Spend Matters welcomes another guest post from Joel Johnson of GEP.
There is general consensus among procurement professionals that Latin America lags five to ten years behind developed markets from a supply chain and procurement maturity standpoint. Challenges range from an unstable credit market to deficient infrastructure. Among the many factors contributing to a complicated and costly procurement environment, the lack of free trade agreements stands at the forefront.
There are currently no free trade agreements governing Latin America as a region. When it comes to procurement, this leads to high tariffs, insufficient transport links, and customs delays. A legacy of regional trade blocks is compounded by a protectionist sentiment that remains pervasive throughout many of Latin America’s largest economies. These conditions are particularly detrimental considering that many of the large manufacturers in the region remain highly reliant on imports for production. For procurement executives, it is essential to account for the current state barriers while also remaining cognizant of economic integration trends that have the potential to impact future supply chain operations.
Procurement teams must confront the practical challenges of an underdeveloped supply market in those regions where supply chain evolution is hindered by a lack of free trade agreements. Production markets benefit greatly from economies of scale and specialization, both of which are currently limited in Latin America’s trade environment. In certain countries such as Venezuela, over 50% of direct materials are imported, contributing further to the challenges associated with inter-country trade. In general, variable lead times must be counteracted by increased inventory levels, and a changing political and economic landscape must be closely monitored to ensure compliance with current legislation and preparedness for legislative changes.
To only take a broad view of Latin America would do a disservice to the regional trade blocs that have taken shape over the years. The trade environment is marked by the following key alliances:
- Mercosur – Comprised of Argentina, Brazil, Uruguay and Venezuela and founded in 1991, it is characterized as a protectionist group, particularly as commodity prices decline.
- Pacific Alliance – Comprised of Mexico, Chile, and Peru and founded in 2012, this bloc is defined by its free trade ambitions which it intends to grow beyond Latin America.
In addition to these regional trading blocs, there are a large number of direct agreements between Latin American countries and many of the world’s largest developed countries. The network of direct and bloc trade agreements in Latin America creates a complex operating environment and does not fully leverage the region’s economic potential. However, many optimistically look towards a period of greater regional economic integration. It is anticipated that this integration would quickly manifest itself into a more efficient supply chain market helping to address many of the challenges faced by procurement professionals today.
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