Global Logistics—July 2006

Logistics and Technology On the Rise in Latin America

As an emerging logistics market, Latin America has a lot going for it: low-cost labor, proximity to the United States, and abundant natural resources, among other attributes.

Soon, it will add access to sophisticated logistics technology to the list, thanks in part to a new agreement between SAP Americas Inc., a subsidiary of global IT giant SAP AG, and Miami-based IT consulting firm Neoris.

The two companies formed a strategic alliance to help Latin American businesses address global logistics challenges by implementing adaptive logistics, manufacturing, warehousing, and transportation execution technologies.

Unleashing these solutions in Latin America will help local businesses and multinational companies with a regional presence increase logistics ROI while reducing cost and risks associated with global business, says Claudio Muruzabal, CEO of Neoris, which serves supply chain leaders such as BASF, Cisco, GlaxoSmithKline, and Whole Foods Market from its offices throughout the United States, Europe, and Latin America.

Inbound Logistics recently caught up with Muruzabal to discuss the new alliance as well as Latin America’s growing presence in international logistics.

CM: Latin America is poised to play a leading role in global supply chain networks and help support the world’s energy and resource needs for the 21st century. As one of the world’s most important emerging markets, Latin America benefits from low labor costs and abundant natural resources.

The business sector in Latin America is a key driver for growth—companies are coming into the region from the United States and elsewhere, and they need local expertise and manufacturing, warehouse, and transportation execution solutions.

CM: The demand comes, in part, from regional companies that are increasingly competing on a global stage, sometimes with rivals from India and China. At the same time, U.S. companies, such as Wal-Mart and Lowe’s, are building a stronger presence in Latin America.

Overall, globalization, outsourcing, and shrinking cycle times all impact Latin America’s need for advanced supply chain technology. These same factors also add risk, cost, and complexity to transportation operations.

In Latin America, shippers face a growing market with unique demands. It’s more common there, for instance, to use multi-compartment container trucks capable of shipping frozen and ambient temperature products, because the region has an abundance of small, full-service retail outlets.

It’s also common to see sales en route, and this requires integrating logistics, warehouse management, and sales demand—from the truck to the warehouse.

CM: Latin America is thinking and acting differently about the integrated supply chain because of the emergence of global sourcing and better access to advanced technologies.

Access to these solutions helps businesses solve a critical challenge—linking and integrating ERP systems so they are available in their trucks, warehouses, on the manufacturing floor, and throughout their shipping channels.

Businesses are facing this challenge throughout Latin America—we work with companies in Brazil, Mexico, Argentina, Chile, and other countries. With improved transportation management, companies gain competitive advantages in key areas of business, from order management, purchasing, and warehouse management, to customer service and finance.

CM: Latin America is becoming a central player in the global supply chain. The infrastructure has improved in the last 10 years—not just the roads, seaports, and air transportation, but telecommunications as well. The business culture has also become more global.

Proximity to and familiarity with the United States is one reason for this change. As a result, outsourcing is booming in Latin America. It’s often called ‘nearshoring,’ and it has a large impact on logistics.

Latin America is also learning to compete with China and India, but businesses need to improve the way they manage manufacturing and transportation through emerging technologies such as service oriented architecture, RFID, and mobile applications.

CM: In the coming years, Latin America will continue to grow as a global supply chain leader.

Brazil is emerging as a top supplier of IT expertise. And Mexico is already viewed as the only Latin American country that is a true challenge to India when it comes to offshore outsourcing. That will continue as U.S. businesses rely on Mexican IT firms for supply chain integration.

Speculation about the Panama Canal’s future continues to stir dialogue between the Panamanian government, The Panama Canal Authority (ACP), and local economists.

But for the time being, the 20th-century anachronism is capably and safely meeting the capacity demands of its most important constituents—global shippers.

This is evident in ACP’s second quarter 2006 metrics:

• Panama Canal/Universal Measurement System tonnage increased 5.7 percent to 75 million tons from 70.9 million tons in 2005.
• Total Canal transits increased 3.5 percent to 3,862 transits.
• Despite tonnage and traffic growth, accidents dropped 3.4 percent to 1.04 accidents per 1,000 transits. In 2005 there were 1.07 accidents per 1,000 transits.

Still, one ominous sign of future capacity constraints persists: Canal Waters Time (CWT)—the average time it takes a vessel to transit the Canal including waiting time for passage—increased 15.8 percent to 30.08 hours.

In 2005, the average dwell period was four hours shorter. CWT for booked vessels (ships holding reservations) also increased 3.4 percent to 16.85 hours from 16.3 hours.

Three factors contribute to this anomaly, says ACP Maritime Operations Director Jorge L. Quijano. "First, world trade is booming and demand for the Canal’s services has increased.

"Second, grain exports through Gulf Coast ports to Asia have increased significantly since infrastructure in the New Orleans area has begun recovery from Hurricane Katrina.

"Third, the additional surge in traffic occurred during the Canal’s peak season, creating a backlog," he says.

Global growth trends, however, indicate this problem will likely worsen before it gets better. The Canal is currently operating at 85 percent capacity and will potentially reach its threshold as early as 2009, economists predict.

To accommodate increasing container volume between Asia and the United States, the ACP and Panamanian government are floating a $5.3-billion expansion plan—which Panama’s citizens will vote on later this year—that would add a third lane to the Canal. The expansion project would dig two new channels and larger locks on both ends of the canal, capable of carrying larger post-Panamax vessels.

Some officials are skeptical of the proposed cost and scope of the plans. They argue that the numbers are too conservative while also questioning whether future profits would be directed to the welfare of the country or to foreign enterprises.

But both global ocean carriers and shippers—who will ultimately foot the bill through scaled toll increases and pass-along surcharges—are positive about the proposed plans.

"The expansion will enable more ships to utilize the Panama Canal. It will strengthen Panama financially by bringing considerable revenues, promote development of Panama’s maritime industry, and ensure Panama’s position as a regional maritime center. It would also benefit the growth of regional and world trade," said Captain Wei, president and CEO of China Ocean Shipping Company, in a recent speech endorsing the redevelopment project.

If the referendum passes, the ACP anticipates starting the dig in 2007 and completing the expansion in time for the Canal’s centennial in 2014.

China: Thinking Massive

When it comes to transportation infrastructure, China thinks big. The country is currently constructing Shanghai Yangshan International Deep Water Port which, when completed, is expected to take its place as the world’s largest port.

The Shanghai government plans to spend approximately $12 billion to develop Yangshan into a world-class port that will boast more than 50 berths and an annual capacity of 25 million TEUs. In comparison, the busiest port in the world today is Hong Kong, with a capacity of 20.5 million TEUs. And with an average depth ranging from 12 to 18 meters, Yangshan will be able to accommodate even the largest containerships.

Shanghai’s main port is constrained by its location on the Yangtze River Estuary, where channel depth reaches a maximum 23 feet. This means today’s larger containerships can only ply the port at high tide. So, several years ago, the Chinese government decided to develop a plan to build a deepwater port on nearby Yangshan island.

Shanghai’s Yangshan Deep Water Port Phase 1—consisting of five container berths and 720,000 square meters of container yards, with planned annual capacity of 2.2 million TEUs—opened at the end of 2005. The second phase of the project is to be completed this year, providing four additional berths.

The new port is expected to handle 10 million TEUs by 2010. The new East Sea Bridge connects the port to the Lingang Industrial Park, a large development devoted largely to logistics-related facilities and services. The six-lane bridge measures 32.5 kilometers (20 miles) long. The depth of the port is 15.5 meters (50 feet), enabling 8,000-TEU or smaller containerships to use the port.