The Offshore Group: Welcome to another installation of The Offshore Group’s continuing series of informational podcasts on the topic of manufacturing in Mexico and business issues that are pertinent to it.

Today we’re fortunate to have with us Michael Goeringer. Michael is the president of a firm out of Elk Grove Village Illinois called Arc-Tronics, Inc.

Hello Michael, How are you doing?

Michael Goeringer: Very good Steve, thank you for inviting me.

The Offshore Group: Let’s start with some questions to hopefully provide our listeners with Mexico manufacturing information on issues that will be relevant and useful to them.

Can you tell us a bit about your company?

Michael Goeringer: Yes, Arc-Tronics is a family owned EMS business (Electronics Manufacturing Services). We’ve got two facilities: one is in Elk Grove Village, IL, and we recently about 10 months ago we opened up a facility with The Offshore Group in Empalme Mexico.

The Offshore Group: Michael, we’ve seen some companies that, in the past, were looking at manufacturing in China that are thinking about bringing back some operations to this part of the world. You’ve only been operating in Mexico for ten months, what were some of the factors that motivated you to look at Mexico as opposed to other places as a manufacturing venue?

Michael Goeringer: Initially it was customer driven, we have a lot of large OEMs that we manufacture for, and they were looking for a low cost manufacturing option. They liked the way we work, and were looking to open a production facility somewhere.

I did investigate China and India, the process started about five years ago, that was the initial sky rocketing of oil prices. Our OEMs reconsidered and told us that they would prefer if we established manufacturing that would be more local. So I visited Costa Rica and Mexico.

I was very impressed with The Offshore Group’s Mexico industrial parks, campuses and people. That’s how we got involved. It took us a couple of years gathering our information, and doing our due diligence, but I’m very glad we’re doing low cost manufacturing in Mexico.

The Offshore Group: You’ve only been there 10 months, what specific products do you produce as an EMS service provider for OEMs out of your Mexico manufacturing facility in Empalme.

Michael Goeringer: We didn’t change our business model from the stand point of our being low-volume, high-mix, EMS company. Our products profile is less than 20,000 pieces per year. This is the high end for us. We choose to move our highest volume and most price sensitive manufactured goods down to Mexico. We currently are building lab equipment, industrial printed circuit board assemblies. We’ve also been experiencing some tremendous price pressures from our medical device customers. We are looking at the option of moving some of our lower tech or easier to assemble type of medical device products down to Mexico.

The Offshore Group: With regard to the first ten months that you’ve been involved in manufacturing in Mexico, how would you categorize your experience thus far in terms of positive and negative outcomes and challenges? What kind of advice would you give the folks that today are in the position you were a few years ago when you were investigating options for low cost manufacturing?

Michael Goeringer: My experience has been very positive with The Offshore Group. This is our first foreign venture and it has helped our business tremendously. Being a smaller company, and not having the legal resources to set up a company in Mexico, setting up operations in Mexico using The Offshore Group Mexico Shelter Plan has proven to be of great value to Arc-Tronics.

In particular, the human resources support team offered by The Offshore Group has been great. We’ve been able to hire fantastic management team.

The only challenge that we’ve had is in The Empalme/Guaymas industrial parks, they were heavy into cable and harness, as well as sheet metal and tool and die, and there was not a lot of EMS or printed circuit board assembly type of companies in the area. When the economy took a downturn, a lot of people were laid off, particularly in the cable and harness area, and we didn’t have experienced labor pool as far as electronics assembly.

We’re doing a lot of training and sending people outside to get proper training. This has been our biggest challenge in being able to ramp up manufacturing a little bit faster.

The Offshore Group: With regard to the need to retain trained people, what has been your experience in terms of turnover? A lot of places, traditionally, the border, in particular, has been a high turnover place. What has been your experience in the Guaymas and Empalme area?

Michael Goeringer: Turnover has been minimal. Within ten months maybe 4-5 people within their first days of work when they or we determined it wasn’t a good fit for both parties.

The way The Offshore Group handles is that, to switch companies, within the Mexican industrial parks plant managers must agree when employees wish to switch from one firm to another.

The Offshore Group: What is your company’s experience, taken from the transition of being U.S. based and then branching out an operation in another country? All of a sudden there is a relationship that develops between the U.S team and their colleagues in the Mexican facility.

What is the interaction between your U.S. operations and your Mexican operations? How do they work together, is there a dynamic developed during the last ten month that you’ve now have operations in two countries?

Michael Goeringer: When we first discussed establishing the Mexican manufacturing operation there were two issues that we took into particular account: 1) we are a family business; and 2) we’ve had only one layoff in 40 years. I was naïve with regard to my concern for losing U.S. jobs by opening a facility in Mexico.

I was preoccupied with this, but things turned out differently. With the set-up of our Mexican facility, we’ve had doors to new business opportunities open up for both plants. Because we now have a manufacturing facility in Mexico, we’ve been awarded additional opportunities that we wouldn’t have otherwise come about. This reflects more work in our Elk Grove Village facility, as well.

We’ve been lucky in many areas. We’ve added a lot of work to our Elk Grove facility and now have to accelerate the move of some product down to Mexico.

I’m actually speaking to your from our Mexico manufacturing plant right now. I have two of my managers from Elk Grove Village with me who are working directly with the people at the Mexico shop. They are here to provide training.

We have a new phone system in place here that allows us to dial extensions to communicate to each other (between the U.S. and Mexico plant). It feels like our Elk Grove facility is across the street. You can’t tell the difference. There is only a 1-2 hour time zone difference, depending on what the daylight saving time schedule is.

It’s a pleasure to see people down here communicating with our U.S. team back and forth, because, as we all know, good interaction between staff is a key to success.

As long as communication goes on by keeping everyone in the loop, everything runs smoothly.

The Offshore Group: Your comments are similar to those that I hear from many of our manufacturing clients in Mexico. Rather than being a zero sum game, when a company creates an environment, when they have resources in the U.S. to certain things, then resources in Mexico creates a competitive advantage and it opens up a lot of doors and it creates more work for both places. You’re not the first person in the position that you’re in that I’ve spoken to pretty much echo this reality. There is a misconception out there. Would you agree?

Michael Goeringer: Yes I agree. I’ve talked to quite a few business owners that have moved manufacturing operations to Mexico, or other areas. Eventually more and more moves in that direction; I didn’t get into detail of their particular business model but I’ve looked at it in a different way, I see it as an opportunity, rather than moving products to a lower cost location.

I thought that this opens up an expanded our capabilities and offerings for our customers. It’s early in our operation’s existence here in Mexico, but we’ve seen significant amount of opportunities for both companies come our way from what we’ve done here.

The Offshore Group: Michael, I’m going to ask this, again you’re relatively new to Mexico in the Guaymas/ Empalme, close to San Carlos which is a retirement community for many U.S. and Canadian citizens.

What’s your assessment of the security situation that you’ve seen down there? What has been your experience?

Michael Goeringer: Literally I’ve had zero security concerns here in Empalme, Mexico. I’ve been down here over the last 2 years, probably 20-24 times. Security has not been an issue at all here.

My biggest problem related to this topic is that some of my large OEM customers have placed travel bans on Mexico in general. Sometimes I have to get something done at our Mexican facility in order to proceed with our business, and sometimes there is a travel ban preventing them from coming down to Mexico.

We just had one of the OEMs lift their travel ban. Our customer’s quality team came down to our facility. Also, I bring my family down here and it’s absolutely beautiful.

The Offshore Group: Obviously what you read on the press does happen but there is a lot of sensationalism. Mexico is a very large country as is the case with the United States or other any other country for that matter.

There are different places with different circumstances.

You happen to be in a place with a large population of retirees; mostly Canadian and U.S. Circumstances are different here.

The last question I’d like to ask you, again digging a bit deeper and thinking about those types of questions regarding: “If I knew then, what I know now.” What can you point out, and how might those issues relate to other people that might be in the situation that you were in not so long ago.

Michael Goeringer: Number 1: definitely do your due diligence; there might be specific businesses that won’t benefit from manufacturing in Mexico. For instance, there might be duties associated with components that you are using that might be costly to get into Mexico. There is a lot of work in getting the materials down to Mexico, and due diligence to be done. HTS codes classifications are important, so you really have to be aware and make sure there aren’t any duties involved for incoming materials, and that you are able to transport back and forth within NAFTA.

I’m very pleased with where we are at and with the direction in which we are heading. There is quite a bit of work that we’re moving down here to our Mexican facility, and at the same time we have to make room to do more in our Elk Gove facility.

The Offshore Group: Well the folks up there are happy with what’s happening. Where they might had experienced a sense of uncertainty at the beginning, now they’re seeing the benefits of what you’ve decided to do strategically with a positive impact to the company as a whole.

Michael Goeringer: Yes, even the two people that I have down here doing the training want to stay longer.

The Offshore Group: Sure, they can do some fishing.

One thing that’s important to mention is that you’re involved with EMS manufacturing. There could be somebody in the future that happens to listen to this podcast that might be in the market for the kind of things that you’re involved with. If they were interested in contacting you to ask more about your company, Arc-Tronics, and its capabilities, how would they go about contacting you? Telephone, e-mail, your website?

Michael Goeringer: Yes they can go to our website at www.arc-tronics.com. We can also be reached at area code 847-437-0211.

The Offshore Group: There you have it. If you need EMS services, you can contact Michael Goeringer and his company Arc-Tronics to help you with that.

Michael, I’d like to thank you for speaking with me today. Thank you and good luck.

Michael Goeringer: Thank you very much Steve.

The Offshore Group: Welcome to another installation of The Offshore Group informational podcast series on manufacturing and business in Mexico issues.

Today we have a guest who I am sure is going to provide our listeners with some very interesting information on the topic of Mexico’s aerospace industry. His name is Mike Smith.

Welcome Mike. How are you today?

Mike Smith: I’m doing great. Thank you for giving me this opportunity to speak to you about aerospace manufacturing in Mexico.

The Offshore Group: I’m going to give a little bit of your background, and then you can give us more information.

Mike spent four and a half years at SAFRAN, looking at strategic sourcing in the aerospace industry in Mexico. Mike you’re now in another project, you might want to tell our listeners more about that, as well as how you continue to be involved in aerospace industry issues in Mexico.

Mike Smith: Currently, I’m still involved with Safran Group as a program buyer for a new business jet program. I also stay actively involved in Mexico aerospace issues through a side project of my own interest called IMAC (Independent Mexico Advisory Council), which I helps organizations and smaller aerospace companies looking to go to Mexico to support OEM activities as part of their growing supply chain efforts. I help these manufacturers to find synergies, and also with federal, state and local government issues, and also to meet and to consult other companies doing aerospace businesses in Mexico.

The Offshore Group: After the four and a half years period of specifically focusing on Mexico aerospace, you’ve picked up a lot of expertise in that area. Other than just strategic sourcing, can you be more specific in what kind of projects were you involved in?

Mike Smith: Part of strategic sourcing was getting down to Mexico. I started going to Mexico and four and a half years ago. The aerospace industry was really in its infancy. My responsibilities included assessing local aerospace manufacturing activity in different Mexican states.

Queretaro was the first state that I went to, due to the fact that it was targeted by SAFRAN to be a key area of manufacturing and repair and overhaul activity for our group, and also for Bombardier had started the construction of their facility there. I went down to see what the aerospace supply chain structure was. That led me to more investigation throughout Mexico the different states in the country.

The Offshore Group: You were originally in Queretaro. In addition to that location, there are significant aerospace clusters in Chihuahua; The Offshore Group has a large aerospace complex in Guaymas Sonora. Can you tell us about a bit about each of Mexico’s major aerospace clusters?

Mike Smith: Working in this activity during four and a half years, I had different collaboration projects with a number of aerospace OEMs. These included companies such as Bombardier, Honeywell, Rockwell Collins, Bell Helicopters, and Eaton. I traveled throughout Mexico and interacted with a lot of these different organizations. We all had the same issues. One of them was that it was, at the beginning, very hard to find capable and competent companies in Mexico to support the activities of our growing and expanding strategies for aerospace manufacturing in Mexico. We decided to collaborate, and had numerous meetings and aerospace functions throughout Mexico. We also worked with Promexico, the foreign investment promotional arm of the Mexican government, to understand what the government’s overall strategy was for the aerospace industry in Mexico was.

I began to visit each of the designated aerospace clusters throughout Mexico, and started to realize there was a little bit of pattern started to happen for the generation of these different clusters.

Starting on the West Coast; Mexicali and Baja California is the site of one of the earlier aerospace clusters in Mexico to evolve. They began primarily with electronics, non-complex sub-assemblies, and heavier aerospace machining in support of a lot of companies in California. As we started to come across eastward, we went into Guaymas and saw a very interesting trend starting to happen. We began to see a natural evolution of what I refer to engine component cluster area in that area.

A lot of companies were starting to go to that Guaymas to complement each other within the aerospace engine components segment of the industry, with Rolls Royce and Trac Tool, Goodrich, BodyCote and Incertec providing special processing activity.

As we went further eastward we reviewed the largest and fastest growing clusters. Chihuahua is the site of one of them. Some of the large air framers and OEMs have set up shop there. Chihuahua is now home to Mexican operations for Honeywell, Cessna, Hawker Beechcraft, and Bell Helicopters. This is a cluster comprised mainly of manufacturers of aero structures.

Then we started to go little further to the south to Queretaro, where primarily we saw repair and overhaul for engines and smaller aero structures to support Bombardier’s activities in Mexico, and some landing gear suppliers looking to support SAFRAN’s activities. Then we visited, Monterrey, Nuevo Leon. They have a great complement of a variety of Mexican aerospace companies there, but a specific niche, or cluster hasn’t been developed there. Once can find little bit of aero structures, stamping, fabrication, machining, and special processing. Other than in the Monterrey area, over time, we started to see a trend to emerge naturally in the aerospace clusters in Mexico by geography and area of specialty.

The Offshore Group: You were involved in these activities during a four and a half year period. Obviously, you’ve given us an overview on this subject in an abbreviated way, but I am sure that the details you could cover would be much more expansive. For the purposes of this conversation, however, how did you see things in the beginning and (four and a half years ago) and, then, later. What are the most notable changes that you have seen in the Mexican aerospace industry over the time period in which you were doing strategic sourcing for an OEM there?

Mike Smith: That’s a great question. When I first went to Mexico, there were a number of suppliers very eager to enter into the aerospace industry, most of them had previous experience in automotive, some with home appliances and refrigeration, others with electrical. They all wanted to become aerospace suppliers in Mexico, but didn’t really understand the steps it took to become an AS9100 certified supplier for aerospace industry purposes. We began communicating with the government for the purpose of explaining the requirements for these companies to become AS9100 certified. Promexico, and the Mexican government as a whole, really stepped up and provided educational support for the suppliers to become and obtain their AS9100 aerospace industry certifications. We were a bit surprised. Some companies gave up the chase, while others got their AS9100 certification and became aerospace OEM suppliers.

The Offshore Group: Over that four and a half period, after what you had just explained, the companies that didn’t give up the chase are servicing aerospace OEMs with a presence in Mexico. Today, where would you consider Mexico to be strong in the supply chain for OEMs, and where are our gaps that you see? And what’s been, and being, done to fill those gaps?

Mike Smith: Right now the overall success of Mexico’s aerospace industry is really going to rely on foreign direct investment. We have a large number of OEMs coming from North America and Europe, and some Mexican domestic capital investing. The effort and cost it takes to develop a supplier up to the AS9100 standard and have them understand their product is a long process. The task itself of locating an aerospace manufacturing facility in Mexico to get the market to offer their customers a cost competitive model is their number one priority. That is why we see, over the course of the last several years, a huge effort on trying to entice Tier 2 suppliers to the aerospace OEMs to come locate a facility in Mexico. We will use the local Mexican suppliers or subcontract work to the Tier 2 companies, to start small before they start to run on a larger scale. Also, there have been a lot of great educational programs offered through Mexican educational institutions supporting and training young engineers, young machinists and quality inspectors to b employed by these companies.

Right now I see how we’re in transition of having our aerospace suppliers invest in Mexico to support our expansion strategies there. We currently see a lot of activities being partially completed in Mexico, and send back to Canada, U.S. or Europe.

The Offshore Group: Yes, we see a little bit of a trend of companies within Tier 1 and Tier 2 manufacturers. They are a little bit more open to the idea of moving to aerospace operations to Mexico now that they see the volumes of work generated in Mexico are the type of volumes to be justified from an investment point of view. We have a company out of Fridley Minnesota called INCERTEC, they do a lot of metal finishing work in Guaymas.

Mike Smith: Yes, I’ve been in contact with INCERTEC and their CEO, definitely Guaymas needed a special metal processing facility for the companies that were in The Offshore Group’s aerospace cluster. Having a local supply chain will help to reduce costs for local manufacturers. Bringing the right companies close to the area will be a huge benefit, and a real catapult for future growth within Guaymas and The Offshore Group.

The Offshore Group: We’re talking in terms of supply chain, but like anything else supply chain is made up of people. What can you say in your travels throughout Mexico all the way from West to East, what did you see initially in terms of workforce capability in Mexico, and how did that evolve in terms of available skill sets? Where do you see the workforce going in the future?

Mike Smith: I have definitely seen it evolve tremendously over the last couple of years. One of the things that I have to confess and admit is that I’ve never seen a greater bunch of people like the Mexican people that are eager to work and to put pride of workmanship in their jobs. They are enthusiastic young people, and are looking for the opportunity to get jobs in the Mexican aerospace industry. They are signing up for training activities, and are continuing their studies with regard to machinery, quality, and all other different aspects of manufacturing. They are hungry for the opportunities to get into aerospace companies. I’ve seen a huge growth; I know that Mexico graduates thousands of engineers per year. Mexico has a great human resource pool to draw from.

One of the things that I advocate is that companies hire for attitude, and, then, train for skill. The attitude of the Mexican people wanting to work in the aerospace industry is great, they’re eager to learn new skills and trades. I think that over the next couple of years we will see a very good trade people coming out of Mexico to support the aerospace OEMs with manufacturing facilites located there.

The Offshore Group: Today what types of processes are very strong in Mexico, and which ones are in the improvement phase?

Mike Smith: My research shows that the most common product coming out of Mexico for the aerospace industry are components that are manufactured from aluminum, either machined, stamped, fabricated. This is because is aluminum is a very forgiving material, and the special process to treat this type of metal is relatively non-complex. Most shops that work with aluminum in Mexico are well established and have their own processes. As we consider more complicated types of metals such as hard metals used in landing gears, and some of the engine components such as nickels and titanium, we’re beginning to see now an emergence of these types of shops. A lot of are related to foreign investment coming from the U.S., Canada and Europe. Over time Mexican workers will be trained and capable of working with these types of metals.

We’re also starting to see a greater influx of special processors. We have one available in Queretaro, Chihuahua, Monterrey and now in Guaymas, Sonora. That was the huge drawback as to why hard metals were not sourced in Mexico for special processing.

We are still a little bit weak in heat treat aspect of things, trying to work with suppliers for hard metal in Mexico. After that we should have the full processes and capabilities required to manufacture complex aerospace parts in Mexico.

The Offshore Group: Mike, I’ve read several articles that speculate that, at some point, a fully assembled plan completely made in Mexico will fly out. From your perspective, what do you see happening in Mexico in the next three to five years in the aerospace industry? Is this a real possibility?

Mike Smith: I don’t discard that statement, as I’ve heard several times over the last couple of years. It’s something that we would love to see. I’m going on a limb here, but here is a lot of market research done on business jets. We are starting to see the growth potential coming back in business jets; we see it in Asia and Eastern Europe. We’re starting to see a great recovery of business jets, more being bought in Mexico. Companies like Bombardier making their Lear Jet 85 in Queretaro, we’re seeing the larger air frames like Hawker Beechcraft, Cessna. Also, there are larger air frames coming out of Mexico, In my opinion, it’s only a matter of time until we see a full airplane assembled in Mexico.

The Offshore Group: That’s very encouraging. My knowledge on this is not as deep as yours, but working with The Offshore Group we’ve been talking to people related to the aerospace industry for the last twelve or thirteen years. It’s pretty amazing what has happened in a relatively short period of time. Your statement about going out on a limb would probably be not on a limb so much, we just have to wait and see what happens.

Mike Smith: We see the faster growth potential in the aerospace market. We see potential in Asia and India. But the business jet we see great opportunity for the North American market and Mexico has a great location having a neighbor partner such as the United States in order to provide cost competitive advantage to the supply chain, and OEMs to provide competitive solutions to the business jet industry.

Recently due to the economic downturn, the business jet industry has been negatively affected. Its resurgence, however, will be good for the overall economy.

The Offshore Group: Our last question, at the beginning of our conversation you’ve described your experience as strategic sourcing for SAFRAN. You also stated that you’re working with another organization as a side project to help people in smaller and mid-sized businesses to access Mexico and to contribute to the Mexico aerospace industry supply chain.

Can you tell us which organization would that be? And for those listeners interested in contacting you, would you tell us how they can reach you?

Mike Smith: IMAC, Independent Mexico Advisory Council is an offshoot of what I was previously doing for the last four and a half year as a strategic sourcing for SAFRAN.

I’ve met great people in Mexico at the federal, state and municipal levels, but also in the supply chain with companies in the U.S., Canada and Europe. There are smaller companies that continue to work on their business cases for establishing themselves as aerospace industry suppliers in Mexico, that are not yet capturing the attention of the large OEMs. I provide the voice or conduit between these companies and different aerospace clusters in Mexico. I stay in contact with quite of few members of the aerospace cluster members throughout Mexico, from economic development in each of the States, to local managers and people in the public sector.

I’m available to be contacted and provide advice regarding Mexico location options based on core manufacturing competencies, markets and OEM locations. It’s something that I’ve developed a passion for and, obviously, I’m still actively involved in this.

The Offshore Group: Would you provide an email or a phone for our listeners that might be interested in speaking to you?

Mike Smith: Yes, they can contact me at my cell: 1-905-903-6433 or via e-mail: michael-smith@rogers.com

The Offshore Group: I’d like to encourage listeners who wish to receive information on establishing an aerospace manufacturing facility in Mexico to give Mike a call. Also, I would like to thank you for joining us today in this podcast.

Mike Smith: Thank you for having me Steve, it was a pleasure.

The Offshore Group: Thank you and have a great day.

The Offshore Group: Hello and welcome to another installation of The Offshore Group’s series of informational podcasts on various aspects of manufacturing in Mexico.

Today we have Eduardo Saavedra with us. He is the Vice President of Business Development for The Offshore Group.

Eduardo, can you give us a brief personal introduction and a little bit of your background, as well as some information with respect to your responsibilities within The Offshore Group.

Eduardo Saavedra:  I’ve been in the international trade arena for about 25 years now, mainly involved in maquiladora manufacturing activities, particularly supporting U.S. companies that have chosen to manufacture their goods in Mexico.

I’ve been with The Offshore Group for 10 years, half of that heavenly involved on the logistics/ operation side of the business, and the last 5 years in business development.

The Offshore Group: Today, the discussion that we’re going to have I assume would be of great interest to people that are looking proactively at locating a manufacturing facility in Mexico.

We’re going to talk about cost modeling, and the analysis of The Offshore Group’s experts perform to estimate how much it will cost for a company to begin and maintain operations in Mexico.

Eduardo, can you tell us about The Offshore Group’s cost model analysis and the methodology that it employs to estimate the cost of manufacturing in Mexico.

Eduardo Saavedra: When a company is considering, or planning on locating a manufacturing operation in Mexico, it is imperative for the Mexico operation to succeed.  A critical component of this success is having clear understanding beforehand of what the operating costs are going to be.  To provide companies with a means of establishing and understanding their future manufacturing costs in Mexico, we put together a very comprehensive set of questions and figures that at the end of the day gives a full picture of the all in-costs of operating a manufacturing facility in Mexico. What’s unique about this model is not the level of detail, but the ability to benchmark the Mexico manufacturing costs against other “like” operations in that are currently operating under The Offshore Group’s Mexico Shelter Program. At the end of the day, the proprietary software that we have developed over the years, throws out a figure expressing a USD dollar amount associated with operating a manufacturing facility in Mexico.   This expressed on a per direct labor basis.

The model is addresses three different manufacturing cost areas:

1. Direct labor
2. Indirect and salary labor
3. Overhead

The Offshore Group: In terms of requirements, what does the cost model to satisfy them for companies looking at where to located in Mexico that are trying to get an understanding of how much it will cost?

Eduardo Saavedra:    The Offshore Group has devised a manufacturing cost model that satisfies three main requirements:

1. It needs to include every cost that will or can be incurred in Mexico; for example, determining fixed costs like rent and phone is fairly easy to predict, but it’s the variable and a less obvious Mexico manufacturing costs that can be challenging to forecast. These include things like employee severance, power factor on a manufacturers utility bills or the cost of moving goods across the Mexico border.
2. A second item that the Mexico manufacturing cost model needs to contain is highly reliable figures.   As I’ve mentioned earlier, this is accomplished through benchmarking figures such as labor, utilities and logistics. Every Friday when we make payroll for about 14,500 people in Mexico, so we’re on a unique position to know how labor and overtime impacts cost, whether it is double or tripled time, bonuses such as attendance and performance. We even address the issues of direct labor employees.
3. Thirdly, the Mexico cost model really needs to be a flexible tool that allows companies to evaluate various scenarios as they go through their decision making processes. An example of this is an operation with 80 people, 150 people, or 200 people side by side, in order to see the impact in all of those costs when the direct labor content of the Manufacturing operation in Mexico changes. We express the figures in USD based on a Peso to Dollar exchange rate that we all agree on.   If a company’s executives want to be conservative we can help them to reflect this in how we go about forecasting.  If they want to vary the figure, we can change the calculation. When running these Mexican manufacturing cost scenarios, the possibilities are endless.

The Offshore Group: Who can benefit by having such an examination of Mexican manufacturing costs performed.

Eduardo Saavedra: Manufacturers of any size can benefit from this exercise. Over the years we’ve conducted hundreds of these cost models for large multi-national manufacturers and publicly traded companies, as well as smaller privately owned firms.

If you’re involved in manufacturing in industries like automotive Tier 1, Tier 2 and Tier 3, the aerospace industry, medical devices, electronics, or plastic injection or metal forming and stamping, the model that we have developed to determine Mexican manufacturing costs is applicable in any of these scenarios.

The Offshore Group: If one wants to go about doing this with expert staff at The Offshore Group, how long does it take to go through the exercise, who participates in it, and where does this session typically takes place?

Eduardo Saavedra: On our end, the people involved in conducting the manufacturing cost model analysis for Mexico are very experienced.   They are people that have worked in a manufacturing for many years, so they’re able to make suggestions and ask the right questions in what is normally a two hour session.

On the side of the manufacturer that has interest in Mexico, we typically see people that will eventually have P&L responsibility over a Mexican operation.  Some of those people can be heading the operational side, supply chain or the finance functions of the company.

Again, it typically takes about 2 hours to complete, depending on the complexity of the scenario we’re working with.

The Offshore Group: Does this takes in a particular place, or are there various places where you can typically performed the analysis?

Eduardo Saavedra: We conduct this analysis in one of our Mexico manufacturing locations.  That would be at an industrial park, either located on the State of Sonora or The State of Coahuila or in Guadalajara. We encourage the session to take place in one of Mexican industrial parks, because before we conduct a cost model, we take visitors on a facility tour.   During this time, they have an opportunity to interface with and ask questions of the leaders of these plants.  They’re able to ask questions about their manufacturing experiences and challenges in Mexico when they were starting up, and also as they continued to produce their products.

When we roll up our sleeve and get down to financial brass tacks, we closely examine all items that will, and could potentially, impact Mexican manufacturing costs.   This is not a casual exercise of sitting down and going through a series of numbers.  It is a case of using real world benchmarking figures, and applying them to a specifically projected situation.

This is very difficult to obviously do this over the phone or via web.  We have done this in the past, but the outcome is not the same as if done at a Mexico manufacturing location.

The Offshore Group: Before actually goes down to one of The Offshore Group’s industrial parks in Mexico, are there items that you require or recommend that participants in the cost model exercise provide The Offshore Group?   Can bringing certain data help to ensure a more accurate analysis?

Eduardo Saavedra: Yes, it depends on where manufacturing executives are in the Mexico site selection decision-making process.  If a company is engaged, if its leaders have had thoughts about manufacturing in Mexico, but haven’t really given it specific thought as far as which product lines and what type of volumes the company expects to produce etc.,  then we can put something together on a general basis.   To get the clearest picture of what Mexico manufacturing cost will look like for a company, however, we often provide questions in advance.  These coincide with the cost model that we’re going to go through, and we sit down and work through each one of these items in a rigorous manner.

If a company is moving a production line to Mexico, then its executives already know what the labor requirements will be. In this circumstance, they will also have a good idea of what manufacturing overhead expenditures will look like.  Running this exercise is much easier to do when comparing a projected manufacturing facility in Mexico to an existing operation.   On many occasions, however, we’ve had existing clients that have asked us to run a cost model because they contemplated the addition of further manufacturing capabilities and headcount in Mexico, or just wanted to see what it would cost to begin manufacturing new products.

The Offshore Group: A question that I think a lot of folks might have is that, given your experience in having done this in numerous occasions, how would you qualify the cost model analysis with regard to the issue of accuracy?

What’s been the experience over the years?  Do the spreadsheet numbers bear out in a real manufacturing in Mexico situation?

Eduardo Saavedra:   That is a good question. The Offshore Group’s Mexico cost model analysis benchmarks against existing operations, so our cost model is verified against a real world figures. For example, if a company’s executives want twenty workers that have a specifically defined skill set and we draw theoretically a figure, we look at that number and compare it those experienced by similar manufacturing operations in Mexico.   We then verify the number. The model will always be accurate. It often happens that manufacturers in Offshore Group industrial parks have come back to us later and compare their actual costs with the cost model analysis that was done for their company at the outset.   The reality of the actual costs actually experienced, most often, is in line the Mexico manufacturing cost forecast that we had competed for the company earlier.

The Offshore Group: Basically, the information you are using to conduct the cost model analysis for Mexican manufacturing is from companies that are appropriate to benchmark against. Would that be an accurate statement?

Eduardo Saavedra: That’s correct, we don’t obviously divulge confidential information, but because we carry the payroll for 14,500 people every week, we know what costs related to manufacturing in Mexico are, and we’re able to look at a specific operation and identify where the variables are likely to be in each area.  We then incorporate this information into a customized analysis.

The Offshore Group: Finally, how can listeners interested participating in a Mexico cost modeling analysis session go about scheduling one?

Eduardo Saavedra: It’s fairly easy. Executives that are investigating the option of locating a manufacturing facility in Mexico can visit us.   We would love to host interested parties in one our Mexican industrial parks.   Having a face to face discussion on this matter based upon our benchmarking and their plans will enable all parties to determine if there is a fit between our organizations. We encourage executives with an interest in locating a manufacturing facility in Mexico to step in a plane and come down to see us.

The Offshore Group: Hello and welcome to another installation of The Offshore Group’s continuing series of podcasts on issues related with doing business in Mexico.

Today we have with us, one of The Offshore Group’s key personnel in its Saltillo shelter program operation, Manufacturas Zapalinamé, in the city of Saltillo, Coahuila, Mexico. His name is Leonard Ottosen.

Leonard, how are you today?

Leonard Ottosen: Very good Steve, how are you?

The Offshore Group: Doing very good thank you. Leonard.  Please tell our listeners how many years you’ve been with The Offshore Group.

Leonard Ottosen: It will be 10 years next week.

The Offshore Group: Well, happy birthday, of sorts.

Leonard Ottosen: Thank you.

The Offshore Group: Leonard is the Saltillo Operations Project Manager at The Offshore Group’s Manufacturas Zapalinamé. Leonard, maybe you can tell us a little bit about your personal background, and about what the project manager’s job entails, as well as some specific things about The Offshore Group’s Saltillo Mexico shelter services operation.

Leonard Ottosen: As you have mentioned, I’ve been with The Offshore Group for 10 years now. My previous background is in the automotive industry. I’ve worked for General Motors in Mexico for about 10 years, DELPHI for another 3 years, and running a Mexican CNC machine shop for another 6 years. I have a strong background in the metal mechanic arena.

Here at The Offshore Group, my main function is divided into two areas.

1. Working with prospective client companies prior to signing a contract for shelter services in Mexico. I work with the new business development group to familiarize prospective client with The Offshore Group and its different services for manufacturers in Mexico, to introduce them to potential vendors and other clients in the La Angostura Industrial Park  I make sure that manufacturers  get all support needed to start-up an operation in Mexico.

1. Once the contract is signed, I become the liaison engineer.  This is the case from the point of signing the shelter service agreement in Mexico to the point of making parts. I help them to find the right vendors in Mexico and provide them with the essential support needed to start up a Mexican operation.

Today, Manufacturas Zapalinamé in Saltillo, Mexico has 17 clients: Fifteen are manufacturing within the La Angostura Industrial Park, while two of them located outside the park.  This is due to specific requirements of those two businesses.  We do provide Mexico shelter services outside the confines of our park.

The Offshore Group: Very interesting Leonard. You gave us a brief description of your main function as a project manager for The Offshore Group in Saltillo.  When companies are looking at Mexico, and If Saltillo is on their short list as a Mexican city in which to locate a manufacturing facility, you have to provide them with information about the area.

I would guess that one of the things that these manufacturers with interest in Mexico ask you to provide is information that will demonstrate that the workers available in the region are capable of doing what’s required in their operation. Is that true? And if so, how do you go about locating different kinds of workers? What kinds of Mexican labor resources are available in the Saltillo and Monterrey area?  What are things that manufacturing labor there is particularly adept at doing?

Leonard Ottosen: Saltillo is known as one of the Mexican Automotive largest clusters in Mexico. You can pretty much assemble a car with all its parts being manufactured here in the area, except for tires.  With that being said, the experience in the area relates to automotive and T1, T2 suppliers that support the automotive industry in Mexico, such as CNC shops, welding shops, different suppliers in place to support the operation to run, from general assemblers to high technical welding and machining operations.

Due to the established infrastructure, when manufacturing clients come into the area, we tour the industrial sites to show all the resources available such as suppliers certified by the American Welders society, CNC operators and machinists, all experienced in the automotive industry.

Automotive is not the only strong manufacturing industry in the Saltillo area.   Other industries with a significant presence include: appliances and aerospace industry. This labor pool is capable of supporting any many kinds of manufacturing operations in Mexico.

The Offshore Group: One of the things I’d like to ask is from a general perspective Leonard, before we touch base on specifics, you’ve been involved in seventeen manufacturing start-ups in Mexico, would that be accurate?

Leonard Ottosen: Yes.

The Offshore Group: From the very beginning, until the time these companies actually began making parts, what’s the average amount of time that it takes from when a contract gets signed for shelter services in Saltillo up to the point at which the company is actually manufacturing? Is there an average time that it takes to start-up a manufacturing operation in Mexico under The Offshore Group’s Shelter Plan?

Leonard Ottosen: It varies, depending on the type of product that is being manufactured in Mexico. For example, if it’s a general assembly operation, you may be looking at an average of two months to get things going. If it’s a company with machined parts, stamping, break presses, this kind of operation requires more installation processes and a start-up period in Mexico between the ranges of 4 to 6 months.

It also depends on how fast the company wants to move on their Mexico manufacturing project. For example, a metal stamping operation and might need to move quickly.   We will put all the efforts into making it happen. We will put more people in place to make the process installation happen faster. When a company visits Manufacturas Zapalinamé for the first time, they understand our capabilities.  When they sign a contract; we hire specific contractors in Mexico that will help them make things happen.

The Offshore Group: Leonard, you relate those things to things that need to be built. For example, if there are electricity issues, I assume you would be the point man in terms of getting all of the permits required for them to begin the process of installing electrical connections.  Would that be true?

Leonard Ottosen: Yes. When a client signs a contract for Mexico shelter services with The Offshore Group in Saltillo, the first person that they hire is the plant manager. The plant manager needs to be trained. He will be transferred for a month or so to the new clients’ corporate offices to get trained in their core manufacturing business.

At the same time, someone needs to be in Mexico to help new clients out with all the installations, permits and other important things.  That point person is me. I become their liaison; I’m the individual on staff that knows the layout, as well as the one that knows about their machinery, their processes and their parts.   With this information I am in a good position to help them to make some decisions that affect the Mexico manufacturing start-up process.

The Offshore Group: This would be post contract signing right? And you would be the person that knows about the layout and the utilities that are required.  When dealing with a company that has significant utility demands, what kind of permits do you have to get? What kind of people do you need to bring in to do the initial set up and make sure that things are “plugged in correctly?”  How does that work?

Leonard Ottosen: The first thing that we ask for in this realm is that the company provides us with the Mexico manufacturing operation layout. The layout shows all of their processes, all the equipment with the power and utility requirements such as water and gas.

Having that information will allow us to work with a contractor that complies with Mexican regulations, such as a certified electrical engineer, to then begin with the installation process.

If a company has heavy electrical utility requirements, you don’t require a special permit but you do require a special installation, and sometimes a little bit more time. This can be up to two or three additional weeks.

Regarding water requirements, there are Mexican standards for water and sewer. If the company is complying with the EPA and OSHA in the U.S., you can pretty much duplicate what is been done in the U.S. in order to comply in Mexico.  The Mexican equivalent of the EPA is essentially a copy and paste of the EPA in the U.S.

Permits for water and sewer are necessary. There are also permits for soil and air pollution.  These are similar to the permits that one encounters in the U.S.

The Offshore Group: Leonard, in terms of other utilities, you’ve mentioned electricity, water and sewer. But is natural gas for industrial use abundant in Saltillo as well?

Leonard Ottosen: Yes

The Offshore Group: What’s the process for getting installation for natural gas at a manufacturing facility in Saltillo?

Leonard Ottosen:  If a company becomes a tenant in the La Angostura Industrial Park, we have gas availability no more than 100 feet away from the buildings. We have a complete natural gas grid inside the park. We have to execute a contract.  The Mexican gas company will provide a gas meter, and all the installation has to be done by a certified contractor.   Those permits have to be approved by the natural gas company.  It’s pretty straight forward process; the main thing is that we have a grid in the La Angostura Industrial Park.

Another utility of import is the phone system. Telephone systems in Mexico are available that are similar to the U.S. and other parts in the world. There are T1s, depending on the bandwidth requested by manufacturing companies.  Additionally, companies can have 1 to 2-T1s, with 4 MGB for video conferencing and data transfer (back and forth).

The Offshore Group: Those are physical needs that a company requires.  I know that you get involved in these things, from layout to electricity, to installing machinery, to the things that you’ve just mentioned in terms of utilities, but another thing that is very important is that the company that interfaces with The Offshore Group on Customs issues.   Can you comment on this?

Leonard Ottosen: Yes. Mexico Import/ Export definitely is a key issue related to the process of any company coming to start up a manufacturing operation in Mexico.

Most finished products go back to the country of origin.  We ask the company to provide us with a list of all the raw materials that they will use to manufacture their products in Mexico, as well as all the machinery will be transferred to Mexico.  Detailed information needs to be provided in order for us to verify discrepancies (if found), to verify Harmonized Tariff Schedule (HTS) issues, and to make sure that the company is not subject to duties, and/or for us to make the necessary provisions to assist the company to avoid payment of unnecessary taxes, since this only a temporary import process.  For example, machinery can be transferred to Mexico for the length of the contract or project; raw materials can be in Mexico for a maximum period of 36 months.

There are cases where we can assist a company to avoid paying taxes if the machinery is coming and parts are coming from China or other places in the world. Import/Export is critical and we have to make sure that The Offshore Group headquarters, Import/Export group, for them to carefully review all the information.

The Offshore Group: Leonard, taking it one step further, to make sure we cover all bases in this podcast, the last item I’d like to ask you about relates to your experience in dealing with many different companies: aerospace manufacturers, medical device manufacturers, metal and plastics manufacturers, cable assemblies, etc.  What type of work do you do in the area of helping companies orient themselves with respect to requirements of Mexico’s equivalent to the EPA? How do you work in order to help them be in compliance?

Leonard Ottosen: With their machinery description, and the parts that will be manufactured, once the plant is operating, we will do an internal audit equivalent to an official audit done by the Mexican authorities.  This is to make sure the company is in compliance with all regulations.

We use the same format that the Mexican authority has and will review it in detail with the company. We will not just audit, but also work with them to assist them in all areas that need to comply by providing corrective actions and preparing them to achieve compliance.

The Environmental Protection Agency equivalent in Mexico is pretty straightforward, and is similar to other environmental agencies in the world.  We assist new companies to help them to comply with Mexican environmental regulations. We do ask the company to have one person in charge of these matters.

We go through the process of staffing the operation.  The company will provide us with the profile of labor pool needed for all different positions and operations in the Mexican manufacturing facility.  We will present them different candidates, and they will pick and choose who they want to be a part of their team.  My role here is basically to match the company requirements into the for new Mexican manufacturing hires with help from the HR team. Sometimes language is a barrier, and also, in other cases, the philosophy of the company might be different. My role is somehow as a translator as I interface with the company that is starting up a manufacturing operation in Mexico since they were a prospect.   Because they once were a prospect, I understand the company pretty well, sometimes more than anybody else at the park during this initial manufacturing start-up process.

The Offshore Group: Is it safe to say, based on your comprehensive answers to our questions, that given all things that must happen:  from the beginning to the exploration, to the research and location of potential suppliers, to the set-up of the building and to the point at which the product and parts are starting to be produced, you’re guiding a process for the company that is installing in Mexico.   Would it be correct to sum things up by saying that your job as Project Manager at Manufacturas Zapalinamé in Saltillo is to make the process move as smoothly as possible?

Leonard Ottosen: That’s exactly right. I take them by the hand and guide them through the entire manufacturing start-up in Mexico until their first skid is out of the door.   After that I kind of fade away, because, at that point, Manufacturas Zapalinamé machinery will take place.

The Offshore Group: Of course, that is the human resources department, customs, procurement department, and all the other things that we provide.

I’d like to ask, given all the experience you’ve had with all the start ups that you’ve done in Mexico, is there advice that you can give to our listeners to keep in mind during their initial research of the whole issue of whether or not it will be a good idea to begin an operation in Mexico.  What kind of advice would you give to people that are just beginning to do some research?

Leonard Ottosen: The manufacturer that is going to start operating in Mexico needs to understand that, although things may be very similar its country of origin, Mexico is a different country with a different culture and different ideas. This is not rocket science, but you have to be aware of how things need to be managed differently in Mexico.

Things may still happen, but we are here to reduce and alleviate any rough patches that a company may hit while starting up in Mexico.  We will do everything that is in our hands to avoid problematic issues, and will help our clients to perform as well, or even better, than at their home office.

In summary, a company needs to understand that Mexico is another country, but that it is a good place to manufacture profitably.

The Offshore Group: Obviously over the years, Mexico has become a place Mexico where U.S. companies have invested for over 30 years now.   As the cost in China obviously rises, a lot of the companies that were previously manufacturing in China may think of manufacturing in Mexico due to its proximity to the U.S.

Leonard, you pretty much covered everything in a very comprehensive and coherent way.  I’d like to thank you for joining us. Also, there maybe things that some of our listeners would have questions about at a later time.  Is there a way that they can contact you directly; perhaps your email information might be available?

Leonard Ottosen: Yes, please at any given time send me an email and I’ll be glad to help you out. My email is: leonard.ottosen@zappa.com.mx

The Offshore Group: Leonard it has been very nice to be able to speak with you today on this topic. You have a wealth of experience to anyone that may have further questions on issues related to the Mexican manufacturing facility start-up process.

Leonard Ottosen: It’s been my pleasure.

The Offshore Group: Thank you and have a good day.

The Offshore Group: Hello and welcome to another edition of our continuous podcasts on Mexico business issues, more specifically manufacturing in Mexico.

Today we are very fortunate to have with us, Alejandro Sanchez. Alejandro is plant manager of Powerbrace de Mexico in Saltillo, México. The company also has its headquarters in Kenosha Wisconsin.

Welcome Alejandro. How are you today?

Alejandro Sanchez: Very good Steve, thank you very much for the invitation to speak to you about Mexico manufacturing.

The Offshore Group: Today let’s discuss establishing a supplier base for manufacturing in Saltillo. But, first tell us a little bit more of yourself and, your company, Powerbrace de México.

Alejandro Sanchez: Yes, I’ve been in the manufacturing industry in Mexico for over 19 years. Prior to joining the Powerbrace Corporation, I was involved in material handling, logistics and manufacturing activities in companies in Saltillo like GE, GM and Caterpillar.

I’m a Saltillo native and business executive. I have an in-depth knowledge of the industry in Northern Mexico.

Powerbrace Corporation is part of a group called Miner Enterprises Inc. We manufacture railroad components, discharge gauges and break beams to stop rail cars on railroad tracks. All of these railroad components are manufactured in Mexico.

The Offshore Group: Has Powerbrace been manufacturing in Saltillo for 8 years? Is that correct?

Alejandro Sanchez: That is absolutely correct. We are in our 9th year of producing railroad components in Saltillo this year. It’s been a wonderful experience. We’ve recently extended our contract for shelter services in Mexico with The Offshore Group.

The Offshore Group: You have been manager of the Powerbrace de México operation for all eight years? What was the biggest challenge in setting up a manufacturing operation in Saltillo, México?

Alejandro Sanchez: Yes, I have been with Powerbrace de México since the beginning. Our biggest challenge was materials management. With headquarters being in Kenosha WI, all of our suppliers, at the beginning, were local to Wisconsin and the surrounding northern U.S. states.

The company’s biggest challenge was related to sourcing of materials, and how to get them to the Saltillo manufacturing plant?

At the beginning we kept our U.S. suppliers, located in the northern part of the U.S. Additionally some parts were coming from China. We invested a lot in freight, but then we tried to locate suppliers closer to Saltillo to be more cost effective.

Material management was the biggest challenge.

The Offshore Group: What was the process that you used to find qualified suppliers of manufactured goods in Saltillo? How did you find Saltillo suppliers that were able to fulfill your requirements?

Alejandro Sanchez: One of the things that were not developed in Mexico at the beginning was an Internet resource that would serve to locate appropriate suppliers in Saltillo. You had to find qualified companies through different methods.

Saltillo is very strategically located for manufacturing. The city is located near one of North America’s major steel mills: AMSA. Additionally, proximity to Monterrey means that we have access to many excellent service providers and machine shops. Saltillo also is positioned for access to great Mexican manufacturing service suppliers and equipment from nearby areas such as Laredo.

We did roll out a plan of what we were looking for, and what we thought we would be able to source locally.

Saltillo used to be one of the old cities with foundries, which was one of the main things that we were looking for. It wasn’t a big issue finding foundries to supply us with castings in Saltillo. We did a Pareto analysis to define the first manufactured items to be sourced from Saltillo. Castings topped the list.

The Offshore Group: With regard to looking for companies that were able to service you, what advice can you offer in terms of information to other manufacturers that may be looking to find suppliers in Saltillo? What other kind of relevant information can you offer to those that may be looking for quality suppliers of manufactured goods and services in Saltillo?

Alejandro Sanchez: Saltillo is very well known for its technical expertise. Machine shops, foundries, metal finishing, heat treatment availability. Specialized assembly occurs here. The best known example of this is the activities that are going on at the GM plant here in Saltillo.

North of Saltillo, steel mills are very strong. Two such operations are AMSA and Cifunsa in Monterrey. There are good sources of Mexican steel in the region that will sell product at very competitive prices.

The best method of developing a local supplier base in Saltillo that I will recommend is to establish good local relationships. Visit Saltillo and regional suppliers. Have face to face meetings, as opposed to communicating by email or by phone call. Once potential Mexican suppliers get to know you, you will establish a stronger business bond. This will make a huge difference in doing business in Saltillo as you progress.

The Offshore Group: In terms of that last point that you made, regarding your supplier base in Saltillo, have you held on to the same suppliers for a long period of time? Have you had continuity in your relationship with them over time?

Alejandro Sanchez: Yes, actually, many of the Saltillo and regional suppliers that we developed back in 2005 remain in the service of our company.

One of the benefits of Saltillo’s manufacturing culture can be attributed to the local quality requirements that have been put into place over the last thirty years by Saltillo’s automotive manufacturers. It’s easy to find good suppliers when the dominant automotive industry in Saltillo is constantly pushing them to develop or improve upon their products. We have very good success stories to share. For example, there is a powder coating supplier that we developed almost from scratch. They were focusing their operation for other types of manufactured products in Mexico. We started to develop them and have been able to share cost improvements in their process and cost. We are very happy with this relationship.

We had a similar situation with Grupo Industrial Saltillo. We’ve been working with them to develop new products. Many times we thought we were not going to be able to compete with China in terms of cost and quality. This final result has been that was not the case. The end result is that after 8 years, I have a multi-year agreement with Cifunsa, and the pricing and the quality of the Mexican product is competitive in terms of cost and quality when compared to China. Due to our strong relationship with Cifunsa, we work with them on new developments in terms or processes and are able to share the cost savings benefits with them. This is a key component of the relationship with industrial suppliers that we have in Saltillo.

The Offshore Group: You’ve made reference to the automotive industry. For our listeners who may not have an extensive understanding of what the manufacturing base in Saltillo is like, can you describe the scope of the automotive industry presence in Saltillo? What kind of effect does it have on the local economy, in general? In essence, what does the automotive industry mean to Saltillo?

Alejandro Sanchez: The automotive industry started in Saltillo in the early 80’s, and immediately occupied much of the labor force in the City. At that time, the automotive industry represented 60-65% of the total manufacturing industry in Saltillo.

Today, the economy in Saltillo has diversified. We have automotive, but also aerospace and medical. Now the automotive industry represents about 40% of the market. Its impact remains strong, but other industries have also discovered that Saltillo is a good place for manufacturing.

The Offshore Group: Which obviously is a positive scenario, you don’t want to depend on one industry to keep an economy afloat.

Alejandro Sanchez: Correct; during the economic downturn, the entire economy was affected of course; however, having a mix of different industries helped Saltillo mitigate some of the negative effects.

The Offshore Group: When you found suppliers Saltillo, when going through the process, was there a methodology that you used that you can describe that can help other companies?

Alejandro Sanchez: Yes. Remember in Mexico we have a different approach to do business.

I would recommend establishing a lunch or dinner (meeting) with the top executives. It’s a culturally important approach. It allows you to get to know the company from a personal perspective, and to identify if the culture will meet your expectations. If the top or executive culture does not meet your criteria, the relationship can be doomed to failure.

For example, if I feel that the company is financially strong, I’m sure I will find a good process relationship.

Then I do a survey facility assessment, as well as a basic ISO 9000 assessment on their capabilities.

One of the things that you need to take in consideration before anything is to properly establish the rules of engagement. Within your first dinner, or personal encounter, you need to define what you like and what you don’t like as concerns the potential suppliers processes, from invoicing, shipping, and accounts payable. Sometimes the failure of administrative processes can cause significant problems. You need to be aware of these things up front, and then establish appropriate rules. For example, one time we were doing business with a supplier that was not invoicing us, because they had told us that they invoice on a quarterly basis. Therefore every shipment was received with a bill of lading did not have a corresponding invoice. At the end of the first quarter, we received 70 invoices that needed to be paid within the next seven day period. We were aware of this process so it wasn’t a problem, but perhaps something like this may have caused a problem for a different company. You might require that every time that you receive a shipment, you receive an invoice. You may want specific terms of payments from suppliers in Saltillo, and in the region.

Again, the first approach is to meet with your supplier for lunch or dinner and make time for this. This will help to establish a good marriage that will work over time.

The Offshore Group: That’s very good advice. When you worked through all of these processes, met with the Saltillo suppliers’ key people, chose who would become your suppliers, when you look back on this effort can you assess the overall impact of your being able to actually succeed in establishing a manufacturing supplier base in Saltillo, rather than having to go with what you had at the beginning? What was the overall effect on the bottom line, quality production, and other things you might be able to comment on?

Alejandro Sanchez: Without disclosing financial information, I will say that the owners are happy with what they have observed. When running P&Ls, we have the cost of goods sold. At the beginning of the project, our cost of goods for materials was almost at 70%. Today we are no more than 63% of the total cost. You that the financial impact of developing suppliers in Saltillo, and in the region, has been significant

In terms of quality, we have improved it. This is mainly in areas of castings and forging. We have a very good forging supplier in Monterrey, and previously we were bringing this material from Illinois. The quality of castings coming from China was not as good as what we’re getting now.

The overall impact has been positive. Nonconforming product and services coming from suppliers have dropped, in addition to a 10% improvement on the cost of goods sold on materials.

Furthermore, cash flow had a positive impact because of the close access to the materials (suppliers). Proximity of suppliers in Saltillo and the region make it possible to work on consignment. For example, Cifunsa right now is producing what I’m consuming next week, my inventory is per week. Prior to this, when I was working with suppliers in China, I had four months of inventory, so you can imagine what my inventory turnover throughout the year was.

Sometimes you cannot even calculate all of the positive impacts and the benefits of having a local supply base near your facility.

The Offshore Group: What you have described is pretty impressive. It seems like there is a need to be disciplined to do your research, sit down and talk to the right people and make sure you’re working with folks that will help you to succeed while you are manufacturing in Mexico.

One last question, in my experience of over 20 years, when a company moves part of its operations to Mexico, it’s very rare that I see, at least with mid-size companies, a complete divestiture of what it has in the United States. Very rarely do companies pack up everything, and move all of their production to Mexico. Most companies have a headquarters, or a complimentary plant perhaps in Mexico. In your case, you have your headquarters in Kenosha WI. Can you tell me what the dynamic is between your headquarters and your particular operation doing manufacturing in Saltillo? How do you interact?

Alejandro Sanchez: I will divide things into two sections. At the beginning, because we were new to manufacturing gauges and brakes, personnel from headquarters was frequently flying into Saltillo to train our Mexico workforce. As time went by, around 2007, we started to become the experts on how to manufacture our products. Today we are the experts. Today we have design and engineering support in Kenosha, and have part of our sales group there. The interaction has changed a lot over the course of the eight years that we have been manufacturing in Mexico.

We maintain weekly conference communications via Skype. Our findings and some of the improvements that are passed on to the products development team are brought up during these meetings. They will visit us periodically to ensure that we maintain our quality system intact, as well.

The Offshore Group: Basically they provide the engineering and design and Powerbrace de México is making the product.

Alejandro Sanchez: Correct.

The Offshore Group: Alejandro, I’m sure that people listening to this recording have found it to be interesting. There may be people that have specific questions regarding manufacturing in Saltillo, and if this is the case, would you be willing to take them from the listeners?

Alejandro Sanchez: Steve, thank you for the opportunity of sharing this information which is critical for anyone who is trying to do business in Mexico in general, and manufacturing in Saltillo in particular. Yes, I’ll be glad to answer any questions via email, and if I can I will put them in contact with local suppliers that I know. I believe we need to develop a good network of peer suppliers and manufacturers in order to succeed.

My email address is: sancheza@powerbrace.com and sancheza@minerent.com

The Offshore Group: I’m sure a lot of people will take your good advice. You’ve done a great job over the years of finding things locally and manufacturing profitably in Saltillo.

Again, to all the listeners that may have questions, Alejandro is a very nice guy and he will help you the best he can.

Alejandro Sanchez: Thank you Steve.