Procurement from Developing Countries

Abstract

In 2008, world trade amounted to over $15.8 trillion, and developing countries were the origin of 38 % of worldwide exports. In every case, a sourcing (buying) decision had to be made, and as we shall show, global logistics is both a logical and essential component in these decisions. This chapter first reviews the motivation for global sourcing/procurement and the role of logistics in executing this strategy. Then we indicate how procurement managers and their logistics service providers can obtain the necessary information to evaluate logistics capabilities throughout the world. Finally, we illustrate the importance of global logistics to sourcing/procurement through an Appendix, a case study that spans the U.S./Mexico border.

Appendix: Logistics and Buying for Maquiladoras-The Chihuahua Automotive Case

1.1 Introduction

When the maquiladora program was established, the plants working under this program were located exclusively in Mexican states bordering the United States. As the maquiladora industry developed, some companies ventured into the interior of Mexico, seeking shelter from the high labor turnover rates and more expensive operations costs that had developed in the border cities. The costs for renting a facility in some of the Mexican border cities was up to 50 % more expensive than the rest of Mexico, and even exceeded U.S. rents. Labor turnover rates in excess of 15 % per month have not been unusual in most of the border cities.

Thus, moving to the interior of Mexico was seen as a way to lower production costs and to get a more stable labor force. However, as some maquila plants moved to the interior, they experienced an increase in transportation and inventory beyond their expectations. In addition, certain problems that these plants were trying to solve, such as turnover rates and higher operations costs, started to appear in the new locations.

It turns out that many of these problems could have been either anticipated and/or mitigated if logistics and procurement personnel had shared a larger role in the decision process. Availability of supplies and labor are critical to selecting the proper supplier location, not only based on existing conditions but also based on the conditions that are likely to exist in the medium and longer term. Where prospective suppliers are maquiladoras, it is prudent to determine whether their total costs allow for long term viability. Thus, it is necessary to look at the likelihood that they locate where they can hold on to their work force, as well as economically access a supply base which is still primarily in the United States (see also Rene Villalobos and Ahumada, 2008).

1.2 Evaluating Wage Rates for Mexican Locations

One of the primary attractions of Mexican suppliers has been low wage rates, although these are not as low as those available from China or other Asian countries. However, stability of work force is also important, especially in relatively skilled jobs such as electronics assembly or aerospace. Table 12.11 shows average monthly wage rates for major Mexican cities which host maquiladora operations.

Table 12.11 Prevailing wages and output per employee primary maquiladora locations

Figure 12.4 demonstrates that higher productivity locations are associated, not surprisingly, with higher wages.

Fig. 12.4

Wages versus. productivity for mexican maquiladora locations

Supply managers have often sought out Mexico because of its proximity to markets at a much lower wage rate than standard U.S. wages. At the same time, it is clear that a reliable Mexican supplier should pay the prevailing wage for its specific location. As procurement managers continue to evaluate their options among Mexican maquiladoras, one indicator of the suitability of a supplier is its wage level versus. both expected productivity and local conditions.

1.3 Inbound Maquiladora Logistics

Beyond labor turnover, maquiladoras should display the ability to handle what are often long supply chains that cross the U.S.-Mexico border. Many of the U.S. component suppliers to the maquiladoras tend to be clustered in areas distant from the US/Mexico border, such as in the US Midwest and Northeast. This clustering of the suppliers in regions far from the assembly plants is not unexpected. Maquiladora plants often assemble products that were transferred from a plant that was originally close to those suppliers. When final assembly was moved to Mexico, the suppliers did not follow, although efforts were often made to move the supply base close to the new final assembly location. (The supplier park near the Ford assembly plant in Hermosillo is a notable exception). The longer trans-border supply chain, as well as efforts to set up maquiladoras as just-in-time operations, result in a number of logistics challenges which should be anticipated by anyone planning to source from Mexican locations, especially in the interior. Some strategies for dealing with this complexity are illustrated in the case example below.

1.4 Chihuahua Auto Supply

One automotive components supplier recognized the difficulties with locating in a border city such as Ciudad Juarez, and thus chose a site in Chihuahua, some 250 km south of the U.S.-Mexico border. The plant was designed to operate on a just-in-time basis with its suppliers, located largely in the Midwest and Northeast parts of the United States. As a result, frequent deliveries and relatively small shipments were the norm, but the realities of distance and the presence of the border added to the planned cost and complexity of the inbound supply chain. This practice has increased the level of coordination needed between the supplier, the transportation company, and the maquiladora plant. The task was difficult enough that it was turned over to a third party logistics operator.

Since one of the key performance metrics for this plant is minimum inventory, full truckloads are rarely sent from a single supplier, in spite of the distances involved. Instead, the third party coordinated multiple pickups of small shipments from the various suppliers and consolidation of these shipments into a single truckload for the long distance from the Midwest to Chihuahua. Three factors increase the complexity of the design of milk runs for a maquiladora plant: the geographical dispersion of the suppliers, the distance from the suppliers to the maquiladora plant, and the requirement for small orders to keep inventory levels down. This resulted in the opening of an El Paso consolidation point that could “feed” the Chihuahua operation. We should also note that under current regulations, the U.S. trucks can take the trailer only to the U.S. side of the border.³ At that point, a Mexican truck and driver take over to deliver the trailer to the maquiladora plant on the Mexican side of the border. In the case of the final product, this process is reversed: the Mexican truck crosses the trailer to the U.S. side of the border, where an American truck takes over to complete the delivery within the U.S.

Unfortunately, the plant management was not satisfied with the cost and service levels attained by the inbound logistics operation. They suspected a disconnection between the strategies followed to order from the suppliers, and those followed to plan and schedule the transportation resources to take these supplies to the plant. It appeared that this lack of coordination might be resulting in higher overall costs versus those that could be obtained by making joint material management-transportation decisions.

To assess the efficiency and propose areas of improvement for in-bound supply chain operations for the Chihuahua plant, a team was formed between the plant’s personnel and Arizona State University (ASU). What follows is a summary of the short and long-term recommendations given by this team, and the plans to implement these recommendations.

• Short term Immediate improvement of utilization of transportation resources by:

  • Better designing and monitoring the utilization efficiency of the weekly milk runs used to transport raw material from the Midwest suppliers to the El Paso consolidation warehouse

  • Synchronizing the time and the frequency of orders and shipments of supplies to avoid low truck utilization from the Midwest to El Paso

  • Educating those in Chihuahua who make ordering/traffic decisions as to the cost implications of deviations from transportation policies

• Long term Increase efficiency of truck utilization by opening a consolidation site closer to the suppliers.

• Long term Develop independent and consolidated metrics of efficiency for transportation and inventory, so that tradeoffs of inventory versus. transportation cost and service are tracked on a regular basis.

• Long term Develop enough in-house expertise to evaluate the efforts of the third party logistics company in operating the inbound supply chain.

1.5 Conclusions

Traditionally, the relocation of a manufacturing plant from the USA to Mexico under the maquiladora plant program was driven only by labor cost savings. As shown above, the overall relocation strategy needs to consider labor stability and potential competition for the labor pool, as well as the added logistics costs associated with the move. Especially if a long term relationship is desired, supply management professionals should be sure that productivity and labor rates are in synch at the candidate Mexican suppliers.

On the other hand, a careful design of the new supply chain for these proposed suppliers can result in a plant capable of successfully meeting the demands of the original customer base, as well as becoming a strategic supply point for other operations, either in Mexico or farther south. In particular, for the case of a Maquiladora, the logistics strategy should consider the factors that are inherent to the binational transportation environment, such as the time and added cost to cross the border, longer travel distances, higher Mexican transportation costs and less sophisticated logistics infrastructure in Mexico.

Mexican firms are increasingly asking third-party logistics companies to design and manage the different aspects of inbound and outbound supply chains of maquiladoras, especially when the U.S. customer and/or parent has had good success with logistics outsourcing. However, the transborder environment is complex enough that it is unrealistic to expect third-party logistics companies to provide a complete replacement for internal experience and knowledge: they are a complement. Adequate internal experience and performance tracking systems should be in place to guarantee the best performance of these companies.