The events of last September and the transportation delays that followed emphasized the fragility of global supply chains. Add to that the effects of a worldwide recession, and it becomes clear why manufacturers in many industries are rethinking both their cost structures and their sourcing strategies.

Some U.S. businesses, in fact, have begun to question the widely held belief that Asia is the best location for overseas production. Instead, they are starting to think about bringing some manufacturing and assembly work back to the Western Hemisphere. That's not an entirely new concept. Since the implementation of the North American Free Trade Agreement (NAFTA), many manufacturers have shifted some production from Asia to Mexico or Canada. Economic incentives created by Congress, moreover, have made the Caribbean and some Central American countries popular locations for garment assembly.

The big question for companies that are contemplating such a move is whether transportation and logistics in Central and South America can support an influx of manufacturing. Could just-in-time (JIT) manufacturing, for example, take root in South America? Surprisingly, several recent transportation and logistics developments indicate that the answer may be yes.

Since Sept. 11, flexibility and contingency planning have become top priorities for shippers, says Bill Villalon, president of the Americas region for Oakland, Calif.-based APL Logistics. Speaking at the Textiles and Apparel Trade and Transportation conference in New York last October, Villalon said, "Importers and retailers of apparel, auto parts and other time-sensitive shipments need to be more focused than ever on ensuring time-definite delivery in today's volatile, indefinite world." They can do that, he said, if they are able to shift sourcing locations and transportation routes or modes quickly.

The terrorist attacks, Villalon continued, only accelerated some developing trends. Several of his company's customers had already been looking at shortening their supply chains and making them more flexible. "Some of those companies," he noted, "are now beginning to shift some of their sourcing closer to home in regions such as Central and South America."

Reducing time in transit is indeed a concern for manufacturers of time-sensitive goods, says David Hummels, assistant professor of economics at Purdue University in West Lafayette, Ind., and author of the study Time as a Trade Barrier. He estimates that each additional day in transit reduces the probability that U.S. companies will source from a country by 1.0 to 1.5 percent. That's largely because each day in transit adds inventory and depreciation costs that are the equivalent of a 0.8-percent ad valorem charge on manufactured goods, he writes. The effects of time on total cost are most pronounced in "fragmented production" that occurs in a series of steps at different manufacturing and assembly locations, such as is common in the apparel and computer industries. For companies that have been sourcing in Asia and experiencing 30-day or longer ocean transit times, therefore, Latin America's proximity to U.S. and Canadian markets may offer significant cost reductions.

At least one U.S.-based shipper has found that moving production back to the United States and Central America has paid off handsomely. The shipper, which does not wish to be named, is a clothing retailer that had been shipping materials for one of its product lines to Asia. There, the fabric was dyed and woven. Next it was shipped via California to Central America to be cut and sewn into garments.

Since last summer, though, the fabric production, dying and weaving have been done in North Carolina. From there, the fabric is shipped in ocean containers directly to Central America for cutting and assembly. The finished garments are then shipped back to the United States for distribution.

Shifting production back to this part of the world has knocked 50 days out of its production cycle, says a consultant who helped to develop the new supply chain. When the company was manufacturing this product in Asia, he says, it took 80-some days from the time raw materials left the U.S. factory to the time finished goods arrived back in the United States. Now, it takes just 30 days for that round trip. "It still takes the same time to manufacture the fabric, cut it and sew it," he says, "but we can move the container from North Carolina to Central America in just eight days and back again in eight days."

In the garment trade, saving that much time amounts to a competitive advantage. For one thing, it allows the shipper to get the product on store shelves while the design is still "hot." Another advantage is that Central America so far is not prone to the industrial spying that is prevalent in Asia. Thus the shipper can get the product line into retail stores long before cheaper imitations start appearing in discount outlets.

Despite the clothing retailer's positive experience, many people doubt that the high levels of transportation and logistics service that manufacturers need today will ever be available in Latin America.

Numerous challenges to logistics excellence certainly remain, but important progress is being made throughout the region. The Council of Logistics Management, for example, has established roundtables in Argentina and Brazil, and the Supply-Chain Council, an organization that promotes the use of the Supply Chain Operations and Reference (SCOR) model, is operating in Latin America. Several third-party logistics companies, including BHP Logistics and DHL Logistics, are offering two- to four-hour parts replenishment in major metropolitan areas throughout South America. And a number of European and U.S.-based 3PLs—Maersk Logistics, APL Logistics, Crowley Logistics, Schenker, Danzas Intercontinental, and Kuehne & Nagel subsidiary USCO Logistics, to name just a few—have established a strong presence, often through alliances or by purchasing local firms.

On the transportation front, carriers are pushing ahead with their drive to bring reliability to a region that has long suffered from unpredictable service. Germany's Hamburg Süd Group, which blankets South America through its Columbus Line, Alianca and Crowley American Transport (CAT) services, recently introduced six new container ships into the U.S. East Coast-East Coast South America trade.

Another development that bodes well for manufacturing in Latin America is a new weekly, day-definite trucking service that was launched in December by Danzas, the Switzerland-based global logistics provider. Although this service is aimed at cross-border traffic between Brazil, Argentina, Chile, Uruguay, Paraguay and Bolivia, its success indicates that the concept could be extended to intercontinental trade in this part of the world as well.

The new service is possible because it focuses on streamlined customs clearance procedures and tight security, says Michael G.W. Pfeffer, regional operations and ocean freight manager for Danzas AEI Brasil Ltda. Intercontinental. According to Pfeffer, almost all cross-border shipments in the southern part of South America stop at the border, go into storage—sometimes for as long as two weeks—while customs are cleared and missing documents are sorted out, and then go on to their destinations on a different vehicle.

Danzas' service, by contrast, moves shipments in bond, handling them in customs-bonded warehouses and on a single through vehicle. Bonded shipments move quickly through customs checkpoints at the borders—a crucial factor in making day-definite delivery possible, Pfeffer says. Some customers have their own bonded warehouses within factories, "so we can make clearance right on the truck at their plant," he notes. The trucks, which are operated by a carefully selected partner, are sealed under customs supervision at the point of origin. A special security detail accompanies high-value goods on both sides of the border on every route. All vehicles, moreover, are equipped with GPS satellite tracking equipment that sets off an alarm if the truck deviates from a pre-determined route, Pfeffer explains. A dispatcher can remotely shut down the engine and block the door opening if he believes there is trouble.

Though Pfeffer reports that the new service is running well, the amount of effort needed to address security and customs issues shows that nothing comes easily in that part of the world. The recent political instability in Argentina, for example, has forced shippers to reroute some cargo from truck to rail or ocean. Labor problems remain, especially in Brazil, where ports like Santos regularly experience strikes and slowdowns. And inconsistencies and corruption in customs procedures are still a problem in many areas, although that situation has improved in recent years.

Despite those drawbacks, it's likely that Central and South America's proximity to North America will help them continue to attract more manufacturing and assembly operations, says Ed Alterman, director of international development for FedEx Freight.

He predicts that as transportation infrastructure and quality improve, industries that want to cut time out of their manufacturing-to-delivery cycle will shift their attention southward. Companies are likely to keep some or all of their Asian capacity, but when they need additional manufacturing capabilities, they'll turn to Latin America, Alterman predicts. "We won't see the kind of explosive growth in manufacturing that we saw in Southeast Asia, but it will be steady growth."