Knowing where to locate your distribution centers is another key component of a successful global supply chain. In international trade, the cost of man- ufacturing a product can amount to half or less of the total cost. Distribution costs, including handling, freight, warehousing, duty and customs, in-transit inventory, inspections, and returns, can exceed the cost to make the products. Distribution also takes up most of the total cycle time. Deciding where to locate distribution centers, consolidation points, and assembly and repair centers is vital to an efficient supply chain system.
Toby B. Gooley, senior editor at Logistics Management & Distribution Report, suggests that when supply chain managers put together global distribution networks, they should answer this question: Should we locate our distribution centers in the markets we are serving or should we set up a centralized DC outside of them? This question is pertinent whether the company is buying from external suppliers or serving external mar- kets. She offers as an example of the importance of that question as one considers the necessities involved in conducting buying and/or selling in Latin America. In an area that includes nearly three dozen countries and stretches for more than 5,000 miles, she claims, “This burgeoning eco- nomic powerhouse has become critically important to U.S. exporters and importers” (Gooley, 2001, p. 17).
Drawing on her experiences in this sector of the world, Gooley has come up with some recommendations that supply chain managers should consider in their decisions. A top priority she recommends is “availability of reliable, reasonably priced transportation services.” Regardless of the size of the orders and the cycle time for deliveries, you need to “locate your DC where the required transportation services are always accessible.” Many firms shipping by air move their Latin American inventory to a staging area in the U.S. — Miami, Dallas, New York, and other locations offering multiple daily flights, including all-cargo services. In this part of the world, the larger cities have frequent flights, but the air traffic to the smaller cities can be very limited, especially where state-owned carriers are favored.
“U.S. exporters may be able to get low rates,” Gooley says, “by providing backhauls for airlines carrying imports from South America (fish from Chile or flowers from Columbia).” From this aspect, it could be less expensive to ship products by air from the U.S. to Latin America, rather than ship air freight within the region.
136 The Supply Chain Manager’s Problem-Solver
The presence of other transportation services must also be considered. Ocean freight is an obvious alternative and many carriers and sailings are available to get products back and forth in the region, including between countries. “Hub cities like Montevideo, Uruguay,” Gooley explains, “offer frequent service to adjacent countries. One U.S.-based company that has taken advantage of this service is Polaroid. This manufacturer of films and cameras flies products to a bonded facility in Montevideo’s free trade zone (FTZ), then ships the goods from the FTZ by ocean each week to Vitoria in southern Brazil” (Gooley, 2001, p. 18).
Gooley sees another consideration having to do with whether a U.S. location would be preferable to a distribution center in the destination country in terms of meeting market demands while maintaining tight cost and inventory control. She reports that Lucent Technologies made the decision to collaborate with Danzas AEI Intercontinental, an experi- enced freight forwarder, to establish an export center in Miami. From there, “products and parts are shipped to in-country warehouses in the Caribbean and Latin America.” Gregory Johnston, the Lucent executive in charge of logistics for the region, explains the firm’s approach this way, “Lucent’s logistics strategy is to position materials within our warehouse network based on customer requirements for installation, regardless of where the customer is located. Transportation is important, but what counts is a flexible distribution network using technology to streamline and improve the flow of inventory and management of the supply chain” (Gooley, 2001, p. 18).
For other companies not in the fast-paced electronic and high tech- nology industry, shipping directly from a plant to a regional DC in Latin America may prove to be more economical. Large and dense loads tend to ship better in full container loads and are less expensive to move directly from factory to a warehouse in the designated country. But like all products moving from or into other countries, deciding on the supply chain infrastructure, especially facilities for holding and shipping prod- ucts, requires an analysis of all the costs, cycle times, and service trade- offs. All transportation options should be considered — availability of telecommunication services, power reliability, local import and export regulations and norms, and the stability of the economic and political climate. It is not the type of decision making that should be made casually, as there are too many ramifications, and today’s business customer and end consumer is simply too unwilling to put up with anything they cannot find from a domestic source.
Mistake 9: Weak Global Concepts 137