Material Handling South of the Border

May 1, 2001
President Bush and Mexico's President Vincente Fox share a vision of free trade stretching from pole to pole.

Seeking the Borderless Economic Border

It was no coincidence that newly elected President George W. Bush chose Mexico for his first foray into a foreign country last February. He and Mexico’s President Vincente Fox share a vision they call a free trade of the Americas zone, stretching from the Arctic to Antarctica. Fox calls it the borderless border.

by Clyde E. Witt, executive editor

Latin America has a rich legacy of cultures and geography. Equally, the importance of global economies, competition and cooperation among business partners has long played a major role in South America. With the advent of the Internet, small countries and companies can become big global suppliers.

There are numerous material handling and logistics concerns facing indigenous companies as well as businesses from other parts of the world as they expand into the Latin American economy. Probably the most critical issues are:

• General globalization of markets;

• Expanding "virtual" economies;

• Need to collaborate.

"What we’re hearing is that our customers," says Robert Valdez, director customer service in Mexico, Exel, "are looking at their supply chains not country by country, but on a regional basis. They’ve approached us, looking for regional solutions to their supply chain needs."

That has implications for information technology, human resources requirements and material management requirements.

While many Latin American countries face similar challenges, rather than take a broad-brush approach to material handling and logistics throughout Latin America, we’ll focus, primarily, on Mexico, a major U.S. trading partner. Mexico exports an estimated 89 percent of its products to the U.S. We are also its leading import trading partner, as it takes in an estimated 75 percent of its imported goods from the U.S.

The acclaimed and despised North American Free Trade Agreement (NAFTA) that went into effect in 1994 continues to enable and hinder the flow of commerce among U.S., Canadian and Mexican businesses.

The current NAFTA issue, effective since January, allowing Mexican truckers unfettered access to U.S. highways, has only recently been resolved. It has the potential for major impact on how U.S. and Canadian companies do logistics with Mexico.

Currently, third-party logistics providers are capitalizing on burgeoning business opportunities, providing everything from huge distribution centers to small, reusable containers.

Finding answers

According to people who do business in Latin America, Mexico in particular, probably the single most important driver these days for improving business is customer service. And in most instances improved customer service is being initiated from within the company as competition heats up.

Ricardo Medina is an engineer and project manager with St. Onge Company, a firm that has been doing business in Mexico for nine years. Medina has spearheaded numerous projects throughout Latin America. He says the landscape, particularly in Mexico, is changing. "Today, the driving force is customer service within the business infrastructure," says Medina. "Deregulation and liberalization of trade agreements and business practices have created more options and flexibility, all at lower costs."

Although progress appears to be slow, the way companies in Latin America will resolve business issues and compete in the near future will be with technology, says Mike Croxton, vice president, Manhattan Associates. "It’s becoming more obvious to businesses that even if they must work with small modules, WMS will improve productivity."

Expanding e-business is a major area that experts who do business in Mexico see as an opportunity. "Business-to-business transactions are growing rapidly," says Medina, "but business-to-consumer, such as in this country, is not happening." That’s not surprising since according to Mexico’s 2000 census, with 100 million people, only about seven percent of its homes have computers.

And then there’s the country’s infrastructure. The transportation infrastructure of Mexico is best described as developing. Only about one percent of its imports, exports and domestic goods move via airplanes. Domestic movement of goods is primarily via highways, and while about one-third of its imported goods arrive via the highway, less than 10 percent leave on the roads.

It is at ship ports where the majority of the transportation activity takes place. Sixty percent of Mexico’s goods arrive and 85 percent leave from the ship ports around the country. The current major highway network consists of 35,953 km of paved roads and 207,307 km of unpaved roads. In an attempt to upgrade its highway infrastructure, currently 14,894 km of roadway is being modernized. There are numerous U.S. and Mexico highway links along our 2,000-mile shared border, with I-35 out of San Antonio, Texas, being dubbed the NAFTA super highway. Currently about half of Mexico’s 26,388 km of railway is also being modernized.

State of the industry

Typical of the growing interest in Mexico by U.S.-based material handling equipment manufacturers, Interlake Material Handling Inc. recently opened a new rack manufacturing facility in Matamoros, Mexico. It is expected that this plant will begin production this summer. The 100,000-square-foot facility will serve markets in Mexico, South America and Southwest U.S.

"We are particularly excited about the impact this facility will have on our business, allowing our existing three manufacturing plants to continue their output, thereby maximizing our ability to fulfill our customers’ rack needs in the U.S." says Mike Gonzalez, president and CEO, Interlake.

Companies that have opted to do business in Mexico have not found language to be a barrier. Medina says there are so many multinational companies in Latin America, it is almost a given that the executives within a company are bilingual.

"I’ve even attended meetings where all the participants are Spanish-speaking, yet the meeting is held in English. I usually prepare my presentations in English," says Medina.

The material handling trend Medina sees is Mexico following a path similar to that taken by the U.S. maybe 15 years ago. "They are focusing on ways to improve productivity," he says, "but there is also a lot of activity toward improving customer service — particularly in terms of improving delivery times."

So, he adds, the simple answer is, if you can pick orders quicker you can load the trucks quicker and be on the way quicker.

But that raises the question of labor, one of the big issues when material handling and automation are being discussed. In general, labor is less expensive in Mexico so it is difficult to justify full automation. The challenge is balance. "What many companies like to do," says Medina, "is bring in handling devices that help employees be more productive or do a job in a safer way."

Worker safety was one of the early pronouncements of the NAFTA agreement: to apply safety measurements to jobs. For example, truck restraints at loading docks were rarely used. When companies were made aware of the costs associated with accidents, the use of restraints became more popular.

3PLs making headway

Using someone else to do your distribution — and more — is an idea just now taking hold in Mexico. The concept is being imported along with other business practices by the multinationals. Some large manufacturers, such as Procter & Gamble, use third-party logistics providers (3PLs) almost exclusively. (See sidebars.) Emerging companies want to deal with more integrated supply chain providers; they want efficiencies across their supply chains. They want to improve the visibility of their inventories across the supply chain. They’ve found that 3PLs are the solution to these and other material handling problems.

For example, in Guadalajara, Exel does everything for its client from receiving inbound material for manufacturing, storing the material until it’s needed at line side, production line feeding, removal of finished product and storage in the warehouse. It then does the final pick-and-pack operations and outbound transport.

"The ability to share resources — people, material or processes — inbound or outbound, is where the customer perceives value," says Valdez. He adds that the Exel philosophy is as complicated as it is simple: to follow our customers around the world to develop partnerships, sharing best practices from one company, country or industry to another.

Generally, the handling of products in Mexico is more manual than in the U.S., except for sea containers, which are handled with contemporary equipment. The real challenge for material handling managers in Mexico starts when the unit loads have to be broken down and mixed loads created. This activity is becoming more commonplace as huge retailers such as Wal-Mart and P&G demand mixed palletloads.

In the past, achieving an optimal size palletload within the distribution centers was not a matter of huge concern. The quality of the pallets was marginal and repairs to damaged pallets was an everyday event. Now, because of competition and the push for better customer service, pallets are being seen as an important route to improved customer service.

The lesson being learned is that when managers optimize the load for the customer, they also optimize service within their own warehouses. They are learning that whereas they might be able to maximize the cube of the trailer by floor-loading cases, service (speed) can be improved by unit loading. Also, case loading takes a lot of time at the dock, and schedule flexibility is lost. Often the number of dock locations becomes a consideration when the managers are assessing on-time delivery programs.

Dave Orozco, regional sales vice president, RiteHite Corporation, has been working on projects in Mexico for about four years. He says the level of dock-safety awareness is increasing.

"For the most part, companies from the U.S. are bringing to Mexico their corporate safety concerns," says Orozco, "which in many instances is new to the business culture there."

He adds that the challenge of a wide variety of truck sizes is often overcome by the simple solution of longer dock levelers.

"In this country, the dock manager knows what kinds of trucks will be at his dock 95 percent of the time. In Mexico, you never really know [what size vehicles will arrive] at many companies," he says.

While some of the new installations his company has done for clients are state-of-the-art, for the most part equipment like trailer restraints are not used. Whether this is a matter of economics or ignorance of dock safety, Orozco says the situation is changing for the better as companies learn the costs of accidents.

A related issue is: If the shipping company automates its operations, will the receiving company be able to match the level of automation on its end. Sometimes the receiver does not have the equipment to handle full pallets. Medina says partnerships, even financial assistance programs, are developing among companies to assure trading partners can all benefit from automation.

Medina says part of his job as a consultant is to make the client aware of safe work practices and the proper operation of equipment. This is done with the aid of videos provided by manufacturers as well as animation created in-house.

"Even though automation is limited," says Medina, "we still show the customer what could be. We put together five- or seven-year plans in hopes that they will eventually be able to change and upgrade systems."

The more highly automated companies seem to be in the pharmaceutical industry. These companies are motivated by the need to track everything they produce along with stringent cleanliness requirements. As a group, companies in this industry tend to have the financial wherewithal to lead the way in automated material handling systems.

A new culture

A dozen years ago in the U.S., we often spoke of changing the work culture within our companies. Hardly anyone talks of changing the culture anymore, yet that is precisely what is taking place in Mexico and throughout Latin America. It takes discipline to run even the simplest of kanban programs, and that is the lesson being taught in Mexico. The country is rich in natural resources and the people are hard workers. Its business managers are highly motivated, educated, skilled and trained in material handling, often by their multinational employers.

Mexico’s gross domestic product (GDP) was the highest in Latin America last year, up nearly seven percent compared with Argentina’s, which hardly grew, and Brazil’s, which was up less than four percent. And Mexico expects its GDP to be up about three percent this year. NAFTA has been given credit for creating stability in the region’s economy, and NAFTA is collecting criticism for job losses on this side of the border.

If there are any barriers for material handling professionals in Mexico they are minor. Speed of getting new equipment for projects was cited by several of the people we spoke with. But that can be overcome with longer project lead times. Trucks, or the lack thereof, was also cited as a challenge. The truck fleet in Mexico seems to be improving, but at peak times, finding a reliable fleet of vehicles has challenged logistics managers. Information technology is growing in importance and in fact. Although warehouse management systems are limited to larger companies and major 3PLs, smaller firms are learning and growing their communications programs.

The basic business plan in Mexico seems simple enough: Look for ways to improve service levels with fewer errors. Just as the U.S. learned a decade ago, Mexican companies understand the concept that errors — be they in physical production, time or management decisions — are wasteful. And when you eliminate waste, you gain profit. MHM


Working the Border Towns

GATX Logistics Inc. (GATXL) has served Thomson Consumer Electronics (Thomson) since the mid-1980s. Thomson is America’s largest consumer electronics employer and is a market leader in U.S. television, digital satellite system, and VCR sales.

A new one million-square-foot facility in El Paso, Texas, houses the Americas Logistics Center, which provides full-service supply chain support for Thomson’s three television factories in nearby Juarez, Mexico. This center also manages the flow of finished goods across the border in both directions.

At the Thomson MASA factory, GATXL is now loading outbound trucks for direct shipment to major stateside retailers. This cuts warehouse and transportation expenses because fewer shipments are "resting" in El Paso. Direct shipment also speeds up the order fulfillment cycle for a more efficient customer response.

Another new initiative is the vendor-managed inventory (VMI) program designed to reduce the cost of inbound raw material and components. GATXL drew on its VMI expertise with Gateway and Mitsubishi to make this service successful. In simple terms, Thomson now defers taking ownership of certain inventory until it is shipped from GATXL’s El Paso DC to Thomson’s factory.

For this program, GATXL’s development team partnered with Thomson’s information systems group, to coordinate design, implement and train for the TLS-WMS system that tracks vendor-owned inventories until they are shipped to the Juarez plants. Any decrease in finished goods volume due to direct shipments from the MASA plant is more than offset by the VMI program, which began with inventory from 20 Thomson suppliers.

El Paso also houses a calibration lab where Thomson technicians "burn in" the first 50 TVs from any new model production run to assure quality and technical standards. The production units are on Quality Control hold until the "cal lab" notifies GATXL of its approval and releases them for shipment.

Audio and telecommunications destined for Mexican retailers are processed through the center where they are converted and labeled to meet both technical and consumer standards. Existing operations that moved to the new center include custom packaging, returns processing, overpack, and the Americas Kit Center, which exports components to South America.

The Americas Kit Center is a component supply operation for consumer electronics sold in South America. The operation consists of picking, packing and shipping export components. These components are supplied to South American manufacturers, who assemble them with local labor and to area specifications for sale in those markets.


Wiring the Border

A select few service companies have been selected to help accelerate Internet trade among businesses in the United States and Mexico.

The U.S.-Mexico Chamber of Commerce’s Wiring the Border project is scheduled to begin this spring. GeoTrust, one of the participating companies, along with IBM, Telmex, CompUSA/Prodigy, Roadway, GE and Onvia/Globe, will provide identity services to a virtual network of 400 small to medium-sized businesses in 10 states along the U.S.-Mexico border, to help foster cross-border Internet trade and increase revenues.

"We are looking at a breakthrough in how business is being done in Mexico," says Al Zapanta, president of the U.S. - Mexico Chamber of Commerce. "From San Diego and Tijuana to Brownsville and Matamoros — this initiative will significantly cut down the time it takes to complete a cross-border business transaction. I think we will have an acceleration of trade not seen since NAFTA was signed."

Wiring the Border, spearheaded by the United States-Mexico Chamber of Commerce, aims to increase economic development along the Southwestern United States border. "For the first time, companies unknown to one another will be able to conduct significant on-line business," says GeoTrust president Jothy Rosenberg. "Being selected by the U.S.-Mexico Chamber, and the potential to be a primary technology service provider fostering NAFTA trading policies, is high praise for GeoTrust."

By giving businesses on either side of the border access to GeoTrust’s registry of corporate profiles, it eliminates the need for expensive on-site visits to verify the credibility and authenticity of Mexican companies, Zapanta says.

GeoTrust and other selected companies will contribute an "E-Commerce Package" to the U.S.-Mexico Wiring the Border project consisting of personal computers, installation and use of a dedicated phone line, Internet connectivity enabling software of e-commerce packages to profile the companies and to obtain on-line procurements and on-line transportation and logistics.

The objective of this project is to identify businesses along the Southwestern border that have the greatest likelihood of increasing sales, revenues, profits and employment in the private sector, if Web-enabled by having the basic hardware, software, telephonyand connectivity. This will provide access to on-line procurements, credit, capital and environmental research.

The Chamber plans to conduct marketplace seminars in key border communities to introduce companies along the border to the buying offices of large businesses and the federal buying community.


Reusable Containers Go International

IFCO Systems is providing reusable containers to growers and packers throughout California, Arizona and Mexico. Its program, in cooperation with Calpine Container Inc., includes education, training and service to its customers.

IFCO manages returnable systems in Europe and the U.S., as well as South America and some Asian countries.

David Russell, IFCO’s senior vice president, says, "It is now much easier for Calpine’s customers to meet the growing demand for produce shipped in returnable containers, which is becoming a requirement for doing business with some national grocery chains and mass retailers like Wal-Mart."

The program will capitalize on Calpine’s 16 distribution centers in states bordering Mexico.


Following the Trade-Show Route

Recently, there has been a flurry of trade shows and conferences focused on material handling and logistics in Latin America. The Packaging Machinery Manufacturers Institute (PMMI) has held an annual event in Mexico City for several years. The EXPO PACK Mexico 2000 attendance continued to climb a moderate six percent as it has since the show began in 1999. The number of exhibitors and exhibition space have also increased each year.

PACK EXPO International, held biennially, is the fourth largest trade show in the U.S. and draws major international crowds. Linda Bertelsen, marketing manager for Iconotech, a manufacturer of digital case printing equipment, says her experience with Latin America business is positive.

"We had done some business in South America, but it was limited," she says. "So when a potential customer from a company in Mexico contacted us, we invited them to the show for a demonstration of our equipment."

Bertelsen says the people from the company were knowledgeable and asked all the right questions. The sale was made. Reflecting on her experience, Bertelsen says, in developing markets such as Mexico, there seems to be fewer barriers because people are more ready to buy. They know precisely what their needs are. She says in her experience working with multinational companies in Latin America, decisions are made locally.


Exel Helps Unilever in Brazil

Unilever selected Exel to design, implement and manage the company’s central distribution network in Brazil. The project will be implemented in two phases over a three- to five-year period. When completed, Exel will manage eight distribution centers, including an 800,000-square-foot Master Logistics Center (MLC), and transportation services for Unilever in Brazil.

The network, which will serve Unilever’s Elida Gibbs and Lever operating units, centralizes slow-moving product to reduce inventory and increase fill rates. Exel is also increasing the level of supply chain automation, and replacing outdated processes with more efficient ones, allowing the implementation of advanced warehouse and transportation management systems.

"We’ve had a very successful relationship with Unilever in the Americas and Europe," says Bruce Edwards, president, consumer, Exel. "This agreement allows us to transfer best practices to South America to lower distribution and transportation costs, increase on-time delivery, and improve capital utilization for Unilever."

"The steps we are taking now create a foundation we will build on well into the future" says Pablo Rodriguez, director supply chain, Unilever Brazil. "Relying on Exel for network design and operation allows us to significantly improve operations in the short term while ensuring continuous improvement in the coming years."

Already a key third-party logistics provider in Mexico, the agreement strengthens Exel’s presence in Brazil. Exel anticipates strong growth in its Brazilian operations in the coming years.

Exel’s Integrated Logistics Design Group worked closely with Unilever to analyze the company’s supply chain and local conditions, and to design a network that improves the movement of product throughout the country while supporting future growth.

The first phase of the Unilever project includes construction and management of the 800,000-square-foot MLC in Louveira, located northwest of Sao Paulo City. Exel managed the site selection and acquisition for this facility through its real estate services group. The company is also providing construction management services, selecting Hines Inc. and Turner Construction for the project.

The facility will serve as the hub of the central network, receiving product from Elida and Lever manufacturing plants, and third-party manufacturers.

In addition to the MLC, the central network will include three merge docks, three integrated distribution centers and one regional distribution center, all of which will be managed by Exel. The merge docks are designed to rapidly flow product through the network by combining fast-moving product received directly from manufacturing plants with slow-moving product received from the MLC. The integrated distribution centers will distribute full, palletized truckloads of fast-moving product directly to customers. They will also replenish the MLC, the merge docks and regional distribution centers outside the network.


Mexico Wins Current Round with Trucks

An international arbitration panel ruled in February that the U.S. cannot block Mexican trucks from its highways for safety reasons. There has been a minor case of road-rage between the two countries over the issue of Mexican trucks crossing the border. In an earlier battle, gasoline with high components of lead was an issue. But as Mexico switched to unleaded gas, and the quality of its trucking fleets improved, that issue was resolved.

Now, driver training is the concern. The panel ruled that truckers who apply and qualify for Department of Transportation permits can receive unrestricted access to U.S. highways.

The NAFTA agreement that went into effect in 1994 said that by January 2000, Mexican trucks would have full highway access. President George W. Bush has vowed to open U.S. highways to Mexican trucks that can pass our safety standards.

An estimated 184 transportation companies have applied to do business in the U.S., according to information from Aaron Dychter, Mexico’s deputy transport minister. He adds that Mexico has harmonized its safety standards with those of the U.S.


Siemens Opens Automation Centers for NAFTA Compliance

Siemens Energy & Automation Inc. now has two new PC-based Automation Competence Centers that will provide consulting, engineering and support services for the application of PC-based automation technology.

The Competence Centers are now open in Detroit, and Princeton, New Jersey, to serve customers in the U.S., Canada and Mexico. The two locations join other regional centers that have been established in Cologne and Nuremberg, Germany; Milan, Italy; and Shanghai, China.

Services range from PC-based application support, consulting services, migration, porting and integration services, proof of concept engineering, performance benchmarking, support with the planning and implementation of programs, training and education.

Each facility will be staffed by consultants and engineers who can facilitate the design, planning and implementation of PC-based control solutions.


DaimlerChrysler Chooses Exel for Tire Sequencing Operations

To increase efficiency and further solidify just-in-time manufacturing, DaimlerChrysler uses Exel to manage sequencing operations for its truck assembly plant in Mexico City.

DaimlerChrysler’s truck assembly plant assembles 1.5- and 3.5-ton Dodge Ram trucks for domestic use, producing approximately 367 trucks a day. Sequencing operations involve delivering parts to the assembly line in the order they are used, supporting just-in-time manufacturing.

As part of the contract, Exel has established a tire sequencing operation at DaimlerChrysler’s Ladoga, Mexico, facility, which is 0.6 miles from the assembly plant. Exel will manage the Ladoga warehouse, control inventory, sequence the tires, transport them to the assembly plant, and feed them to the assembly line to support DaimlerChrysler’s just-in-time operations. The sequencing function previously was done at a rented facility eight miles from the truck assembly plant, while the mounting function was done inside the Lago Alberto, Mexico, plant.

"This facility is a key link between DaimlerChrysler and its suppliers, and an invaluable component for just-in-time manufacturing," says Alejandro Marines, operations director. "With the Exel-managed operations in a new location, DaimlerChrysler will be able to reduce shrinkage and transportation costs, free up productive space in the assembly plant, and gain more control over the whole process."

Since the truck assembly plant is located in the Mexico City metropolitan area and has a limited amount of space, the sequencing facility also will provide DaimlerChrysler with room for the possible sequencing of other parts, such as transmissions, engines, fuel tanks and radiators.

Exel also serves as lead logistics provider for DaimlerChrysler’s other Mexico locations, including engine and assembly plants in Saltillo and Toluca. As the lead logistics provider, Exel handles supply chain management services such as integrated logistics centers and transportation administration.

For more on material handling south of the border, visit Click on "News" and look for the "Logistics in South America" Consultant Forum feature.

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