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WORLD OF INDUSTRIES - LOGISTICS 3/2017

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WORLD OF INDUSTRIES - LOGISTICS 3/2017

Iguazu Falls on the

Iguazu Falls on the border of Argentina and Brazil NEWS AND MARKETS Challenges One quick look at a map, and it becomes clear that the region’s sheer geographic size presents a challenge. The distance between São Paulo (Brazil) and Santiago (Chile), for example, is 2,500 km, around the same as the distance between London and Moscow. The distance between Buenos Aires and Bogota is 6,800 km, the same distance as from London to New Delhi. The region’s natural barriers, like the Andes mountains and the Amazon river, add further cost and complexity to the transport picture. Moreover, rail network is poor and ports are overcrowded. Countries in the region rely heavily on roadways. Road transport is slow and more expensive than rail or ship. All these factors contribute to higher logistics cost. Shipping a 20-foot ocean container from Mexico to Brazil costs about the same as shipping a container to Brazil from China. Also, local transportation is very expensive, it costs more to move a container between major cities in Argentina than it would to ship that same container from Europe to Buenos Aires. Although the continent as a whole has the characteristics of an emerging economy, it is not a true low-cost region. In South America, logistics costs range from 15-35 % of the product value and even higher for small and medium‐sized enterprises (SMEs) at about 40 %. Labor costs, for example, are significantly higher than those of China, up to 3.5 times higher in the case of Brazil. This is true not just for warehouse, distribution center, and factory workers but also for managers and professionals. The cost to employ an experienced supply chain manager in Brazil, for example, is now similar to that in the U.S. Strategies for success Despite the above challenges, some local and foreign companies have built extremely successful businesses in South American. A fundamental part of this success is to adapt a region-specific approach to the design and execution of the supply chains, together with targeted investments in the region. Let’s review some of the key elements of these strategies. Increasing localization: The supply chains with a larger local footprints are designed accordingly to meet the requirements of local tax and duty regimes or to overcome import quotas. The benefits of this type of tax-efficient approach can be considerably large, often outweighing the higher costs of local manufacturing. It also allows companies to be faster and more agile in a volatile market. Split into regional clusters: An efficient supply chain must take into account the long distances, geographic terrain, languages barriers and income differences in South America. As a result of these complexities, most large companies operating here choose to segment their supply chain into regional clusters. Within a clusters, companies must then ensure that purchasing, manufacturing, sales, warehousing, and distribution assets are located in a way that balances cost, service, and local taxation. Strategies to beat high market volatility: Companies need to create their strategies to suit the market realities. For example, one consumer goods company manufacturing in Argentina, found that supply to Brazil was affected by variations in the time required for goods to clear customs at the border, which varied from a day to several weeks. To minimize the effect of delays, the company monitored border transit times and dynamically adjusted its safety stocks in Brazil, increasing them when border congestion rose and cutting them back to reduce costs as goods began to move more freely. This sort of strategic agility can have a swift and significant impact on supply chain costs and efficiency. In the recent years most South and Central American countries have realized the significance of efficient logistics networks and have taken some measures to improve this element of their markets. But the region still lags behind. These countries will have to attract heavy investments in the logistics sector in order to improve their competitiveness and integrate in the global supply chain. Photographs: Fotolia WORLD OF INDUSTRIES – INTRALOGISTICS & DISTRIBUTION 3/2017

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