring in Mexico, you should speak to the experts at NAPS. They’ve spent several decades helping hundreds of businesses successfully set up processes or entire operations, and they can help you too.