By Jacob House and Charles Cartaya
Companies seeking to get their products to market globally in the most cost-effective manner must seriously consider how they will serve or be served by Latin America. With economic growth rates in Latin America that exceed those in the United States and the European Union, consumer demand will continue to increase, offering new markets to penetrate.
At the same time, the region provides low-cost labor and an attractive alternative for manufacturing goods destined for the North American market. The proactive supply chain managers must determine what roles Latin America should play in their companies' revenue growth and cost minimization strategies. There is not a single approach that addresses the needs of both strategies.
Know the Risks
The supply chain challenges of Latin America are numerous and can be overwhelming for the newcomer to this region. With heavy population centers scattered throughout the vast geography and an underdeveloped transportation infrastructure, physically getting goods to the right markets poses a significant hurdle. Approximately 75 percent of the region's population lives within 200 km of the coast in concentrated areas. Consider the difficulty of transporting product between three of the five largest cities in Latin America: Mexico City, São Paulo and Lima. Aside from the sheer distance between these cities, one would face major geographical obstacles, including the Amazon River and the Andes Mountains. In addition, the lack of economic integration between countries in Latin America and the security concerns associated with low-cost labor produce a recipe for potential supply chain and financial disaster for the unprepared product company.
The major supply chain challenges in well-developed regions of the world are exacerbated in Latin America due to its geographic, political and economic complexities. Although multiple initiatives have been undertaken to unify Latin America into a single trading bloc, a handful of organizations, including Mercosur, Andean Community, South American Community of Nations and Caribbean Community, among others, remain as distinct trading groups. A company familiar with balancing time-to-market, inventory carrying cost, retail relationships and intellectual property protection in the United States — with one country, one currency and a well-developed logistics infrastructure — will find something quite different in Latin America. A region comprised of 20 countries with 18 currencies that is nearly twice the size of the United States requires a different toolset for dealing with traditional supply chain challenges. Perhaps some of those tools will be similar to those used in supply chains that include low-cost manufacturing in Eastern Europe or Asia challenged with getting products to the European market.
Learning from Experience
Let's briefly look at some successful supply chain strategies in Europe and Asia to see what can be leveraged. In Europe, the manufacturing base has steadily moved further east to lower-cost areas such as the Czech Republic, Poland, Hungary, Ukraine and Romania. The manufacturing cost advantage is partially offset by increased security and transportation costs. Each company must find the right balance, depending on their particular product cost, demand and supply profiles.
Supply chain nirvana would be to have the lowest-cost supply and manufacturing base next door to the demand base. Latin America is increasingly in a position to offer this. Companies burdened by transportation costs, lead times and the complexities of Asia-based manufacturing for American markets can turn to Latin American manufacturing bases that continue to offer low cost but, with creative transportation models, can be closer to demand.