The Complete Guide to Mexican Contract Manufacturing

Whether you’re a new business looking for ways to minimize hassle and get up and running or an established business looking to scale operations, Mexican contract manufacturing offers significant advantages you should be aware of.

But why Mexico? And why contract manufacturing? It’s certainly not the only mode of outsourcing manufacturing. In this complete guide, we’ll explore what the pros and cons are, how Mexico offers unique advantages, when contract manufacturing makes the most sense, and how to go about it.

If you’re wanting to outsource manufacturing, but want to make the best choice for your company’s unique situation, stay tuned. This article is for you.

What Are the Benefits of Contract Manufacturing?

So, what exactly is contract manufacturing, and why do companies go this route? 

First off, let’s define our terms. Contract manufacturing usually refers to the production of a finished product that the client can then place their branding on and sell as their own or use in their own assembled product. This is also called private label manufacturing. 

A variation on this theme is when a company only hires out the production of individual components they then assemble, themselves. This is typically referred to as subcontracting. Or on the other end of the spectrum, end-to-end contract manufacturing means hiring a factory to assemble the finished product for you.

This form of outsourcing isn’t for everyone. But for those in the sweet spot, it can have incredible benefits. It’s especially good for:

• Small companies with more financial pressures and less capacity or equipment
• Small-to-medium companies that prefer consolidated operations or working with a single outsource partner
• Any size companies in a market with swinging demand shifts requiring high levels of flexibility and scaling potential

For companies with one or more of these needs, the benefits of contract manufacturing include:

• The ability to incrementally expand output
• Streamlined, consolidated operations
• Maximum flexibility with minimum risk exposure
• Access to equipment and expertise far surpassing in-house capacity
• Access to Mexico’s reduced costs with less startup effort and time

Contract vs. Wholly Owned vs. Shelter

But contract certainly isn’t the only way to outsource manufacturing. Some companies prefer opening a wholly-owned factory or maquiladora, while others prefer partnering with a shelter service to employ an entire factory on their behalf. 

So how do these options stack up against Mexican contract manufacturing, and which of the three is best for your situation?

1. Opening a standalone factory or wholly-owned subsidiary offers incredible control over the manufacturing process. Many multi-national corporations and mega companies find this to be the best option, in spite of the complex startup process and steeper learning curve of doing business in a foreign country.

But for large companies with a lot of capital, the reduced risk of IP violations, long-term savings, and potential for expanding their footprint in the country are worth the additional regulatory risk, longer start-up times, and reduced flexibility. Opening their own factory in a country like Mexico is a smart, long-term investment.

2. But others want the capacity and control of owning a factory without the hassle and risk, so they turn to shelter manufacturing. Partnering with a shelter manufacturer is an incredible hack for companies wanting to unlock Mexico’s unique advantages but without the hassle of owning the factory outright. 

This option allows for full control over the product design and quality, minimal IP risk, increased flexibility, and little to no regulatory risk – but without the operational or maintenance hassle, lengthy learning curve and long-term commitment.

3. Contract manufacturing, however, serves as an even more flexible and less committal option. While it doesn’t offer the control of a wholly-owned factory or the long-term savings of purchasing your own equipment, it does offer the most flexibility and quickest startup. Because you are purchasing a service in the foreign country, there is no regulatory risk, tax exposure, or lengthy startup. You can be up and running in a few weeks and adjust in tandem with demand fluctuations.

Why US Businesses Use Mexican Contract Manufacturing

US-based businesses leverage Mexican contract manufacturing for a wide variety of reasons. Again, not all companies find this option the best way to outsource – many choose shelter manufacturing instead – but those who choose contract manufacturers in Mexico often benefit in several key areas.

Lower Costs

Mexican labor costs are significantly lower than in the US or Canada. They’re even lower than in China, now! And Mexico is highly interested in incentivizing investment in the country. So, contract manufacturing in Mexico is built on lower-cost manufacturing, and available to you on an as-needed basis.

Better Quality

Mexican contract manufacturing is somewhat different than in other countries. The manufacturers there have extensive experience in most products and systems. Quality control in Mexico is first-in-class. And because the country is just south of the border, communication and collaboration on quality issues is much easier and more effective. 

Faster Time to Market

Many Mexican contract manufacturers have the latest equipment and technology to speed up the manufacturing process. And transporting goods across the border is much faster than shipping them across an ocean.

Customized Flexibility

While contract manufacturers often specialize in certain products, they are also keenly adept at working with businesses to customize products and meet specific requirements and scale up or down during demand cycles.

Sustainability

An often-overlooked benefit to US businesses is that Mexican contract manufacturers are highly attuned to and experienced in working within environmental parameters. Social responsibility and sustainability are high priorities in Mexico, so US companies are instantly linked to local communities and environmentally-conscious practices.

Steps to Succeed in Mexican Contract Manufacturing

Navigating contract manufacturing in Mexico can be daunting to the uninitiated. And not all providers are created equal. Be sure to carefully weigh all the key criteria when selecting a provider for maximum success. Not all providers are right for your operation. To avoid common pitfalls, choose the right contract manufacturer by:

• Dealing directly with multiple potential providers
• Comparing capabilities
• Considering qualifications
• Checking capacity
• Examining personnel capability
• Discussing location
• Choosing stability

Follow these steps when you first start out to choose the right contract manufacturer:

Step 1: Consult a directory of contract manufacturers and initiate contact directly.

Step 2: Compile a list of key capabilities needed for your project, and compare this list with the contract manufacturers you are considering.

Step 3: Match provider qualifications, experience, certifications, and equipment to your product requirements and priorities.

Step 4: Verify that your shortlist of providers has the capacity for your project now and if the market changes in the future.

Step 5: Consider personnel capabilities and competency to make sure their team matches up with your expectations.

Step 6: Discuss where in Mexico your product will be manufactured to ensure ideal transportation circumstances.

Step 7: Last, but far from least, proceed only when you have identified the right Mexican contract manufacturer with a history of stability and trustworthiness.

Now that you understand Mexican contract manufacturing, and how it compares with other modes of outsourcing, you’re better informed to make a decision that is right for your situation. And using the tips and steps provided, you’re better prepared to succeed if you choose this route. 

Remember to consider not only current needs, but also where you company will be in 5 years or 10 to help you make the right decision. Mexico has a lot to offer and multiple ways to take advantage of its many benefits. 

It could be that contract manufacturing is just the thing your company needs to take you to the next level!