U.S. 3rd parties hit the Road to Rio

Third-party logistics companies are flocking to Latin America these days. Their goal: to bring U.S.-style logistics to this undeveloped but fast-growing market.

By Toby B Gooley -- Logistics Management, 8/1/1998

You'd think we were back in the days of the Gold Rush. U.S.-based third-party logistics companies are heading to Mexico and South America en masse. They are indeed hoping to strike gold--not with pickaxes and shovels, but with U.S.-style logistics management and information systems. And they are likely to hit paydirt, tapping into a fast-growing market in which demand for products outstrips companies' ability to deliver. In short, third parties have what Latin American companies urgently need: logistics know-how and technology that will help them meet international standards of efficiency and logistics performance.

The need for logistics services in Latin America is being driven by record economic growth. Several factors are contributing to this welcome development. Most important, perhaps, is the region's steady move toward political and economic stability. In recent years, military rule has been replaced by civilian-led governments, and many countries have introduced popular elections. Several heads of state, moreover, are economists by training, an indication of the region's newfound focus on trade as an agent of change.

The positive impact of bringing inflation under control can't be underestimated. Where once inflation roared at an annual rate of 1,000 percent or more--eroding both industrial and consumers' purchasing power by the minute--inflation of 5 percent or less now is the norm. Taming inflation not only has reduced risk for foreign investors, but it also has allowed Latin America to get on with the business of doing business.

Several other developments are fueling market growth from Mexico to Tierra del Fuego. Rising production and labor costs in Asia, along with duty reductions under the North American Free Trade Agreement (NAFTA), are leading manufacturers to shift production to Mexico and other low-cost countries in this hemisphere. The "Mercosur" free-trade agreement, which encompasses Brazil, Argentina, Paraguay, and Uruguay, plus associate members Chile and Bolivia, also is boosting trade and manufacturing capacity within that region.

U.S. third-party providers' entry into these fast-growing economies is good news for U.S.- and locally based shippers alike. Latin America's reputation for unreliable transportation, substandard warehouse space, and inefficient work practices have kept many U.S.-based companies out of that market. They also have hindered the efforts of local companies to sell abroad. If U.S. third parties can consistently offer first-rate logistics services in Latin America, they not only will line their own pockets, but they also will help trade in the Southern Hemisphere grow to its potential.

Standardizing Service

Most of the U.S.-based third parties operating in Latin America are focusing largely on warehouse-based services, such as consolidation and deconsolidation, inventory control, pick-and-pack, repackaging and labeling for local markets, and storage. There also is great demand for import/export management, domestic distribution, transportation management, and logistics information systems, says Len Bennett, chairman and CEO of Enfield Logistics. Enfield's Latin American subsidiary, Celsur Logistica, operates distribution centers in Argentina and Brazil.

In order to offer the sophisticated logistics services their multinational customers demand, most providers are trying to replicate their U.S. operations as closely as possible in Latin America while allowing for local needs that are dictated by custom or by law. There are plenty of roadblocks in their way, however. For one thing, some of these services are either virtually unknown or are still in the early stages of development in Latin America.

Another problem is that the existing infrastructure is not designed to support efficient, high-volume operations. "There are not many quality [distribution] sites," explains Ron Caplinger, vice president of trade development for GeoLogistics Corp.'s LEP Profit International division. "In Brazil, Argentina, and Chile, good warehousing is at a very high premium."

That's why many U.S.-based providers are building their own warehouses and distribution centers. Celsur Logistica, for example, has built a 235,000 square-foot distribution center in General Rodriguez, a suburb of Buenos Aires. It features 69 dock doors, cross-docking capabilities, sprinkler systems, dock levelers, fiber-optic data and voice lines, and many other features that are expected in a top-notch DC in the United States but which essentially did not exist in South America, says Bennett. The company now is adding an additional 200,000 square feet, plus U.S.-style driver dormitories and a vehicle-maintenance center for its fleet of tractors and trailers.

Demand for high-tech warehousing is booming. Last year, GATX Logistics and its joint venture partner, Wackenhut de Chile, built a 330,000 square-foot distribution center in Santiago, Chile. It serves both U.S.-based customers like Kellogg Co. and Chilean customers like Briones, a distributor of consumer electronics, and Sagemuller, one of South America's largest food importers and distributors. "We've only been there one year, and it's already filled to capacity," says Robert Simcoe, vice president/general manager of Latin American business development.

Another example is the 366,000 square-foot distribution center that Redwood Systems is building in Guadalajara, Mexico, for Philips Consumer Communications. Redwood will manage cross-border transportation, warehousing, shipment tracking and reporting, and outbound distribution for Philips' telephones, pagers, and other wireless products. Business is growing at such a rapid pace that Redwood plans to add 110,000 square feet and an additional 65 dock doors to the warehouse by the end of next year.

Third parties also are "importing" U.S.-style standard operating procedures, quality standards, and information systems to Latin America. Most local companies have had little exposure to these subjects and often don't have the resources or education to implement them on their own. Mark Skoda, executive vice president of Penske Logistics, says his company plans to share its expertise with joint venture partner Cotia Trading S.A. in Brazil. "We can help them achieve ISO certifications and we have General Electric's quality practices and Six-Sigma quality control--all those things transfer well because they're not people dependent, they're process dependent," Skoda says.

Perhaps the most important contribution U.S. third-party logistics companies will make in Latin America is in the area of information technology. Because U.S.-based customers demand total visibility of their supply chains, it's imperative that third parties be able to provide information at that level of detail. But the warehouse-management systems and shipment- tracking, inventory-management, and other logistics software that are taken for granted in the United States are not widely available in Latin America. Third parties, therefore, are bringing their own systems with them and making them available to their local partners.

USCO Distribution Services, for example, lets local partners choose to participate fully in USCO's information system or to add USCO's inventory and order-status data to their own systems, says Vincent Gulisano, an executive vice president. Another approach is that taken by American Consolidation Services (ACS), which helps customers manage vendor activities and tracks orders down to the purchase order and stock-keeping-unit level. ACS has fully integrated its bar-code-based tracking and information systems with those of Fastcargo, its partner in Brazil. Integration allows ACS to offer its customers in South America the same visibility of products in transit that is offered to customers around the world, says Carlos Fernandez, vice president, Latin America.

Although the need for sophisticated logistics information systems is clear, implementation is complicated by a lack of necessary infrastructure. "The infrastructure in Latin America doesn't support the upgraded technology we would like to see in the immediate future," says Otto Valdes, trade lane development manager, Latin America, for LEP Profit. A third party that is serving that region has to consider the availability of ground lines and wireless communication in each area, he explains. For example, some logistics companies offer Internet-based tracking of shipments and purchase orders, but that isn't possible in many countries. "It doesn't matter whether it's your own office or not, the infrastructure isn't going to support that," Valdes notes. The answer for some providers, therefore, is to "bring your own." UPS Worldwide Logistics, for example, has its own dedicated phone lines in Mexico that are linked by satellite with the UPSNet information system in the United States.

Logistics service providers in Latin America also must address the widespread lack of experience with automated environments. Bennett of Enfield Logistics says that because many people in Latin America have no contact with computers or software in their daily lives, they often don't understand the technology's importance or its benefits. As a result, employees may not use the system consistently, he says. "There is a discipline to using information systems, and you have to police that," he says. He notes that at one location, managers thought the warehouse-management system was too complicated for workers to use. But when they saw how costs went down and productivity rose, they accepted the system and enforced its use. To help ensure accuracy, however, the software has safeguards built into it that require workers to complete a specific action before it allows them to go on to the next step.

Benefits of Joint Ventures

The issue of meeting service standards while adapting to local cultural, legal, and business needs is a crucial one for U.S.-based third parties. A few, such as Enfield Logistics, UPS Worldwide Logistics, and Redwood Systems, have chosen to go it alone, building their own facilities and hiring their own employees.

Others have formed joint ventures with carefully chosen local firms. These joint ventures hold benefits for both partners, participants agree. "A major integration and collaboration between local and foreign companies is the best option to successfully advance on this route," says Armando Sosto, logistics business adviser for S.A. De Giácomo, USCO's partner in Argentina. "Local and international experience combined with proven information systems and operations will be able to offer the market the services that are being demanded."

Penske's Skoda agrees. Cotia Trading, his company's Brazilian partner, brings market knowledge and expertise in government relations, port operations, export financing, and customs law to the arrangement. "We bring engineering and supply-chain system design capabilities, something that they don't have," he says.

USCO, meanwhile, has adopted a unique approach to partnerships in Latin America. Logistics-service providers in Argentina and Chile are investing in joint enterprises that will allow them to use USCO's name and information systems. In return, they are obligated to follow USCO's standard operating procedures and policies. This arrangement gives them access to USCO's expertise while providing both local and multinational clients with high-quality service, says Gulisano. Another unusual aspect of this arrangement is that all of their training will be managed by Almacenadora InverMexico USCO, the company's joint venture in Mexico. The Mexican operation is highly successful and an excellent model for other locations in Latin America, Gulisano says. Training personnel in Spanish, moreover, removes communication barriers and makes training more effective, he adds.

Guaranteed Growth

The future is extremely bright for logistics outsourcing in Latin America. Executives interviewed for this article said they had received serious inquiries from potential customers in Venezuela, Panama, and Costa Rica. American Consolidation Services already has operations in Brazil and Peru, and will open in Colombia, Argentina, Chile, Nicaragua, and Venezuela by the end of this year.

Rapid growth appears to be guaranteed, but the concept of logistics outsourcing is still so new that third parties will have to work at convincing Latin American companies of the benefits. "Multinational companies in Latin America have experience with logistics and outsourcing through their parent companies," says John Maldonado, managing director-Latin America for UPS Worldwide Logistics. "Usually a domestic company is still in the learning process and it's a longer sell. We have to show them the value added through technology and educate them about what logistics can actually do."

That learning curve is likely to be a short one, though, say third-party executives. The desire and the need for logistics excellence is so great that shippers in some countries are unwilling to make incremental changes, says Mark Skoda. "People are leapfrogging the traditional incremental path to supply-chain management and operational excellence," he says. "They want to know how they can do this quicker and better." U.S. third-party logistics companies may well be the best choice to show Latin American shippers and service providers all the shortcuts.

Who's Operating in Latin America?

Many United States-based third-party logistics companies are operating under their own names or through joint ventures in Latin America. Although service offerings vary for each provider, these companies typically offer one or more of the following: warehousing, consolidation/deconsolidation, import/export management, domestic distribution, transportation management, inventory control, repackaging and labeling for local markets, returns management, light assembly, and logistics information systems. Several also offer a supply-chain design consulting service.

The following are major U.S.-based third-party logistics companies that have their own or joint-venture operations in Latin America. (Note: This list does not include companies whose primary business is freight forwarding and customs brokerage.) For more information on any of these companies, circle the corresponding number on the card in this issue. To obtain information from all of the providers on this list, circle number 127.

128/American Consolidation Services (ACS)

129/BAX Global

130/Caliber Logistics (to start up later this year)

131/Caterpillar Logistics Services

132/Customized Transportation Inc. (CTI)

133/Emery Global Logistics

134/Enfield Logistics

135/Exel Logistics

136/GATX Logistics

137/Menlo Logistics

138/Penske Logistics

139/Redwood Systems