Logistics-related policies have facilitated the spread of global supply chains. During the 1970s, the world aeronautic industry was vertically integrated, with only about 20 percent of the typical aircraft manufacturer’s total value being outsourced. Today, that outsourced share is close to 80 percent. Mexico is taking advantage of this trend by spurring the development of an aeronautic cluster, mainly centered in the state of Querétaro. The aim is to attract global firms and support linkages between them and Mexican suppliers.
One of the foreign firms attracted to Querétaro was Bombardier, the Canadian aircraft manufacturer. Cost advantage, proximity to North America, and the free trade agreement among Mexico, Canada, and the US (NAFTA) were among the pull factors for Bombardier. But these incentives were complemented by a series of logistics developments, such as large investments in the Querétaro airport. With specialized warehouse services and one of the longest runways in the country, the airport sits at the convergence of Mexico’s road, rail, and telecommunications network, thereby facilitating multimodal operations and allowing Bombardier to ship parts to Wichita and Toronto for assembly much more quickly than if they had been produced in China. In fact, Bombardier’s plant is located within the perimeters of this airport.
Bombardier was attracted to the cluster by the massive transport infrastructure investments made by the state government. Nevertheless, a number of logistics issues also needed to be addressed to guarantee smooth operations of the company’s supply chain. For instance, when Bombardier started its operations in Mexico, the federal customs office was located in downtown Querétaro, not at the airport. The authorities initially insisted that every component be brought from the airport to downtown for customs clearance, and then shipped back to the airport, where the Bombardier factory is located. This extra step increased time and costs for customs clearance. Eventually, the federal government established a customs area at the airport.
Another soft policy measure was the signing of the Bilateral Aviation Safety Agreement with the US, which allows Mexico’s civil aviation authority to certify parts and components produced in Mexico. This development essentially eliminated one step in the supply chain, which considerably reduced costs and time because components and parts no longer had to be inspected in the US before being shipped off to the assembly locations.
Basso in Argentina
Since the 1990s, the automotive industry has become more global with the growing importance of FDI in developing countries during recent years. This shift in global production resulted from a significant organizational change in which the Ford model was replaced by the Toyota model, which prioritizes production flexibility, quality, and speed. Assemblers started delegating more design responsibilities to component suppliers, urging the latter to supply them with efficient technological solutions.
One of these component suppliers is Basso, a producer of combustion engine valves, located in Rafaela, Argentina. The firm makes valves for automakers (e.g., Peugeot, Ferrari, and Ford), motorcycle producers (Harley Davidson), and farm tractor producers (John Deere). Its clients also include engine builders in competition and high-performance markets and aftermarket engine rebuilders.
Basso has been able to compete globally due to its high-quality customization of products and a strict commitment to provide just-in-time delivery services, the demanding mode of production that became widespread with the emergence of the Toyota model. Logistics is key to the firm’s business, and its just-in-time delivery service—which coordinates storage, transport, and inventory—is one of the firm’s main distinguishing features.
Complying with just-in-time shipment commitments is not easy, however, particularly when about half of the company’s clients are located more than 8,000 km away. Basso orchestrates a logistical system that makes customers feel that such long distances are not relevant.
One change that was fundamental to the company’s ability to fulfill its delivery commitments was the creation of an Argentine customs office in the city of Rafaela, a move that resulted from joint action by businessmen and city officials. The new customs office enables Basso to clear every export and import operation in Rafaela without the need to do so at the Port of Buenos Aires. Since the valves that are shipped from Rafaela already have customs verification and approval, delivery is much more rapid.
Despite these advances, the company must still plan for possible logistics problems, such as roadblocks or strikes at the ports. For example, the firm maintains a permanent stock of goods on ships and in warehouses, a practice that increases its inventory costs. As such, while the firm benefits from facilitated customs clearance, it incurs other costs in dealing with uncertainty in logistics.
The examples of Bombardier and Basso illustrate that creating an adequate logistics system is not only about big physical infrastructure works, but also about the less visible but perhaps equally important soft policies related to logistics.
Strengthening Business Associations: Brazilian coffee growers and the Illy supply chain
For decades the worldwide coffee business was structured almost exclusively around the commodity model prevailing when coffee was regulated with a target price in the international market and an allocation of export quotas among producing countries. The collapse of the system in 1984 generated economic incentives for the development of a market in which coffee could be differentiated by quality or processes (e.g., organic).
The Italian firm Illy, a medium-sized roaster, went to Brazil, attracted by the high quality of the country’s coffee cherries. It quickly discovered that problems in processing the cherries into quality coffee were mainly due to the lack of incentives for producers to invest in high-quality production methods. Illy created an award for the best coffee beans and established a price differential to reward quality. But the company did not teach prospective producers the precise characteristics of superior coffee and how to identify these characteristics. Some of this knowledge is tacit, and its acquisition requires a great deal of practice and learning.
The information the growers needed was ultimately provided by an intermediary: the Brazilian Specialty Coffee Association (BSCA), which received the support of the Brazilian Trade and Investment Promotion Agency. BSCA developed a special classification system, a certification scheme, and a technical training program that enabled many growers to learn how to identify the characteristics of a high-quality coffee. This eventually enabled some of the growers to reach Illy’s standards and join its supply chain.