Sourcing in Latin America Opportunities and Strategies for the Latin American Region

Transcription

1 Sourcing in Latin America Opportunities and Strategies for the Latin American Region A GT Nexus White Paper

2 The Economics of Sourcing in Latin America After years of companies flocking to Asia in search of low-cost manufacturing, Latin America is showing strong as the sourcing landscape evolves. Historically, most brands looking to manufacture products abroad set up shop in China, where they were able to counter the longer lead times with low production and labor costs. Now, however, the changing cost structure in China and the trend toward near-sourcing and supply chain agility are causing them to rethink their sourcing strategies. The Latin America and the Caribbean (LAC) region including Mexico, Central and South America, and the Caribbean Basin, has experienced steady growth in recent years, with average GDP doubling over the past few decades and the middle class growing by approximately 0% since the early 000s. Its economies have benefitted from trade agreements like NAFTA, which phased out tariffs associated with trade between the US and Mexico, and CAFTA, a similar agreement across a broader spectrum of Latin America that has been a catalyst for increased exports from the region in recent years. These had an impressive impact: the trade balance between the US and Mexico alone swung from a $.7 billion U.S. surplus in 99 to a $6. billion deficit in 0. Over the last decade, US imports from Latin America have more than doubled. For mid-size firms, or larger firms looking to pilot a single product line in the region, the area is rife with opportunity. Factories are eager to build long-term relationships and will accept smaller orders on shorter timelines. Additionally, because of order downturns in the 000s, capacity is not an issue. Some facilities are able to fill gaps in their manufacturing schedule, which makes them more willing to work with smaller brands. Latin America is not the next China. Labor, energy, and transportation is still more expensive, although the wages are much closer than they used to be. But its proximity to regions where the final products will be sold contributes to shorter lead times and greater agility and efficiency major benefits that are luring brands to the region to compete with the most nimble global supply chains. Fast Fashion and Omnichannel Retailing Consumer expectations around fast fashion have driven down lead times at some brands from 90 days to -6 weeks. Fast fashion chains such as Zara, H&M, and Uniqlo have been employing strategies to get products to consumers more quickly in regions that offer proximity and low enough production costs. Retailers are considering more than just labor costs they re weighing the data on supplier performance and reliability, transportation options, distance to end customers, and the prospect of forging more collaborative partnerships in the region. The Americas proximity to the US means firms can wait longer to make decisions about combinations of styles, sizes, and SKUs to order, which helps them confront this trend more effectively. Many firms are fortifying their omnichannel strategies with technology that allows for visibility into these products as they re being produced and transported, allowing customers to purchase from the same pool of inventory via online, mobile, or instore shopping channels. The World Bank, Latin America: Middle Class Hits Historic High Council on Foreign Relations, NAFTA s Economic Impact

3 FIGURE : Sourcing in Latin America makes apparel companies more agile, shortening lead times and giving customers in nearby markets on-trend clothes. UNITED STATES Latest trends are identified and orders are sent to factories in nearby, low-cost regions Production cycle is completed quickly Proximity allows for faster transportation, shortening lead times by several weeks MEXICO Asian markets have difficulty competing on this front. In China, this is due to sailing times and rising wages. In Pakistan, Bangladesh, and Vietnam, quick turn factory capacity is largely dedicated to European firms and markets, and quality can be inconsistent. The additional cost of air-freight for quick turn goods also erodes the competitive edge of these countries, despite their low wages. Because of this, apparel retailers catering to volatile demand and seasonal trends make up a large portion of companies using Latin America as a manufacturing base. Automotive and Electronics Driving Growth in the Region An interesting result of broad free trade agreements (FAs) has been the easier flow of goods from one country to another throughout production. In addition to textiles, the automobile and electronics industries in Latin America have become pivotal in many brands sourcing strategies. Automotive production has been steadily growing thanks to the proximity of Latin America to a major customer base in the United States. Transportation and lead times are shorter than in the Asia-Pacific region, and wages are still a fourth of those manufactured within the US. Often, as a result of FAs, parts used in these autos will originate in places like Nicaragua, making Latin America an attractive place for n-tier suppliers as well. Mexico Positioning Itself in the Auto Industry Japanese car giant Nissan holds production facilities and R&D centers in Mexico, with its latest $ billion manufacturing complex in Aguascalientes, Mexico. The automotive company is using its Latin American investments to drive a global growth strategy, expanding to a regional headcount of over,000 local employees. Honda turned to Mexico too, for production of its new Honda Fit at an $800 million factory near Celaya, Mexico, proving the country s skill in manufacturing sophisticated autos at relatively low labor rates and loose export regulations. Mexico is poised to have as much as % market share of autos exported to the US by 00 as it builds a reputation as a reliable, cost-effective, and high-quality locale for auto manufacturing. LA Times, Mexico becoming a driving force in auto production, 0

4 The story is similar in electronics. Costa Rica processes integrated circuits from the United States, China, and other countries for re-export under CAFTA. Mexico is one of the largest electronics exporters with companies like Samsung, LG, Toshiba, and Flextronics all investing in production facilities in the country. Local demand for consumer electronics is set to grow significantly, and many manufacturers are investing more in nearsourcing to cover both Latin American and US demand. Maintaining Control Over Local Transport & Logistics For those companies that have yet to set up a solid supply chain network in Latin America, a challenge is to maintain control over transportation and suppliers in the region and still choose the right strategy for each location. While it s often necessary to build new relationships with local transportation and logistics partners, companies must have a system in place that integrates the entire transportation process. Control and visibility is especially important in the Latin American region, where ground transportation has been a target of criminal activity and infrastructure around port facilities is still considered below average by the World Bank. Transportation in general is still very fragmented, with many transactions and regulations complicating the system. However, the risk from these factors can be mitigated. Companies investing in Latin America are able to control their providers and keep manual transactions down to a minimum by adopting cloud-based technology. Their supply chain networks pull data from various transportation partners into a control layer that can alert supply chain managers when a disruption has or is expected to occur. FIGURE : A visibility platform brings together fragmented transportation providers often prevalent in Latin America. Extended Enterprise Visibility and Control Infrastructure TM Control Layer TM PL PL TM TM With the right tools, companies can take advantage of opportunities in Latin America without losing control over their transportation activity. The region remains an attractive place for US shippers and manufacturers, and foreign direct investments are trending upward. As trade and infrastructure continues to develop in places like Mexico, Panama, Peru, and Brazil, having a strong transportation network will be a competitive advantage for global brands.

5 Financing Suppliers in a Tight Credit Market Access to credit and lack of working capital can be major pitfalls when working with Latin American factories. The region has the highest level of partially credit constrained firms behind Sub-Saharan Africa ; in other words, they were rejected from most financial markets and institutions but were still able to receive some funding through alternative means. To counter this, brands can help their Latin American trading partners by leveraging their own financial strength and credit ratings. They can implement supplier financing programs that offer the same lending terms to suppliers as they would receive, improving the suppliers working capital and strengthening the health of their overall supply chain network. Early payment programs can also help suppliers gain a better working capital position. Companies are allowing suppliers to discount orders in exchange for earlier payment, contributing to two important areas: better supplier relationships and greater assurance of supply. FIGURE : Supply Chain Finance in Action: Sellers can leverage their buyers stronger credit ratings to get fi nancing based on buyer-approved invoices. Supplier s Accounts Receivable PO Buyer s Accounts Goods Payable invoice Buyer issues purchase order Supplier delivers goods Supplier invoices buyer Buyer approves invoice for payment; sends confirmation Supplier offered early payment discount 7 6 $ 8 $ Supplier accepts early payment discount Bank funds early payment Buyer makes payment on original due date Bank A Good Long-Term Outlook for Latin America Companies can count on continued long-term growth in most of the region s economies, meaning that the infrastructure and investment they set up now will allow them to reap the benefits for years to come. However, because of the nature of these still-developing countries, it s crucial to not only invest in sourcing but in technology that can monitor and control supply chain activity in a holistic way. With a strong network of suppliers, a platform that can monitor transportation and logistics partners, and a plan to manage risk and supply chain disruption, companies can make the Latin American region a profitable and competitive sourcing location for many of the world s largest industries. Enterprise Surveys, Obtaining Credit in Latin America and the Caribbean