Logistics Fundamentals, Supply Chain

Nearshoring operations have witnessed a hike in Mexico after the pandemic. Today, the country is well-positioned to capitalize on the global markets with its business sector. Along with the pandemic, the supply chain issues and the US-China tensions, charged up the concept of nearshoring in Mexico. However, Mexico’s established framework, including the IMMEX program, demonstrates its longstanding commitment to nearshoring. This, coupled with the recent US economic strength and fading recession fears, has created a prime environment for increased demand for Mexican-made goods and services.

But beyond the established legal and business infrastructure, it’s the dynamic interplay of political, commercial, and financial trends that truly shapes the nearshoring landscape. For instance, the US economic growth, after overcoming recession worries in early 2023, has significantly boosted the demand for Mexican products and services.

Mexico businesses can use Vendor Managed Inventory (VMI) to solidify their position as a major supplier in the global market. It is a prime opportunity for Mexico to attract new business and VMI can be a useful tool to ensure its success.

 

Trends for 2024

These are the top industries poised for nearshoring growth in Mexico:

  • Automotive, electrical and electronics, medical devices and pharmaceuticals, semiconductors, and agribusiness are the five industries that will benefit most from nearshoring, according to the Mexican Ministry of Economy.
  • The Isthmus of Tehuantepec Interoceanic Corridor is being developed as an integrated logistics platform. It will connect two 1,000-kilometer highways between the ports of Salina Cruz, Coatzacoalcos, Chiapas, and Dos Bocas.
  • The Inter-American Development Bank (IDB) estimates that financing for the next three years will range from US$1.75 billion to US$2.25 billion. The focus will be on the construction of industrial parks, new investments by key companies, and the development of innovative mechanisms to expand financing for small and medium-sized enterprises participating in global value chains.

Automotive industry increasingly booming thanks to nearshoring push

Mexico Nearshoring Forecast for 2030

Mexico is a competitive country with all the conditions to achieve adequate economic growth. Therefore, investing in Mexico is a favorable opportunity for the supply chains of foreign companies to start operations in Mexico. This will improve the quality of domestic suppliers, quality of life, job creation and foreign exchange, socio-economic development, knowledge and technology transfer.

To reap the most benefits, process automation is very important to ensure high quality controls. Although the country does not yet have all the digital infrastructure in place, it is a reality that companies from the United States and India are setting up software factories and service centers.

Some economists estimate that between 2023 and 2030, if Mexico manages to take full advantage of the relocation of companies, the following results can be expected:

  • A substantial increase in annual GDP growth from 2.6% (historical average) to 3.7% by 2030.
  • Manufacturing is expected to become the dominant sector, accounting for a record-breaking 22.4% of GDP by 2030 and contributing the majority (96%) of total exports.
  • About one million new formal jobs will be created each year.
  • Exports are projected to surge from $578 billion in 2022 to $1.1 trillion by 2030, with their share of GDP rising from 39% to 49%. Foreign investment is also expected to climb significantly, reaching $87 billion by 2030 (up from $36 billion in 2022) and representing a larger share (3.8%) of GDP.

 

How Vendor Managed Inventory benefits Global Companies

However, the most common concerns for companies considering nearshoring to Mexico involve navigating the business setup process. This includes obtaining permits and authorizations related to exporting, such as the IMMEX program and VAT certificates, as well as understanding import/export regulations and tax accounting/compliance processes.

But did you know that you can do business in Mexico without having to set up shop in the country? You can with the implementation of Vendor Managed Inventory.

VMI or Vendor Managed Inventory is a supply chain management model in which the supplier (or vendor) is responsible for not only replenishing the buyer’s inventory but also maintaining it at optimal levels without the customer having to place an order each time.

VMI streamlines inventory management and reduces out-of-stocks, improving operational efficiency and ensuring continuous supply chain reliability for companies that cannot relocate production.

Key aspects of VMI include:

  1. Inventory management: The supplier proactively tracks inventory levels and ensures the customer avoids stockouts or excess inventory.
  2. Efficiency and optimization: Aims to optimize the supply chain by reducing out-of-stocks and overstocks.
  3. Collaboration: Successful VMI requires close cooperation and communication between the supplier and customer.
  4. Cost and time savings: Both parties can save time and money by reducing order fulfillment and inventory by reducing order fulfillment and inventory carrying costs.
  5. Improved sales and service levels: By preventing stockouts, VMI can contribute to smoother sales processes and better customer service. For example, a manufacturer with consistent inventory levels can fulfill customer orders faster and avoid disappointing delays.

While Vendor Managed Inventory has been widely adopted in regions such as Mexico, its benefits are universal for companies with global operations. From efficient inventory management and cost savings to improved collaboration and customer satisfaction, VMI can be a strategic asset in optimizing supply chain operations and driving business success.

 

Conclusion

Mexico is at the forefront of nearshoring operations, poised to capitalize on global markets with its robust business sector. The convergence of factors such as the pandemic, supply chain disruptions, and US-China tensions has accelerated the adoption of nearshoring in Mexico. But it’s not just Mexico’s established framework, including initiatives such as the IMMEX program, that positions it as a premier nearshoring destination. The dynamic interplay of political, economic, and financial trends, coupled with the recent economic strength of the U.S., further enhances Mexico’s attractiveness.

In addition, the adoption of Vendor Managed Inventory (VMI) provides a prime opportunity for Mexico to solidify its position as a major supplier in the global marketplace. With this method, you can leave all the management in the hands of your supplier so you can focus on growing your business. Trust is the basis for this and The ILS Company has proven to be a reliable partner for any logistics operation.