Executive Briefings

Understanding Latin America's Supply Chain Risks

Regulatory concerns top the catalog of supply chain risks confronting executives in Latin America--unlike executives in other regions, where labor issues are the paramount supply chain risks. Further, executives in Latin America are more likely than their counterparts elsewhere to worry about foreign-exchange rates and fluctuations in commodity prices--fears that probably reflect the prominence of cyclical, export-driven industries in the region's economic growth. Still, few executives in Latin America or other parts of the world express confidence in the ability of their companies to manage these and other supply chain risks successfully.

These are among the findings of a 2006 survey examining the risks that make it more difficult for companies to supply their customers with goods and services cost effectively, as well as the way companies manage these risks. The 201 executives in Latin America who were polled during this effort (out of a global panel of 3,172 executives) represent a mix of privately and publicly held businesses across a range of industries in Brazil (82 respondents) and the rest of the region (119 respondents). Respondents in Brazil were far more likely than others in Latin America to cite commodities and foreign exchange as worries, which isn't surprising, given the Brazilian real's recent volatility. Likewise, the supply chain infrastructure was a clear concern among executives in Brazil; respondents there mentioned it more often than those in any other country save India.

These concerns echo our experience in Brazil, where complicated licensing arrangements and tax laws that vary state by state also add regulatory uncertainty and risk to supply chain management.
More broadly, the concerns of executives in Brazil reflect the importance to the region's prospects of cyclical, export-driven industries, such as agriculture, energy, and mining, which are particularly sensitive to price fluctuations. Indeed, fully one-third of the executives in Brazil and elsewhere in Latin America cited a short-term decrease in profits as the biggest threat that their companies face from supply chain risks. Fewer than one-quarter of executives elsewhere did so.

How do companies in Latin America mitigate the supply chain risks they face? Like respondents globally, the region's executives were most likely to cite performance contracts with suppliers. Interestingly, however, respondents in Brazil were more likely to choose this option than were executives elsewhere in the world, perhaps owing to the combination of poor infrastructure and vast distances involved in transporting goods in that country.

Executives everywhere agreed that their companies do a "fairly poor" job of mitigating key supply chain risks. Forty percent of the respondents in Latin America rated their companies as, at best, "slightly capable" of doing so--in line with the responses of executives throughout the world. Moreover, about the same proportion in Latin America as elsewhere believed that their companies don't devote enough time and resources to this issue. Fifty-seven percent of executives in Brazil, and 59 percent elsewhere in the region, indicated that their companies undertake either no formal risk assessments or only qualitative ones.

Yet executives in Brazil were twice as likely as other executives in Latin America to report that their companies use detailed quantitative models of cash flows at risk in supply chains. In fact, their companies are more likely to use this method than are the companies of our respondents in the world as a whole. This finding might reflect a combination of Brazil's physical size and level of economic development, which together raise levels of uncertainty around supply chain risks there.

Relatively few respondents in Latin America (or their global counterparts) say that their companies have standards and practices to oversee the mitigation of supply chain risk. Thirty-nine percent of the respondents in Brazil, and 49 percent in the rest of Latin America, say that their companies have no such standards. An additional 20 percent and 10 percent in Brazil and Latin America, respectively, didn't know if their companies had them.

Such findings confirm our belief that precious few companies truly understand the nature and scope of the supply chain risks they face. More should. Companies that optimize the risks and returns of their supply chains often reduce their level of risk and, at the same time, increase their margins. Our findings also suggest that managing supply chains successfully requires considerably more flexibility and creativity in Latin America than in developed markets--a lesson that, in our experience, foreign executives all too frequently overlook when contemplating the region's opportunities.
About the Authors: Muthu Krishnan is a consultant in McKinsey's Chicago office, Eduardo Parente is a principal in the Rio de Janeiro office, and Jeffrey Shulman is an associate principal in the Dallas office.
http://www.mckinseyquarterly.com

Regulatory concerns top the catalog of supply chain risks confronting executives in Latin America--unlike executives in other regions, where labor issues are the paramount supply chain risks. Further, executives in Latin America are more likely than their counterparts elsewhere to worry about foreign-exchange rates and fluctuations in commodity prices--fears that probably reflect the prominence of cyclical, export-driven industries in the region's economic growth. Still, few executives in Latin America or other parts of the world express confidence in the ability of their companies to manage these and other supply chain risks successfully.

These are among the findings of a 2006 survey examining the risks that make it more difficult for companies to supply their customers with goods and services cost effectively, as well as the way companies manage these risks. The 201 executives in Latin America who were polled during this effort (out of a global panel of 3,172 executives) represent a mix of privately and publicly held businesses across a range of industries in Brazil (82 respondents) and the rest of the region (119 respondents). Respondents in Brazil were far more likely than others in Latin America to cite commodities and foreign exchange as worries, which isn't surprising, given the Brazilian real's recent volatility. Likewise, the supply chain infrastructure was a clear concern among executives in Brazil; respondents there mentioned it more often than those in any other country save India.

These concerns echo our experience in Brazil, where complicated licensing arrangements and tax laws that vary state by state also add regulatory uncertainty and risk to supply chain management.
More broadly, the concerns of executives in Brazil reflect the importance to the region's prospects of cyclical, export-driven industries, such as agriculture, energy, and mining, which are particularly sensitive to price fluctuations. Indeed, fully one-third of the executives in Brazil and elsewhere in Latin America cited a short-term decrease in profits as the biggest threat that their companies face from supply chain risks. Fewer than one-quarter of executives elsewhere did so.

How do companies in Latin America mitigate the supply chain risks they face? Like respondents globally, the region's executives were most likely to cite performance contracts with suppliers. Interestingly, however, respondents in Brazil were more likely to choose this option than were executives elsewhere in the world, perhaps owing to the combination of poor infrastructure and vast distances involved in transporting goods in that country.

Executives everywhere agreed that their companies do a "fairly poor" job of mitigating key supply chain risks. Forty percent of the respondents in Latin America rated their companies as, at best, "slightly capable" of doing so--in line with the responses of executives throughout the world. Moreover, about the same proportion in Latin America as elsewhere believed that their companies don't devote enough time and resources to this issue. Fifty-seven percent of executives in Brazil, and 59 percent elsewhere in the region, indicated that their companies undertake either no formal risk assessments or only qualitative ones.

Yet executives in Brazil were twice as likely as other executives in Latin America to report that their companies use detailed quantitative models of cash flows at risk in supply chains. In fact, their companies are more likely to use this method than are the companies of our respondents in the world as a whole. This finding might reflect a combination of Brazil's physical size and level of economic development, which together raise levels of uncertainty around supply chain risks there.

Relatively few respondents in Latin America (or their global counterparts) say that their companies have standards and practices to oversee the mitigation of supply chain risk. Thirty-nine percent of the respondents in Brazil, and 49 percent in the rest of Latin America, say that their companies have no such standards. An additional 20 percent and 10 percent in Brazil and Latin America, respectively, didn't know if their companies had them.

Such findings confirm our belief that precious few companies truly understand the nature and scope of the supply chain risks they face. More should. Companies that optimize the risks and returns of their supply chains often reduce their level of risk and, at the same time, increase their margins. Our findings also suggest that managing supply chains successfully requires considerably more flexibility and creativity in Latin America than in developed markets--a lesson that, in our experience, foreign executives all too frequently overlook when contemplating the region's opportunities.
About the Authors: Muthu Krishnan is a consultant in McKinsey's Chicago office, Eduardo Parente is a principal in the Rio de Janeiro office, and Jeffrey Shulman is an associate principal in the Dallas office.
http://www.mckinseyquarterly.com