Complexities of Latin American Supply Chain

According to an article published in CSCMP's Supply Chain Quarterly, the Latin America region with a total GDP of US $5.5 trillion and more than half a billion consumers presents tremendous potential of companies. However, there are some unique challenges within the region.

1. Sheer geographic size: The distance between Sao Paolo (Brazil) and Santiago (Chile) is 2,500 kms, around the same distance as between London and Moscow. The flying distance between Sao Paolo (Brazil) and Mexico City (Mexico) is 7,500 kms, the same distance as between London and Kathmandu.
2. Density of population: The direct 2,500 kms route from Sao Paolo to Santiago passes within 100 kms of only two secondary cities (Mendoza and Cordoba in Argentina). The top 10 cities in Latin America are 3,900 kms apart on average which is 2,500 kms more than that of Europe. If the concentrated region of Brazil is excluded from the mix, the average increases to 4,200 kms.
3. Low quality of infrastructure: Latin American countries rely extensively on road transportation. For example, in Brazil 60% of the total domestic ton-kms (metric tons times kms traveled) transported per year moves over the road; in Columbia it's 77%, and in Mexico it's 90%. In comparison, the corresponding figure in China is 21% and in US is 36%. Road transportation is more expensive and relatively slower than other modes.
4. High cost of transportation: For example, shipping a 20-foot ocean container from Mexico to Colombia to Brazil costs about the same as shipping a container to Brazil from China or Hong Kong. The transit time from China to Brazil is 20 to 23 days, which is about 10 days lesser than from Mexico to Colombia to Brazil.
5. High labor cost: For example, the labor cost in Brazil is about 3.5 times that of China.
6. High variability in tax regulations and exchange rates: It is not uncommon for companies to maintain idle manufacturing capacity in both Brazil and Argentina so that they can quickly change the percentage of good manufactured in a country in response to changes in exchange rates or tax policies.
7. A significant local footprint: The top four mobile handset makers in Brazil and Argentina each manufacture or assemble locally more than 90% of the products they sell in these countries. The local footprint has largely been driven by regulatory conditions. However, companies have used the local production strategy to customize products as per local preferences (e.g. The subcompact Gol by Volkswagen for the Brazil and Argentina).
8. Typical Latin American supply chain clusters: Given the sheer size of the region, most large companies cluster their supply chain organizations into regional clusters. The following figure outlines these typical segments:
9. Directions for supply chain execution: 
1. Tactical responsiveness: A common strategy is to carry higher risk-adjusted safety stocks than would be typical elsewhere in the world. To control costs associated with higher inventories, companies take steps to improve the overall agility of their Latin America supply chains by constantly monitoring changing supply chain conditions.
2. Strategic agility: Create and rehearse contingency plans to deal with a wide range of possible scenarios and improve ability to collaboratively plan for and reach to unpredicted events.
3. A focus on capabilities: It is important to recognize individual and institutional capabilities to operate in the region, however, a examination using the "maturity assessment" diagnostic tool included in the McKinsey Supply Chain 360 benchmarking suite identifies considerable gaps.
10. Companies that successfully manage Latin American supply chains could increase order fill rates by about 10%, decrease inventory by about 30% and reduce transportation costs by 15%.

 

Source: Branco, J. P., Cabral, L., Kraiselburd, S., Silva, I., and Witty, T. 2014. Building a winning supply chain in Latin America. CSCMP's Supply Chain Quarterly, Quarter 2, 40-47.