European CEO 2014: Smart Relocation

By Doug Donahue as published in European CEO magazine

With pressure on margins tightening every day, many European manufacturers are considering production in a cost-competitive location. Such companies should initiate their search with a cost model analysis. This may seem like common sense, especially when the new site is in an unfamiliar country. After all, no company would make any investment without a full picture of costs they would incur.

Unfortunately, however, because many manufacturers are unaware of the gamut of expenses that can arise in a foreign location, they are unable to execute a fully comprehensive and accurate cost analysis. Others lack the in-house skills required to make accurate projections. This can lead to hidden costs that will only be identified when it is too late. It is advisable, therefore, to rely on the insight and data-collection assistance of an expert familiar with the manufacturing operating environment of the prospective location and to benchmark, when possible, against similar operations already established there.

Key requirements

How can a proper cost model analysis set manufacturers on the path to success when it comes to site selection in a cost-competitive destination? There are several elements to keep in mind. All costs associated with doing business in a particular place should be included with the exception of raw materials. Be aware that a cost model is not a startup model. While startup models are vital in the early stages, they are not all-encompassing like a cost model. To be accurate, a cost model should include all the operational costs a company will incur. From there, it should take account of particular local costs. These can vary depending on the region. Examples of these expenses include rent, taxes, utilities, maintenance, waste, security and shipping costs.

An accurate cost model allows for a clear comparison between your current manufacturing operations and an alternative facility in a new location. It can also enable you to compare expenses at two different locations in the same region. Finally, it can also give some idea of the costs experienced by the competition.

Regional expertise

No matter the country, prices vary depending on the region. Mexico is Entrada Group’s country of expertise and specialisation, so we can illustrate the range of costs savings throughout regions of Mexico. For example, total operating costs in the centrally located state of Zacatecas can be as much as 40 percent lower than at a similar site near the U.S. border. Within a single region, prices can vary depending on the manufacturing processes and types of production. In Zacatecas, companies with labour-intensive operations may pay as little as $5 an hour in average total operating costs. Companies with more sophisticated processes can pay as much triple that. So while costs fluctuate across Mexico (like anywhere else) companies can expect to save between 25 percent and 50 percent by relocating or expanding operations to Mexico.

A 2014 study by the Boston Consulting Group found that Mexico has lower average manufacturing costs than China. This is due in part to stable wage growth, productivity gains and steady exchange rates. The lower cost of labour in Mexico allows companies to save money on things such as wages and healthcare costs. Once an accurate cost model is developed, manufacturers can shift to productivity and quality assurance – core aspects that will enhance prospects for success in the new location.

Source: European CEO

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