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back to index backLATINtalk January,  2006

Latin American Benchmarks Are Route To Better Logistics Performance

Managing logistics in Latin America has always been a challenge for U.S. companies doing business there because of persistently high costs and nagging service problems.

According to a recent benchmarking study by the Latin American Logistics Center (LALC), significant progress is finally being made. LALC is the largest logistics training, education and benchmarking services in Latin America. It has its U.S. headquarters in Washington, D.C., because of its alliance with Georgetown University's McDonough School of Business.

According to LALC founder and executive director Maria Rey, the benchmarking project now has 528 companies registered and providing data on a regular basis. The benchmarking project tracks four types of metrics:

• Financial and cost metrics
• Productivity metrics (orders per person hour at DCs, inventory turns)
• Quality metrics (percent of perfect orders, or POP)
• Demand for Forecast accuracy and velocity metrics (customer order cycle times--domestic and international, supplier replenishment cycle times).

Last year, Latin American logistics costs averaged 16.8 percent of sales, which is nearly double the U.S. figure of about 8.7 percent of sales. According to Rey, the higher cost figures for Latin America are only partially due to lack of consistently good transportation infrastructure, poorer worker productivity and less efficient administration and customs costs. She believes the cost of making mistakes and the cost of rework is the main culprit. If a shipment is late or incomplete, it may have to be shipped again. If an order is wrong, that order has to be shipped again. All of these errors have financial consequences.

"Poor quality is the overall problem," says Rey, "so quality metrics are where we are focusing the greatest attention."

One measure of quality is perfect orders percentage (POP). In the U.S. the POP is about 78 percent, but in Latin America it is only 62 percent. That means that one in every three orders has an error that has to be fixed, which in turn raises the cost of logistics costs.

"Companies in our benchmarking study are using the cost and quality data and to justify investments in new initiatives, especially in inventory planning and in warehouse management," says Rey. "This approach is very positive."

Wholesalers and retailers are keenly focused on warehousing and distribution investment, which has been much lower in Latin America than in the U.S., Europe or even Asia. According to Rey, Asian investment in warehouse technology and material handling averages about $10 per square foot. In Latin America, it is only $3.50 per square foot.

Rey points out that Latin American warehouse investments have been deferred for years on the basis that wages were so much lower there that any type of mechanization or technology was a wasteful tradeoff. The average warehouse worker in Latin America earns only $2 per hour.

"This thinking ignores the cost of all the errors and the low productivity that a totally manual approach produces," says Rey. "Once you factor in these costs, the total cost of warehouse operations in Latin America is not much different from operating in the U.S."

Rey is quick to point out that the benchmarking data shows steady progress in a number of areas.

"In 1999 when we started, logistics costs were nearly 20 percent of sales," she says. "Now they are slightly above 16 percent. In the case of retail and consumer goods, the cost of logistics as a percent of sales is down to about 13.2 percent."

Another area of improvement is customer order cycle times. Just a few years ago, the domestic order cycle time from when the order is placed until it is shipped was about 10 days. Now the order cycle time is down to 5.3 days.

"There is still much room for improvement, but we have achieved a 45 percent improvement in cycle time in just a few years."

Line fill rates have improved in CPG and are now about 90.4 percent, which are comparable with the US. Most of that is pressure from retailers on their vendors. Retailers in LA are very competitive. Foreign retailers such as Carreforre, Wal-Mart are here. The domestic retailers have to compete with them, and they are leaning on their vendors to perform on time arrivals, and order fill rates. "Competition if driving improvement," says Rey.

Source: - GAI

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