The proactive supply chain managers must determine what roles Latin America should play in their companies' revenue growth and cost minimization strategies.
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.
Once a product is manufactured in Central or Eastern Europe, an effective approach for minimizing transportation costs is to use intelligent load planning to fully deploy a line-haul strategy into friendlier break-bulk locations in Western Europe close to the demand base. This concept is transferable to some extent to Latin America. In the case of Mexican maquiladoras primarily charged with providing lower-cost manufacturing for U.S.-destined goods, this logistics solution can be leveraged. However, it would not be feasible to serve many other Latin American markets from that same Mexican operation due to logistics, security and tax implications. With Miami, one can see the same efficient transportation model used in reverse: getting goods produced in the higher-cost country efficiently distributed to emerging markets in Latin America. Many U.S. product companies hand their products (and potential profits) over to Latin American distributors in Miami to avoid the complexity of transporting, securing and marketing their products in unfamiliar and challenging lands. The question that should frequently be asked by these companies is, "When do I pass that critical threshold where it is no longer in my best interest to work through a distributor network?" The answer will be different for every company, depending on its unique blend of financial goals, products, supply, demand, purchasing power and partnerships. Partnerships with outsourced supply chain services providers can be invaluable in the decision-making and strategy execution phases, as local market knowledge and accumulated purchasing power are keys to success.
With the upward cost pressures of transportation, security and inventory, how does a company pull off a low-cost supply chain in Latin America? One step at a time and with customized strategies.
Mexico and other Central American countries continue to produce a solid return on investment for companies seeking low-cost manufacturing for North American demand. Companies should work with their partners to choose the appropriate location, considering logistics, security, labor availability and supply sources.
Many companies selling products with relatively low assembly requirements (e.g., software) or that deal with worldwide component supply constraints (e.g., semi-conductors) understand the importance of maintaining a minimal number of inventory locations in the Americas and distributing products via Miami to Latin American markets because the manufacturing or inventory cost savings of having a physical presence in Latin America are significantly reduced.
If a company is targeting a Latin America market such as São Paolo, Rio de Janeiro, Buenos Aires, Bogotá or Caracas because a specific focus on one of these markets would lead to revenue growth, a product-by-product analysis should be performed to weigh the cost and benefit tradeoffs between volume, product costs, duties and taxes, inventory, and transportation. For example, a consumer electronics company may choose to make only certain products available directly to the Brazilian market from within Brazil, allowing other products to continue to be sold through distributor networks. That consumer electronics company may find that it is most cost effective to manufacture the device in one of the many contract electronics manufacturing service providers in the São Paolo area (therefore avoiding the hefty import taxes), then work with a nearby packaging and supply chain services partner to take the product the rest of the way to the Brazilian market. The particular solution that is devised for Brazil will likely be quite different from the best solution for Venezuela. A company must choose the right supply chain tool to address the needs of each challenge.
It is understandable, given the complexity of working with this diverse region of the world, that companies avoid the topic of Latin America supply chain strategies. However, the cost avoidance opportunities and the revenue growth potential require serious consideration. Will you build your own internal Latin America expertise or will you partner? Will you use distributors or a more direct and potentially profitable channel? Should you locate in a foreign trade zone and, if so, which one? There are many questions, but leading companies are asking and answering them sooner rather than later.
About the Authors: Jacob House is director of Market Solutions for ModusLink Corporation, responsible for developing supply chain services and strategy for the Consumer Electronics market segment. Charles Cartaya, regional general manager for ModusLink Corporation, is responsible for all Miami and Latin American Operations. ModusLink Corporation is a leading provider of global supply chain management solutions with more than 20 years experience helping technology companies take inefficiency and risk out of the supply chain for greater return on investment and customer satisfaction. For more information visit www.moduslink.com.