In many ways, doing business in emerging markets has a great deal in common with summer, especially from a supply chain perspective. Both are hot topics. Both usually involve some noteworthy journeys. Both can make companies sweat, because even though the practice of manufacturing or selling products overseas is rapidly becoming commonplace, it’s still anything but routine. With that in mind, here are five practical travel advisories about some of the most common logistical challenges that could be coming to an emerging market near you.
Lower Your Transportation Speed Expectations
Although much has been said about the need to repair our country’s aging highway system, U.S. transportation infrastructure limitations are a comparative walk in the park when weighed against the substantial congestion and bottlenecks that often plague emerging markets’ land transportation networks. It’s not just because the latter have a considerably lower highway density.
Among other things, a vast percentage of the roads in these markets are unpaved, and many don’t have more than two lanes. Some are clogged with livestock, as well as people, especially in places such as Mumbai or rural areas of Vietnam. Many experience frequent closures or blockages due to political protests or demonstrations (just ask manufacturers in many parts of Mexico). Additionally, many of these countries’ highway systems were not designed with long-term growth or superior connectivity in mind.
As a result of this, expect for it to take considerably longer to move products from one part of a “typical” emerging market country to another. In India, for example, it’s not uncommon for trucks to travel less than 9 miles per hour for a north-south transit. City-to-city commutes in Colombia can take anywhere from 7 to 24 hours. Just as important, expect the unexpected, because traveling conditions can easily change from day-to-day or even hour-to-hour.
Don’t Expect To Find High-End Warehouses
In an ideal world, it would be easy to find state-of-the-art warehousing space almost anywhere your company does business. In the real world, such space is often difficult to come by in emerging markets where developable land is sometimes at a premium, land acquisition is a tricky prospect, the quality of construction or cleanliness is frequently of lower caliber or all of the above.
For example, in densely developed Asian cities like Hong Kong it’s far more difficult to find ground-floor, single-level warehousing facilities. And in India, cracks or dips in warehouse floors are not uncommon, even in relatively new facilities.
As a result of these things, your company may have to rethink its rigorous facility selection standards when looking for distribution center space in these countries, whether that means settling for a building with fewer dock doors, lower ceiling heights or far more “character” than you’re accustomed to. Otherwise your search for facilities may wind up being far less productive and more frustrating than it should be.
Recalculate Your Ideal Labor/Technology Balance
Achieving the optimal tradeoff between supply chain labor, mechanization/automation and IT can be a complicated balancing act regardless of where you operate warehouses. However, several factors suggest that the ideal ratio you arrive at for your logistics facilities in emerging markets is likely to look very different than it does for similar operations in other parts of the world.
For one thing, the cost of labor in these markets, with the exception of China, is often considerably lower. Thus it’s usually less expensive to have people rather than systems or equipment perform many common distribution tasks. For another, the cost of equipping emerging market distribution centers can be a significantly more expensive proposition, because many vehicles, systems and devices will have to be imported, often with very high duties attached. In addition, it’s possible that the power supplies and Internet connectivity required to support and power any systems and devices you decide to use in these markets will be limited or erratic, increasing the risk of service delays.
Be careful to run some highly detailed staffing and equipment optimizations in every emerging market you enter, because the configurations you ultimately settle upon will probably vary more than you might imagine. And if you do decide to take a more mechanized or IT-intensive approach, consider investing in back-up diesel generators, battery packs and uninterrupted power supply to offset the possibility of untimely disruptions.
Consider Bringing A Traveling Companion
Making your way through the complex labyrinth of tax, financial and social structures that go hand-in-hand with emerging market logistics isn’t rocket science. But if it were, it might actually be easier for the average business to navigate.
Whether it’s the Goods and Service Tax that has to be paid every time goods cross over from one Indian province to another, or the “facilitation” payments that companies must make to ensure smoother product transits or faster facility permitting in many parts of Asia or South America, the average company can expect to encounter numerous regulations and local business practices ranging from the nebulous to the not-always-above-board.
The confusion associated with these myriad and often inconsistently applied rules is a key reason why many companies will often choose to ally with a well-established operator or consultant in the area when establishing logistics operations in emerging markets, at least during the early years. It’s a good way to gain the knowledge, connections and insight required to make a start-up or key transit happen sooner than later — and the best possible way to anticipate and account for many of the potential political or bureaucratic delays you might not otherwise see coming.
Be Prepared To Shift Gears
One of the things that it’s all too easy to forget about emerging markets is that they are very much works in progress.
As these markets mature, the ultra-low wage rates that initially made them so appealing eventually begin to climb and erode the huge cost advantage they once enjoyed over other countries. A good example of this phenomenon is, of course, China, an emerging market that once offered the lowest landed cost for many U.S.-consumed products, has now been surpassed by countries like Mexico and the U.S. itself.
However, that doesn’t mean emerging markets’ business viability is merely a temporary phenomenon either, because as more jobs and higher wages come to these markets, a larger middle class is being formed — one that is highly interested in exercising its buying power (which explains why companies like Amazon are anxious to get a foothold in many places like India.)
What this means from a supply chain perspective is clear: While emerging market networks predominantly start out supporting export activities, they increasingly become about serving domestic market needs as their story unfolds. And so, of course, must your logistics network and operations.
What this means from a business perspective is equally clear: Even if you’re not planning to make a major manufacturing move into one or more of these markets today, don’t underestimate their potential importance as a major source of sales revenue tomorrow. In fact, when it comes to figuring out how to deliver the goods to customers there, the heat may already be on.
Rajiv Saxena is head of supply chain solutions at APL Logistics.