4 Ways Companies in Latin America Are Reducing Logistics Costs
Our Latin American logistics practice at Americas Market Intelligence (AMI) provides market intelligence both for logistics suppliers as well as large customers of logistics, like CPG companies to help them benchmark their approach to business versus their peers. Bringing competitive intelligence capabilities to a cost-cutting exercise is a powerful and accelerated method for realizing large savings. Our engagements in this area have revealed a number of ways in which companies can reduce logistics costs.
1) Reduce Overspending on Trucking ServicesTrucking costs can be the largest line item external expense for CPG companies. However, few CPG firms know if they are paying a fair market price for outsourced trucking vis-à-vis their competitors because service contracts are secretly negotiated and can be difficult to compare.
In most of LatAm, the trucking industry is highly fragmented with providers ranging from hombre camiones (owner operators) to sizeable fleet operators and experienced freight forwarders who may own no trucks at all. Choosing a logistics vendor is difficult, to balance costs with reliability and geographic coverage. Small firms are often cheaper, in part because they do not comply with the nation’s safety, environmental, labor or tax laws. Large firms and third-party logistics firms (3PLs) and freight forwarders can be very expensive. Another factor impacting pricing is backhaul. Without a steady flow of backhaul contracts, trucking firms are quickly priced out of the market, as is often the case with freight forwarders and 3PLs who rely on a few multinational clients to sustain their business but do not pursue smaller clients to provide backhaul volumes.
By comparing the freight rates paid, rate models (price per pallet, per trip, per truck, etc.), and payment terms used by a firm’s main competitors, a company can identify distribution lines where it is overpaying its truckers. Armed with this researched evidence, companies can more easily renegotiate their vendor contracts and bring down their trucking costs.
2) Consolidate Cargo with Similar ShippersWhen manufacturers or CPG firms lack enough large freight volumes to be distributed in regions located far from their production and distribution centers, load consolidation with other CPG firms, even one’s competitors, can generate savings. Shifting from the more expensive less-than-truckload (LTL) to a shared (with your competitor) full truckload can save considerable costs.
Another alternative for CPG firms is to identify other manufacturers that could provide return trips, thus maximizing the utilization of the truck and driver. In more mature markets, such a service would be provided by a 3rd party. In much of Latin America, commission based agents charge 7-10% to match truckers with back-haul customers. But for large CPGs who have the volumes to purchase freight transport & logistics (FTL) services, such intermediaries do not exist so it falls upon them to find other trucking customers with whom to share FTL capacity.
3) Avoid Unnecessary Product MovementsRetailers can avoid unnecessary product movements like shipping their products to outsourced packaging firms, which involves product losses and damages by performing secondary packaging and product customization inside their own distribution centers. Usually, CPG manufacturers separate product packaging from their warehousing and distribution operations because companies don’t always sell products in the same quantity and configuration as they are produced in the factory. Some markets and customers require different quantities per pack or different packaging and kitting. Bringing packaging and kitting under one roof alongside inventory and distribution will save time and potentially costs. Additionally, outsourced kitting providers are often willing to work inside the facilities of their clients.
4) Outsourcing or Leasing AssetsTraditionally, Latin American-owned firms tend to be distrustful of outsourcing high value-added logistics services. However, for companies rapidly growing in the e-commerce space, outsourcing their supply-chain management functions enables them to focus on what they do best, marketing and selling their products. Stock-outs are a dangerous mistake for a small high growth company to commit, and yet, in e-commerce is far too common because the e-retailer failed to outsource their often complex logistics.
At AMI we have seen that companies outsourcing their warehousing and supply chain functions to 3PLs not only achieve essential cost savings but also improve customer satisfaction by eliminating stock-outs and providing faster delivery.
In addition, companies in Mexico, for example, are changing the way assets are used by getting rid of underutilized vehicle fleets, warehousing facilities and inventory. They’re doing this by moving to leased state-of-the-art facilities (owned and operated by 3PLs like FedEx and DHL) that offer narrow aisle handling equipment, mezzanines, better layouts and more appropriate storage modes. This move frees up precious working capital, generating significant savings in financing costs.
Manufacturers with demand peaks at the end of the month or during determined seasons can accommodate additional warehousing space or fleets by renting the extra capacity from a 3PL on a monthly (or even daily) basis instead of committing to higher capacities and rents throughout the year.