Do I Need Contract Manufacturing or Shelter Manufacturing?
07.29.21
Entering the market in Mexico offers manufacturers several ways to set up operations. Contract manufacturing may be an optimal solution for smaller companies that want to hire contractors to do the manufacturing operations for them, without having ownership of a facility or overseeing production. The interest here is finding a counterpart in Mexico that can build the same or similar product as what they’re manufacturing at their central location.
Though technically this may work when there’s only one product to mass produce, if the product is unique, it’s better to explore the option of shelter manufacturing. In fact, it’s common for many smaller companies to begin with contract manufacturing and switch to a shelter model as their business grows and product line expands.
Despite some conveniences, with contract manufacturing, companies give up control over the production of their operations and entrust the contractor to meet the level of quality desired. Alternatively, partnering with a shelter company as part of a larger Mexico manufacturing solutions strategy allows companies to maintain complete control over their operation and work with a trusted program that’s been proven to work successfully.
Contract Manufacturing vs. Shelter Manufacturing Benefits
Essentially, a contract manufacturing model may be one of the best Mexico manufacturing solutions for companies that want a consistent run of specific products and are at an earlier stage of business growth. However, since the company won’t have full oversight over production consistency or quality assurance, it can derail growth efforts and make it challenging to maintain a healthy supply and demand.
Whereas, a shelter manufacturing solution takes care of all the administrative tasks necessary to get and keep an operation up and running, while leaving full operational oversight and control in the hands of the manufacturer. For example, when partnering with IVEMSA, the following responsibilities are delegated to the shelter for the Mexico operation:
- General administration
- Recruiting
- Human resources
- Accounting and taxes
- Customs compliance and import/export
- Payroll processing
- Accounts payable
These are the main categories the shelter is responsible for, though there are additional shelter services included as well. The benefit of this model is manufacturers can dedicate their full time and resources to manufacturing operations, quality control, and customer service. Manufacturers also maintain complete ownership over their assets, machinery, and inventory.
Furthermore, contract manufacturing doesn’t offer the cost benefits a shelter does. For example, a shelter maintains certification under the IMMEX maquiladora program. This program allows exemption of the 16 percent VAT tax on all temporarily imported goods, tools, and materials.
This is a significant cost savings implemented on day one when working with a shelter company. On the other hand, it can be more difficult to quantify value with contract manufacturing, both in terms of hard costs and overall effectiveness.
Choosing the Right Solution for Your Company
Deciding whether to choose contract manufacturing or a shelter operation comes down to what stage of business your company is in. In general, medium- to large-sized companies benefit from a shelter model due to the savings of time and cost, as well as the level of expertise and experience necessary to successfully set up and manage operations.