Commentary: Preparing for Capacity Challenges in Mexico

More and more companies are looking to Mexico as the preferred location for near-sourcing their operations. This trend has gained increasing momentum in recent years because of prolonged economic hardships as many manufacturers looked to decrease time-to-market, reduce inventory warehouse space, speed up cash-to-cash cycles and cut transportation costs. Mexico’s labor costs also are now lower than some areas in Asia, making the country a very attractive manufacturing option.

The U.S.-Mexico border is one of the busiest, most economically important borders in the world, with nearly 1 million travelers and nearly a billion dollars’ worth of goods crossing each day. Eighty percent of this trade crosses the land border on trucks and trains. Border states aren’t the only ones benefiting from this dynamic trade relationship, as 22 U.S. states have identified Mexico as one of the top two destinations for their exports.

In February 2012, Mexico reported a trade surplus of $442 million, according to Trading Economics, and approximately 86 percent of Mexican exports and 50 percent of its imports are traded with the U.S. and Canada.

It’s becoming increasingly easy to do business in Mexico and streamline cross-border operations. Still, the ever-changing business environment and an increase in economic activity have many shippers concerned about capacity tightening in the near future. To be successful and adapt to market changes, companies need to plan for potential capacity challenges and create a flexible supply chain.

Mexico’s peak season usually runs between June and early August. This year’s peak, however, hit earlier than expected, which has already had a drastic effect on capacity in several major Mexican cities. Northbound U.S. trailer capacity that was once available has dried up, causing a ripple effect for companies involved in cross-border trade. In June, some major carriers reported one trailer moving southbound into Mexico for every 2.5 trailers required northbound.

As capacity in Mexico tightens, the initial impact is felt on northbound lanes from Monterrey, Mexico, because that city is a primary source for the country’s manufacturing market and has high freight volumes. The impact then trickles down to Guadalajara, the source of a number of high-tech products. Because Monterrey does not manufacture significant inbound consumer goods and doesn’t have the same inbound shipments as Mexico City, it causes a greater capacity challenge in this market.

As capacity dries up within Mexico, it puts additional pressure on equipment availability at the border. As a result of this cycle, freight rates tend to increase, putting pressure on shippers. It’s not uncommon for carriers to ask shippers to cover the equipment-repositioning costs from the border southbound in order to cover the northbound demands.

The produce season is the largest contributing factor to equipment shortages in Mexico. During the summer months, much of the freight capacity is refocused on perishable and time-sensitive agricultural products. These agricultural shippers bid against year-round shippers and manufacturers for the limited capacity available for U.S. northbound equipment, causing a large part of the overall shortage.

A number of other variables have affected trucking capacity between Mexico and the U.S. recently. The number of companies near-sourcing their operations to Mexico has increased the pressure on capacity. Their goal is to be closer to the U.S. markets — often driven by shorter lead times and sales cycles.

As a result, companies are reducing lead times from 15 to 20 days by ocean from Asia to 48 to 72 hours by truck from Mexico. This move can create opportunities for companies to perfect forecasts to reflect current demand and react in real-time to canceled, increased or decreased order capacity. However, this is contributing to an imbalance of trade and putting additional pressure on capacity.

In addition, questionable global economic times, previous lack of foreign investment, presidential elections and drug cartel issues have many Mexican carriers apprehensive to invest more money in equipment and other assets. Without these assets and an increase in U.S. equipment, demand for northbound equipment far outweighs supply.

Swings in the exchange rate between pesos and dollars also have reduced the attractiveness of U.S. goods, although recent trends suggest the dollar is weakening again. The balance of trade between the two countries is a critical component in balancing the trucking equipment shortage being experienced today.

Another issue that has had an impact on the economy and, consequently, capacity, is this week’s Mexican presidential elections. The polls show a narrow gap between potential candidates, making it unclear how many of the important issues will be resolved in the coming year. Many companies are delaying important expansion or growth decisions until the political climate is determined.

The only consistency in Mexico is the consistency of inconsistency, so it’s critical for companies to implement flexible solutions and contingency plans into their transportation strategy. In an ever-changing environment, developing long-term strategies will help shippers adapt to the variety of factors that could impact their supply chain. Nurtured and strong partnerships with carriers and logistics providers will prove beneficial, especially when capacity becomes tight.

Partnering with a third-party logistics provider can help companies forecast capacity constraints and leverage their diverse carrier network, purchasing strength and strong relationships. The right partner will be able to help create diversity throughout a shipper’s transportation operations by expanding the carrier base, providing multimodal options such as cross-docking at the border and rail.

Additional routing options also can help decrease capacity pressure in specific ports. In January, 86.3 percent of U.S. trade by value with Canada and Mexico moved via land. Establishing a multimodal, multiroute and multicarrier approach will help shippers mitigate the constant fluctuations of northbound and southbound freight. Having consistent volume with carriers during nonpeak months also will help build strong relationships and become a shipper of choice for reputable carriers.

Shippers also should take advantage of southbound freight and leverage their purchasing power. When planning, companies need to consider the established carrier relationships that current capacity utilization, which often leads to having first opportunity to secure space on trailers heading back north.

A reputable 3PL will combine and balance north and south shipments for efficiency and cost-savings. We must all realize it is a seller’s market, not a buyer’s market as we have seen in the past. The carriers have the luxury of choosing their clients as equipment demand is high. Shippers need to approach the market knowing it’s to their benefit to make themselves as attractive a client as possible to the carriers. If not, it will likely be this shipper’s cargo that will be left behind.

The right relationship with the service provider will allow conservative companies to get equipment as required during these more difficult times.

Troy Ryley is director of transportation and distribution and Jose Minarro is director of customs brokerage at Transplace Mexico. Contact them at troy.ryley@transplace.com and jose.minarro@transplace.com.
 

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