Companies within the United States have long looked to Mexico to expand manufacturing operations, whether by directly owning and controlling operations in Mexico, or working with outsourced and contract manufacturers. Mexico’s proximity to the U.S. and its long track record of providing high-quality inexpensive labor and resources make it an attractive location.
Mexican manufacturing is an integral part of the value chain for many commodities from agriculture to high-tech. The end-to-end assembly is sometimes completed within Mexico, but more commonly the process spans multiple countries. Raw materials, components and sub-assemblies are sourced from Mexico for final assembly in the U.S., or parts are sent to Mexico for final assembly and completion. Repair and rework activities are another element of cross-border trade. A growing trend in value chain collaboration is merge-in-transit. One facility receives parts and sub-assemblies from multiple locations, then packages and routes shipments to a distribution center or directly to the end-customer. All these scenarios require tracking shipments across the U.S.-Mexico border.
Balanced with the many benefits of cross-border trade with Mexico are concerns with regulatory compliance and security. Within this article, we’ll look at the top five challenges.
1. Maintaining Predictable Lead-Times for Cross-Border Shipments
Unpredictable delays wreak havoc on the tight lead-times required for lean manufacturing and inventory. To guarantee availability of parts and materials, you need a reliable shipment transit. Any uncertainty increases the probability of missing delivery times. When a shipment that normally requires days is delayed for weeks, the impact of the delay is felt throughout the tightly integrated value chain.
Avoiding delays requires accurate documentation and strict adherence to compliance requirements. Generating accurate documentation starts early in the manufacturing process, when information on the components and sources of raw materials is collected, and continues through to loading goods for shipment. Shipment data, such as quantities, weights, carriers, freight costs and cargo seals, must be consistent across ERP, WMS and cargo manifesting systems. Every aspect of the procurement, manufacturing and shipping processes must be performed with the end goal of creating secure shipments and accurate documents for cross-border trade.
2. Maintaining Accurate Records of Duties Owed
Free trade under the NAFTA provisions is not necessarily free. Complying with regulations and tracking the tariffs for each commodity, including changes year-to-year, requires time and effort. This is a high-cost activity which adds little real value to your end products. When valuable resources must delay their regular tasks to respond to an audit or assessment, the cost increases. Many shippers underestimate the cost and complexity of the task.
To some measure, NAFTA preferential treatment for manufactured products is calculated based on the parts used during manufacture. The source of the parts, the program under which they entered Mexico and the duty schedules in effect throughout the manufacturing process determine NAFTA eligibility. Implementing NAFTA compliance software to maintain this data is a cost-effective solution.
Mexican Customs regulations require accurate records of inventory shipped into Mexico, completed within Mexico and shipped out of Mexico, including the date and applicable tariff program. This is required to report duties owed on the outbound shipment. Due to the complexity of the tracking and reporting requirements, Mexican Customs requires manufacturers—both importers and exporters—to implement software solutions to track activities, generate reports and pay duties electronically to Customs.
3. Sharing Information with Trading Partners
Visibility along the supply chain allows all trading partners to view material movements, inventory levels and capacity to meet demand. Providing manufacturing partners visibility to your demand forecast, and in turn viewing their stock levels and projected output, allows you to project your ability to meet demand. This also allows you to confidently assess which orders you can fulfill or assess the need to find additional manufacturing capacity.
Integrating business processes with multiple trading partners along the complex value chain is always difficult. The difficulty increases when data is interfaced across a border, with differing protocols and levels of technology. One emerging trend, using SaaS (software-as-a-service) solutions to collaborate via a shared platform hosted on the Internet, can ease integration. However, with each SaaS solution due diligence must be performed to ensure the security and ownership of the data.
Systems that provide seamless data integration across the enterprise can be extended to outside trading partners. Data collection starts within the factory, where a WMS (warehouse management system) maintains accurate records on inventory, consumption, production and assets. Global operations require the ability to view data across their enterprise to balance resources across multiple factories. The enterprise data can be leveraged to collaborate with trading partners throughout the value chain.
4. Complying with Security Requirements
The dual threats of terrorism and drug-smuggling require knowing the provenance of every part and the persons handling material during every leg of the shipment. C-TPAT (Customs-Trade Partnership Against Terrorism) requests that every person shipping goods from Mexico knows the source back to the original farm or factory. Assessing threat risk factors applicable to all trading partners who manufacture or handle the materials requires a far-reaching scope. Rapidly shifting regulations for carrier selection, certifying the safety of cargo shipments and constant updates to multiple screening lists all increase the complexity of compliance.
Creating the initial records is a start; maintaining accurate records over time is much more difficult. Consider how often a part is sourced from an alternative vendor, ownership and corporate structures of vendors shift, and regulations and guidelines change. Data collection throughout procurement, manufacturing and shipment processes is critical to accurate vendor origin certification and compliance with security requirements.
5. Maintaining Accurate Records for Taxes and Invoicing
The final challenge is accurately calculating the VAT (value-added tax) and transmitting data required for invoicing. In general, the VAT is a 15% surcharge paid to the Mexican tax authorities. Being able to document that the material is manufactured under a tax-advantaged program and will be utilized entirely outside of Mexico’s borders can reduce the VAT, sometimes removing it altogether.
Even if the tax is removed under a special program, the requirements for generating the invoice and recording the VAT calculation remain, and are constantly strengthened as the Mexican tax authority attempts to increase compliance and collections. Many companies are required to use electronic invoicing with the Firma Electronica Avanzada (FIEL), a digital signature authorized by the Servicio de Administracion Tributaria (SAT). Generating electronic invoices that are transmitted to the customer, your AP department and the tax authorities reduces duplication of effort and the risk of fines for non-compliance, which adds up to cost savings.
Cross-border trade with Mexico offers many opportunities to decrease manufacturing costs. However, ensuring the safety and timeliness of each shipment can increase the cost of goods. Mexican counterparts need to be part of an integrated collaboration network that is maintained with constant vigilance. Accurate data collection and visibility throughout and beyond the enterprise are crucial to tracking material movements across the border, and consistently meeting downstream demand. This effort pays dividends when you can increase profit margins with a resilient value chain that extends across the U.S.-Mexico border.
Lalo Solorzano is a global trade expert and Tamara Dwyer is a product management business analyst for TAKE Solutions Inc., an international business technology company specializing in life sciences and supply chain management.