Issue identification
When the American Free Trade Agreement (NAFTA) was enacted, the Martin’s Textiles was plunged into a major survival challenge (BrainMass par. 1). The agreement was adopted with the aim of tariff elimination. In addition, the quota system was introduced for all imported textile products from Mexico and Canada. Worse still, the company had been making progressive losses for a couple of years.
Some of the long term customers were also threatening to quit doing business with the Martin’s Textiles because the company had raised its prices. As a result of these developments, the Chief Executive Officer of the company (John Martin) had to decide whether to transfer the production of textiles to Mexico (BrainMass par. 5).
However, making such a decision was not easy for John bearing in mind that the production plant in New York had several advantages. Nonetheless, relocating the production to Mexico would probably minimize the cost of labor and also diffuse the possibility of the company going into bankruptcy.
Analysis
Although the Martin’s Textiles has been in operation for over 100 years, the current market competition is proving to be a major challenge. For example, there are several cheap imports from the Asian markets as well as the local production. The cheap goods are hurting the domestic market.
In addition, the cost of labor is apparently high ($12.5 per hour). The high cost of labor has been occasioned by the fact that all the employees of the company are unionized. If the company decides to operate in Mexico, the labor expenses may be sustainable (BrainMass par. 9). The high cost of competition is indeed compelling the company to seek other austerity measures.
Moving the production of textiles to Mexico has its own merits and demerits. For instance, Mexico is well endowed with a cheap human resource base. In other words, the company will be in a position to sustain the cost of labor. Second, tariff elimination implies that the overall cost of production will be lowered. Consequently, the company will revert to profitability.
As much as the above benefits may be derived, it is still not clear whether the purported production advantages will be practically realized. To begin with, it cannot be an easy task to secure a committed, reliable and loyal workforce as it is the case with the operations in the New York textile plant (Myers, Bryce and Kakabadse 17).
Workers in this textile factory pledge their allegiance to the company. They are also very productive. Such benefits cannot be guaranteed when the company will move its operations to Mexico. The current labor relation with employees is indeed great because most of them have worked for the company for a long time.
A simple SWOT analysis can be used to demonstrate the possible strengths, weaknesses, opportunities and threats that may be realized if the company moves to Mexico (see appendix).
Recommendations
The company should relocate part of its production to Mexico in order to enjoy the trade benefits that will be accrued from the NAFTA partnership. The remaining textile plant in New York should be downsized both in terms of employee reduction and the scale of production.
Since the cost of labor in Mexico is considerably low, the Martin’s Textiles will return to profitability within a short time. Finally, the company should seek cheap sources of raw materials and also expand its production lines according to the needs of the market (Zahra and Covin 451).
Appendix: SWOT analysis for John Martin’s Textiles
Works Cited
BrainMass. Martin’s Textiles case: Shift production to Mexico NAFTA. 2014. Web.
Myers, Andrew, Mairi Bryce, and Andrew Kakabadse. “Business Success and 1992: The Need for Effective Top Teams.” Management Decision 30.6 (1992): 17. Print.
Zahra, Shaker and Jeffrey, Covin. “Business Strategy, Technology Policy And Firm Performance.” Strategic Management Journal (1986-1998) 14.6 (1993): 451. Print.