Maquiladora Shelter Services Provider Keeps Manufacturer's Supply Chain Nimble, Affordable

By Gary N. Bowen

Eight years ago, Kenosha, Wisconsin's Powerbrace Rail Products, which develops and builds intricately engineered components for railroad freight cars, was in expansion mode. If it didn't expand, it would have to consider subcontracting the manufacturing of one of its proprietary devices to another firm, which was not appealing to President Mike Weber.

While the company didn't have a choice to expand, it did have a choice about where. Powerbrace chose to expand outside of the United States because "domestic plant start-ups require meticulous planning, execution, and a lot of cash," he says.

Weber did not like the then-booming option of outsourcing to the Far East, specifically China, especially after 9/11. "China has reduced financial incentives to some of its industries to stimulate its own exports," he says. "Coupled with the weakening dollar and oil's explosive rise, all three factors dampen demand for imports from the region. That gave us cause for pause in deciding to build there."

He briefly toyed with the idea of outsourcing the manufacture of some components but quickly discarded the idea due to the potential problems that many who did choose a Far Eastern manufacturing option have faced.

"Even at the $100 per barrel oil price, the gains manufacturers found from friendly foreign tariffs not long ago are greatly outstripped by very expensive energy and higher overall supply-chain management costs," according to a May 2008 study, "Will Soaring Transport Costs Reverse Globalization?" by CIBC World Markets, a Canadian investment bank.

"It takes a lot of cash to build a supply chain to China and a lot of time," adds Weber. "And with inventory in-transit for six weeks, there's no flexibility to make changes if suddenly needed." His deliberations led him to consider another option -- Mexico's Maquiladora program.

Simply-defined, Maquiladora is a corporate relationship for foreign -- primarily American and Canadian -- manufacturers through the Mexican government under the aegis of the North American Free Trade Association (NAFTA). Maquiladora firms can ship their Mexican manufactured goods out of that country at greatly reduced prices and, in some cases, without tariffs. Typically, these factories are located together on self-sustaining campuses in cities not far from the southern U.S. border. These campuses are in some ways modern-day company towns that remind one of America's early industrial age.

But challenges lay there for Weber, too. He needed a service provider that knew the ins-and-outs of Maquiladora to help him negotiate the development of his facility. Then he needed the supplier to manage it.

After several years of study, in late 2004 Powerbrace entered into a seven-year contract with the Offshore Group of Tucson, Arizona, a Shelter Service Provider (SSP) of manufacturing and other comprehensive services for companies to establish and maintain manufacturing facilities in Mexico.

In addition to helping supply-chain-conscious American Maquiladoras, the Offshore Group provides an array of support services such as human resources, employee (and in some cases, family) medical services and benefits, payroll, accounting, logistics, facilities management and short-term warehousing just north of the border. "The service bundle allows our buyers to manufacture and ship for less," says Steve Colantuoni, manager of Market Research at the Offshore Group. "We handle the day-to-day support."

This benefits Powerbrace's entire expanded ring obligations in ways Weber anticipated, like providing a better cost structure and keeping to its core. But it also produced benefits he didn't expect. "We don't concern ourselves with support services. We outsource all of the operational and support aspects including staffing of our Maquiladora operation to the Offshore Group."

But his needs for highly educated employees and managers in 2004 required more talented Mexican manufacturing workers.

Provider listens to new breed of buyer and delivers

"Our large, heavy products are components of freight rail cars," says Weber. "They cost a lot to move. So efficient supply chains are a big part of the cost equation."

As Powerbrace entered the Maquiladora program, it was generally typified by lower-skilled, higher-turnover, simple-assembly workers. The labor force was becoming more sophisticated. But the trick for his provider was finding skilled workers who could use and understand highly-refined assembly robotic devices and other complicated systems. This required the Offshore Group to utilize some of the characteristics found in Recruitment Process Outsourcing (RPO) to fill the buyer's acute needs.

"It wasn't easy," says Miguel Hernandez, general manager of the Offshore Group's Saltillo, Mexico, manufacturing campus and employee services community, which includes a modern health center. "The workers were certainly here. But we had to focus on identifying, then attracting a better worker because of Powerbrace's needs." He says it took almost a year.

"They listened carefully and worked hard," says Weber. "Many go to Mexico, set up a few assembly tables, and approach manufacturing in a generic manner. We, on the other hand, weld and fabricate steel into finely engineered systems. Training and employee retention are very important. Finding the right workers, hired and supported by the Offshore Group, is worth the extra effort."

Weber notes that many of his Maquiladora managers and employees could hold similar positions in his U.S. manufacturing operations if there were an opening. "Saltillo has quickly attracted an abundance of mechanical engineers and others with advanced degrees."

Much lower supply chain costs

According to the CIBC study, many North American manufacturers that outsourced to far-shore locations not long ago, due primarily to lower costs, now reap a lean harvest of financial headaches due to significantly smaller foreign government credits and higher supply-chain transportation costs from those distant shores.

Chinese exports to the United States, such as metal manufacturing and industrial machinery -- goods with low value to freight ratios -- typically command relatively high transport costs, according to CIBC analyst and co-author of the investment bank's study, Jeff Rubin. "Their exports of these goods have slowed under the pressure of rapidly rising transport costs the past year."

He adds that on a year-by-year basis, the total amount of high transport cost goods shipped from East Asia to the United States began falling for the first time in more than 10 years in 2008.

"Freight-sensitive Chinese exports to the United States account for 42 percent of their total exports, down 10 percent from 2004. If it were not for the dramatic transport cost increases, Chinese exports to the United States since 2004 could have grown as much as 30 percent," he adds.

"Higher energy costs mean higher shipping costs," Rubin adds. "At $150 per-barrel, every 10 percent increase in trip distance translates into a 4.5 percent increase in transport costs. Add transcontinental shipping from a West Coast port to the U.S. eastern seaboard, and a standard 40-foot container from Shanghai costs around $8,000. But in 2000 when oil prices were $20 per barrel, it cost a mere $3,000 to ship the same full container."

Bill Golden, president of International Logistic Solutions, knows the shipping savings to Powerbrace's Maquiladora plant compared to China.

"Using CIBC's figures, the total cost to ship from Shanghai to the Eastern United States is $8,000. But to ship that same container from Saltillo, Mexico, to, say, Chicago, costs about $3,000; or the same as it did to send from Asia to the United States in 2000.

Having its cake and eating it too through outsourcing

Today, Powerbrace reaps significant benefits through Maquiladora's manufacturing of quality components and lower shipping rates and cites the Offshore Group as the primary reason.

"We visited many SSPs throughout northern Mexico. Many offered a la carte services. But we wanted a full service provider and found they had a depth of experience in all SSP aspects." He adds that Powerbrace is better insulated from many of the cost headaches plaguing other American manufactures that outsource to far shores.

"We aren't there just to do business in Mexico, but to be the best," he adds. "We insist on finding and retaining the best people, the best business processes, the best support services and the most efficient supply chain with the help of our provider."

"Customers compliment our Saltillo service capability and products produced there," he continues. "Many customers audit our facility each year and are very pleased. As our business grows, we are able to concentrate on expanding capacity without the burden of more layers of administrative support. The Offshore Group provides those, and we're very pleased," concludes Weber.