Land of opportunity—and challenges

As someone who has spent much of his career managing supply chains in Latin America, Mauricio Ferreira, Latin America Supply Chain Director for Kraft Foods Brazil, is well-acquainted with the challenges and opportunities involved with manufacturing, sourcing, and distribution in that part of the world. In his current role, he heads up the food manufacturer's customer service, logistics, and planning functions.

Like many supply chain professionals in Latin America, Ferreira came to the profession with a background in engineering. He later earned a master's degree in business administration. Prior to joining Kraft, he worked at the consumer goods giant Unilever, beginning his career in plant maintenance and later overseeing manufacturing at a factory in São Paulo, Brazil. He continued to work in various positions for Unilever, including an assignment in Europe, and eventually became the supply chain planning director for Unilever Brazil. In 2009 he joined Kraft Foods Brazil as customer service and logistics director. At Kraft, he has led efforts to boost productivity and reduce inventory levels throughout the country.

Recently Ferreira has seen Latin America's fastgrowing consumer markets attracting companies from around the world. Indeed his own company, Kraft, is taking a careful look at how it can take advantage of economic and market growth there. But, as the CSCMP member explains in this interview with Editor James Cooke, growth creates both opportunities and challenges. Companies that want to succeed in Latin American markets must be fully aware of the unique conditions that affect supply chains in the region, he says.

What are the biggest challenges in running a supply chain operation serving Latin America?
In Latin America, the biggest challenge has to do with the fact that the economies are experiencing healthy growth. As a result of that growth and a lack of investment by Latin American countries, there are three roadblocks: an ill-prepared workforce, poor infrastructure, and a complicated business system with a lot of bureaucracy and dead-end processes that reduce supply chain efficiency. Although governments here have speeded up their efforts to make improvements, unfortunately, these are complex problems that will require time to fix.

The normal, day-to-day supply chain professional's agenda in Latin America is all about finding the right balance between urgent, pressing issues and long-term strategies. On the one hand, there are urgent matters that prevent the company from growing faster in the market. Examples include the import restrictions in Venezuela and the long lead times for adding production capacity in Brazil due to excessive demands for licenses and documentation. On the other hand, you need to build and put in place a strategy to support the sustainable development of your supply chain processes.

Is it possible to run a central distribution operation to serve all regions in Latin America? Or does a company have to maintain a distribution presence in each country?
It depends. Normally, in capital-intensive businesses, longer order lifecycles and lower transportation costs relative to the product cost permit you to set up a network that is centralized in one country. So, if you run a global sourcing unit for power generators, a luxury car plant, or an electronics supply chain, you can centralize distribution.

But if you run a consumer-goods supply chain, you need to have a well-balanced network of warehouses to reach your customers and consumers. You also must keep products close to the point of consumption for a number of reasons. For one thing, you need to keep products fresh to maintain quality, and that requires a short-reach, highly responsive supply chain. You also need an extensive supply chain to deal with the poor logistics infrastructure that can cause long lead times for fulfilling orders. The last reason to have a well-balanced network is to be able to serve both the modern and the traditional trade channels in this market. The latter channel reaches the street-vending activity (via direct selling or distributors) that has a strong presence here.

Would you advise using a third-party logistics company (3PL) to handle warehousing and shipping in Latin America, or would you contract directly with warehouse and transportation operators?
Kraft uses a 3PL in almost all of its operations in the region. However, there is a disproportionate number of companies that still run warehousing and transportation operations with no economies of scale. So this is a "greenfield" market for those [third-party logistics] operators that are willing to take the risk and come to do business in the region.

Are there trucking companies that can deliver products throughout Latin America? Or does one have to contract with a trucker to service a specific country or region?
Although it's possible [to use a single carrier], it is not the rule. The market for trucking companies is very fragmented, with only a couple dozen companies that have revenues exceeding US $1 billion dollars. The market fragmentation also drives a fiercely competitive battle that drives down rates. As a consequence, the trucking companies can make only modest investments in process improvements and advanced technologies that would enable them to develop and compete in international operations.

Moreover, the customs bureaucracy's time-consuming clearance process adds more complexity to this kind of operation. For example, there are regulations in place that prevent one truck from operating in multiple countries. So at certain times of the year, it's faster to drive a Brazilian truck to the Argentine border, switch the load to an Argentine truck, cross the border on that truck, and move the load to the final destination. The customs regulations are very volatile and change frequently based on the relationships between countries.

Are some locations or countries better than others for setting up a manufacturing plant because of lower labor, regulatory, or logistics costs?
There are some free trade areas that have been strategically developed to provide companies with competitive costs. For manufacturing, there are free trade areas in northern Mexico and some areas in the northeastern region of Brazil.

Competitive "shared service" capabilities can be found in Central America and parts of Brazil. These areas combine labor capacity and lower labor costs with tax incentives from governments, and they are situated in "easy to flow" locations for logistics. These places have been developed through agreements between the government and the investing company. As a result, it's possible for a company to receive better or worse [tax] incentives than its competitors. In Brazil, such incentives often depend on the period when you are negotiating. For example, this is a pre-election period, so you can get better incentives now. In a post-election period, you will be assessed the full rate because the new government needs more money.

There are specific zones, such as those for the automobile industry and the maquilas in Mexico, for electronics and motorcycles in the rain forest in northern Brazil, and for the consumer industry in northeastern Brazil. There are also shared-service centers in Costa Rica and for the global call-center industry in the Brazilian state of São Paulo.

One of your accomplishments at Kraft was generating impressive savings through improved delivery productivity. How did you achieve those results?
We have been very aggressive in pursuing an optimized supply chain operation. One of the most important activities we've focused on is choosing the right partners that will be able to join us in a "co-creative" journey to best-in-class operations. We need partners that are able to invest in the best talent, technology, and efficiency in the market—partners that can challenge our status quo and are not afraid to take risks together with us. The key factor in achieving success with our partners is to be very open in sharing business perspectives and our ultimate supply chain objectives.

Another important aspect [of our effort to achieve best-inclass operations] is to look outside our own walls. We are a huge consumer company, and there's a lot of knowledge spread around the world within the company and within our partners—academics, suppliers, customers, and even benchmarking peers in the industry. Our company's leaders have been able to create an "open mind" culture that generates continuous improvements and helps us to be a performancedriven organization. This has inspired us to do more sharing and learn faster.

What advice would you give a supply chain manager who has been asked to establish a supply chain in South America?
First of all, have a very strong strategy beforehand—that will be your compass. Second, the diversity of agendas and the challenges here have led to the development of many highcaliber supply chain professionals, and you should recruit the best talent you can afford.

There are a lot of roadblocks, such as infrastructure, government regulations, market practices, and "guerrilla" competitors that do not operate with a high standard of business ethics, so you need to know and learn the field fast. Also, you should be capable of raising the bar and running an operation with the highest standards, as that will result in a quick payback.

People here want to be successful. They are very creative and smart, and they are prepared to work hard. This is what makes us special: the emotional involvement and passion we add to everything we do. So, enjoy the ride!