Turnkey Operations Model in Mexico: What is Contract Logistics?

In today’s fast-paced manufacturing environment, efficiency and reliability are paramount. One way manufacturers, especially those involved in nearshoring, can achieve this is through contract logistics. But what exactly is contract logistics, and how can it benefit your business? Let's break it down.

What is Contract Logistics?

Contract logistics refers to the outsourcing of resource management tasks to a third-party logistics (3PL) provider. These tasks can include anything from warehousing and transportation to inventory management and order fulfillment. Essentially, contract logistics providers take over the logistical operations, allowing manufacturers to focus on their core competencies.

Objective of Contract Logistics

Increased service levels by being close to customers through 3PL, having ability to have presence in Mexico without investing in facilities - simple manufacturing for export.

Vendor Management Inventory

Vendor Management Inventory (VMI) is a supply chain management strategy where a vendor (supplier) takes responsibility for managing inventory levels at a customer's (manufacturer) facility. This strategy often benefits maquiladoras (or IMMEX facilities) where companies can import materials and components temporarily without paying import duties.

Key features include:

• Vendor Responsibility: The vendor is responsible for replenishing inventory as needed, ensuring that the customer has the right quantity of materials at the right time.
• Inventory Placement: Inventory is typically stored at the customer's facility, near the production line, to minimize handling and transportation costs.
• Tax Benefits: Under the IMMEX program, the vendor can import materials temporarily without paying import duties, which can significantly reduce costs for both the vendor and the customer.
• Reduced Lead Times: By having inventory on-site, lead times for materials can be significantly reduced, improving production efficiency.
• Improved Customer Service: VMI can help ensure that the customer has the materials they need when they need them, improving customer satisfaction.

How does it work?

PRODENSA-WISDOM warehousing and logistics capabilities enable companies to extend their service delivery and order fulfillment for clients, both domestically and internationally. Through the IMMEX Program, companies can also perform final assemblies before distribution. This integration allows for streamlined operations tailored to the specific needs of export markets or local distribution.

• IMMEX Certification allows imports at 0% VAT and virtual transfers to other IMMEX entities in Mexico
• Authorized Economic Operator certification gives extended timeframe (up to 36 months) for temporarily-imported materials 

Example.

Consider an automotive parts supplier based in Germany that needs to efficiently distribute parts to assembly plants across North America. Using Prodensa’s Contract Logistics solution, the supplier can store parts in Mexico, perform simple final assemblies as needed, and/or packaging modifications, to quickly distribute them to automotive manufacturers in both the U.S. and Mexico. This setup minimizes logistics delays and reduces storage and transportation costs.

Pros & Cons of Contract Logistics

As with all turnkey operational models, it is not right for all business goals in Mexico.

Pros.

• End-to-End Visibility: The WISDOM Connect system offers complete visualization of logistics processes for better control, and responsiveness.
• Local Warehousing Benefits: By storing goods close to their destination markets, companies can offer higher service levels and faster delivery to clients.
• Streamlined Import/Export Operations: Simplifies logistics management, enhancing the efficiency of the supply chain for exports.
  

Cons.

• Activity Limitations: The scope of work is limited to final assemblies and packaging.
• Regulatory Compliance: Requires strict adherence to IMMEX regulations, which may limit the types of activities companies can perform under this program, i.e. not suited for processes that transform inputs into final goods.

Beneficial for:

• Industry Stability: Best for export-oriented companies that require efficient logistics setups and want to expand their service offerings by having a local footprint in Mexico, and reducing logistics costs overall.
• Service Extension: Ideal for businesses aiming to enhance their client services capabilities through faster order fulfillment and localized solutions.
• Strategic Expansion of Existing Operations: Great solution to minimizing inventory in Cost-Center facilities, allowing them to take full advantage of their operations floor for value-added activities, while increasing their inventory management capabilities and reducing operational costs.

Not suitable for:

• Value-Added Manufacturing: As activities are limited to assembly, packaging, and customer management, Contract Logistics is not suited for companies seeking to establish a manufacturing operation in Mexico.

Conclusion

Contract logistics offers manufacturers, especially those involved in nearshoring, a powerful tool to enhance operational efficiency and reduce costs. By outsourcing logistics tasks to a specialized provider, you can focus on what you do best—creating high-quality products.

If you’re ready to optimize your logistics operations and take your business to the next level, consider exploring contract logistics solutions. For personalized advice and solutions tailored to your operations, contact us today.

By understanding and implementing contract logistics, manufacturers can not only streamline their operations but also gain a competitive edge in the market. Ready to get started? Reach out to our team of experts and see how we can transform your logistics.