Manufacturing costs significantly impact a business’s financial health and competitive edge. These costs dictate pricing strategies, investment decisions, and operational efficiency. When asking how to reduce manufacturing costs, managers must first understand how these different costs interact and combine to bring about productivity.
As Mexico becomes a prominent destination for manufacturing outsourcing, it becomes apparent that the Latin American country is well suited to helping companies cut costs and save money. But just where are these savings at, and how much can the average company cut from the bottom line? What is it about Mexico’s unique offering that makes nearshoring there so profitable?
These and other considerations are what we will now discuss.
Total manufacturing costs consist primarily of three broad categories:
Direct materials include raw materials like steel, plastic, and packaging materials, with costs varying by production volume. Companies typically manage these expenses by negotiating with suppliers or seeking bulk discounts.
Direct labor involves wages paid to workers directly involved in production, like assembly personnel, quality inspectors, etc. Businesses can optimize these costs through workforce training and efficient production techniques.
Manufacturing overhead, or indirect costs, include expenses like machinery depreciation, utilities, and factory management salaries. These costs are fixed but can fluctuate with production volume. Accurate cost allocation requires businesses to use cost drivers to distribute these expenses across products.
Calculating total manufacturing costs involves summing direct materials, direct labor, and manufacturing overhead. Accurate calculations are crucial for informed decision-making. Cost accounting systems help assign costs to individual products, aiding in price determination. Pricing must cover production costs and consider market demand, competition, and desired profit margins.
Streamlining manufacturing costs involves continuous improvement and vigilance. Leaders must be willing to think outside of the box. Traditionally, lean manufacturing and advanced technologies have been used to reduce raw material and labor costs, minimize defects, lower overhead, and maximize quality. Investing in quality employee training also fosters efficiency and morale, contributing to cost-effective operations.
Fortunately, manufacturing in a Mexican maquiladora or export factory offers unique advantages to help US companies find how to reduce manufacturing costs in each of these categories.
Manufacturing in Mexico allows US businesses to significantly cut direct material costs. Thanks to the USMCA, materials, equipment, and finished products can freely move across the border without tariffs.
This tariff-free environment enables companies to source materials locally at lower costs. Rather than ship materials from around the world, when applicable, direct inputs can be sourced directly from a highly localized vendor and supplier network.
Additionally, Mexico’s proximity to the US reduces shipping expenses and delivery times, which further drives down material costs. When US businesses can leverage local suppliers in Mexico and North America, they benefit from competitive pricing and reduce the financial burden associated with importing materials from distant locations like Asia.
One of the most compelling advantages of outsourcing manufacturing to Mexico is the reduction in labor costs. Mexican labor rates are substantially lower than those in the US, allowing companies to save on wages and benefits. But they’re also on par with or even lower than China’s rapidly rising labor wages.
The maquiladora program enhances these savings by enabling US companies to set up local factories with favorable labor conditions. By employing skilled Mexican workers at lower rates, businesses outsourcing to Mexico can maintain high production standards without the steep labor expenses typical in the US.
This cost efficiency is further amplified by the ease of access to a large, trained workforce ready to meet the demands of various manufacturing processes. Mexico’s labor force is renowned for being highly skilled and tailor fit to industry requirements. No longer the home of low-skill assembly workers, Mexico is up to the high-skill jobs associated with more sophisticated manufacturing and fabrication.
US manufacturers can also reduce their overhead costs by outsourcing to Mexico. Manufacturing overhead encompasses expenses like utilities, factory maintenance, and administrative salaries, all of which are lower in Mexico.
The maquiladora program and partnerships with shelter services offer additional cost-saving benefits. These arrangements streamline operations, provide tax advantages, and minimize administrative burdens, allowing businesses to focus on production efficiency.
Additionally, Mexico’s ongoing infrastructure investments, which are aimed at supporting the surge in manufacturing activities, also contribute to lower overhead. They achieve these cost savings by improving logistics and reducing transportation delays. The strategic location of manufacturing hubs near the US border ensures seamless operations, cutting down on costs related to transport and logistics.
Beyond direct material, labor, and overhead cost reductions, outsourcing manufacturing to Mexico helps manufacturers save in another area, too: streamlining.
Manufacturers who outsource to Mexico’s dynamic production environment find that overall operational efficiency is enhanced. Shorter supply chains, reduced lead times, and proximity to US markets enable quicker response to demand fluctuations. And in turn, this agility allows companies to manage inventory better, minimize waste, and optimize production schedules.
This is only compounded when they access Mexico via a shelter partner or contract manufacturer. These turnkey options provide additional support in navigating regulatory compliance and customs procedures, ensuring smooth operations.
The collective benefits of lower costs and improved efficiency position US businesses to compete more effectively on a global scale, capitalizing on Mexico’s many strategic advantages.
