Articles in Category: Sourcing Strategies

This weekend we had a chance to catch up with a partner of ours, German Dominguez, who is based out of Juarez, Mexico. Dominguez sources parts on behalf of American companies. This is Part Two of a Two-Part interview. You can read Part One here.

MetalMiner: Based on your success, it might appear as though Mexico is starting to gain the edge over China. Is that the case?

German Dominguez: Out of my personal experience, it has taken me two years to gain the trust of my supply base, so now my suppliers really work hard to try to win a new project. That 100 percent margin that they used to quote is now between 15-20 percent so that I can secure the business. Because of these relationships, the partnership, if you will, my suppliers are much more competitive than they were previously.

MM: US firms are now looking to Mexico again for quotes. It appears that there are more inquiries and quoting activities going on. What are you seeing?

GD: I do think there is more quoting activity, but I don’t think that US companies can move programs quickly. Of course, wanting to move something to Mexico and actually moving it are two totally different things. Mexican suppliers will work with American buyers, but it’s important to remember that Mexican suppliers are very time-consuming and/or high maintenance, if you will, during the initial phase, whereas American buyers are not used to that kind of process. For example in the US, a company might send a RFQ to 10 domestic companies and definitely at least five will respond. The same process in Mexico will result in only 1-2 suppliers participating. You would have to really pursue and chase a Mexican supplier until they get to know you very well. A quote from a Mexican supplier might take 3-4 weeks, while a quote from China may only take 3-4 days. Eventually a Mexican supplier will forget about the RFQ if the American buyer doesn’t stay on top of it. So for the initial supplier development process, the effort level appears as follows: 80% American, 20% Mexican, but that can switch over time. It takes about 1-2 years to truly gain and establish a partnership with a supplier in Mexico. But what is important to keep in mind is that US buyers have advantages over Mexican buyers because Mexican suppliers will give more attention to foreign buyers. The Mexican supplier may be interested in growing export business or doing business in USD.

MM: Do you feel that looking at total landed cost is the key to making the right award decisions between the two countries?

GD: I’m not a big believer in total landed cost. Why? Generally speaking, I see a large enough differential on the piece part price that I don’t need to use a total landed cost model. However, that is changing now as we speak. When the delta between the Chinese and Mexican piece part price falls between 12-15% of each other (depending on volume and parts) a total landed cost model makes a lot of sense. But not until the prices are within that range; it’s irrelevant. The issue is that the China price is changing, not Mexico.

MM: How much cheaper is Mexico-to-the-US vs. China-to-the-US from a logistics perspective? How does that make/break a deal — or does it?

GD: Mexico is not a low-cost freight country. On a kilometer-by-kilometer basis, China ships more competitively than Mexico. But because Mexico is so much closer to the US, it tricks the buyer into thinking that freight from Mexico is proportionally cheaper than freight from China. Diesel gasoline, taxes and freight rate tolls are all very expensive in Mexico. So freight may not be as big a factor as the popular media would lead one to believe!

–Lisa Reisman

This weekend we had a chance to catch up with a partner of ours, German Dominguez, who is based out of Juarez, Mexico. German sources parts on behalf of American companies. This is Part One of a Two Part interview.

Question: How many programs have you quoted on during the past 4-5 months where the buyer was trying to decide where to go between China vs. Mexico? Please describe what types of program these were as well.

Answer: I have looked at 10 new programs in total.  Six of them moved to Mexico (four were for new products) and  two migrated from China.  Four were awarded to China (and one went from Mexico to China). Four of these programs were for new products altogether where we looked at a full concept-to-market and two programs were currently sourced in China but the buyer had hoped to re-source to Mexico. The re-sourcing projects were machined components and light metal fabrications. The new products were machined components and light metal fabrication with electro-mechanical components. So I could characterize all of these as value-added parts and/or assemblies.

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Finnish-based Outokumpu, the second largest stainless steel maker in the world, is one step closer to reaching their ultimate goal becoming the world’s number one stainless steel maker. Earlier this week, Outokumpu announced plans to double their ferrochrome production to 530,000 tons per year, making the company self-sufficient in ferrochrome. Ferrochrome is essential for the stainless steel industry, since stainless steel expends more than 80 percent of all ferrochrome produced. Read more

It’s  not just  small- to medium-sized manufacturing companies in the U.S. that are seeing work coming back onto domestic soil from China. The UK  is also experiencing a drift of contract work back to British suppliers  for even quite basic semi-finished products, like metal castings, metal formed parts and plastic injection moldings. The reasons cited by an FT report are cost, quality, and timely deliveries. Read more

Sorry in advance for my little geek-out today. This past weekend, I finally had the opportunity to catch Iron Man,  and for those of you in the metals industry who have not seen it, you really must. Personally, I thought it was much better than Indiana Jones. But I couldn’t help running my little calculator in the background taking snippets from the movie and extrapolating its implications for building a prototype. I promise not to give away the movie, but suffice it to say, if you built a real world Iron Man prototype, you may have to be as rich as Tony Stark. So let’s take a look at our hero’s prototype, shall we? Read more

A cost down from the American automotive industry? Surely you jest. As you read in MetalMiner’s last post, US automakers are in trouble financially —  and Chrysler’s recent announcement that it is seeking a 25% cut in parts prices doesn’t change this writer’s point of view. Although Chrysler’s CPO, John Campi, intends to meet with legendary purchasing czar Tom Stallkamp for cost down ideas, 25% seems like a pretty big long-shot in this market. Read more

Today, I thought I would continue my earlier  piece on managing metal pricing volatility. You can find that article  here.

Have you ever received the advice of a consultant who suggested that one way to mitigate metals cost increases is to develop a contract pegged to an index? Well, truthfully, we’ve given out that advice, so let’s see what these indexes actually cover and who can take advantage of them.

The most famous of the metals exchanges (in which daily price information is published) is the London Metal Exchange. There, a company can participate in the largest metals futures market for a range of base metals including steel, nickel, copper, aluminum, zinc, lead and tin. Most recently, the exchange added steel (billets specifically), which we have previously reported on here and here. The last article also references the hot rolled coil steel futures market with Nymex. These futures markets, like the LME and Comex, are viable if you are buying primary metals, but rarely correlate well for semi finished metals. Read more

ThomasNet’s newish blog, Industrial Market Trends,  included a great piece last week on “Managing Spiking Metals Prices”. It is highly worth reading, as it refers to a white paper presented by the North American Die Casting Association (NADCA) on methods to cut risk out of spiking metals prices. Its recommendations are so worth reading that I’d like to recap them here:

1. Hedging  — the notion is to reduce price change risk by purchasing in the futures markets. This is workable for metals that are traded on an exchange (e.g. the base metals, precious metals etc). It will, in the future, be available for a range of steel products as we have been reporting. But some organizations are not able to take advantage of hedging techniques because their volumes don’t justify hedging, the cost of the hedge is higher than the risk and for a host of other reasons that we could write about. Read more

Looking  at much of the recent commentary on this blog, one might  think that our content pertains to  the effect of  particular news items on various  metal prices. And it is true to say that trends within our world of metals have profound ripple effects around the globe.  Various activities around the world profoundly impact the price of metal. So when I saw that two inventors were seeking to file a patent application as per this Economist article, claiming “exclusive rights to the process of using transactions to hedge the risk that demand for a commodity will change,” I became quite interested. I am all about protecting intellectual property, but according to my Hedging for Dummies book, the whole notion of a hedge was well developed several hundred years ago. To recap, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment.

The notion of patenting the absurd has been around for quite awhile. In fact, in the larger sourcing and business realms, suing folks for patent infringement is a popular business strategy for growing revenues  — just check out this blog and this article.

But if you are a metals buyer, this case is particularly worth watching. Let’s hope our courts will get tough on these business process method patent applications. Otherwise, we’re in for an even bigger roller coaster ride than the one we’re already  on.

–Lisa Reisman

Our thoughts and prayers are with the people of China after the Sichuan earthquake this Monday, a 7.9 magnitude earthquake and the second deadliest earthquake in Chinese history. The Sichuan death toll has nearly reached a devastating 15,000, and the numbers continue to escalate.

Aftershocks continue to hit the region, and the horrific earthquake and aftershocks will have an affect on the metals industry. Yesterday, the Financial Express predicted that the earthquake will cause lead, zinc and aluminum, major commodities from China, to see some disruptions in their production. The Express also noted that “damaged facilities and disrupted power supplies are expected to affect aluminum smelters.”

In addition, zinc smelters in China have halted production, which we expect will result in a definite impact for zinc. Zinc price increases of seven percent were witnessed this week, likely due to fears about the supply base. When we look to the long-term, though, only damaged zinc plants will be affected, since these smelters need more time for repairs. For others, the production is halted short-term for safety reasons and aftershocks. Read more

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