McKinsey Study Illustrates New Nearshoring Advantages

Posted by Nathan Pieri on September 17, 2008

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Earlier this year I had the opportunity to hear former president Vincete Fox of Mexico talk about the the changing economics of Nearshoring. And sure enough, I was sitting next to an executive from a large high technology company that had recently shifted production from Asia back to Mexico. Roll forward four months and McKinsey today published a nice article Time to rethink offshoring?

The world has changed over the past four years. China wage inflation has run rampant (19% year over year) and now wages in Mexico are only 15% higher - a small price to pay for a half-day plane ride and the luxury of dealing with operations in the same time zone.

McKinsey then analyzed the impact of increased logistics costs on these sourcing decisions. Net-net, with fuel increases (crude is up from $28 a barrel to about $100 over the past few years) it is not surprising that the cost of shipping a 40' is 3 times more expensive than in 2000. They translated this cost to an equivalent tariff of 11% on the cost of goods.

Considering the increase in wages and logistics costs, McKinsey calculated break-even curves for manufacturing in the US, Mexico and China. Then, plotted a number of high technology products like servers, copiers and TVs. Not a big surprise: the curves are shifting in favor of producing in Mexico and for certain (heavy) products like copiers and TVs, the United States.

The key take away here is that you can't establish a sourcing strategy without periodically revisiting your assumptions like:

  • Total landed cost including product invoice, duties, excise VAT, other governmental charges, transportation, insurance, and other logistics costs
  • Regulatory controls (both export & import) including licenses, embargoes, quotas, and AD/CVD
  • Country risk including political stability, macro-economic policies, quality of infrastructure, environmental factors, availability of capital, and labor risk. Check out some good resources at CountryRisk.com and Trading-Safely.com.

Web-based information services are available to keep up to date on changes in landed cost and regulatory environment and optimize sourcing as well as distribution decisions.

As commodity & freight costs continue to grow and the comparative advantage in labor wages falls, we are seeing the proliferation of preferential trade agreements. This is becoming a real challenge to not only find these 'global optimums' but then put in place the business process and automation to ensure compliance.

This post was published on September 17, 2008 and updated on April 22, 2014.

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Topics: Landed Cost Calculation, Global Sourcing, Sourcing Analysis

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