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.