Council of Supply Chain Management Points to Mantenance and Technology as Fundamentals to Improve Logistics in Mexico

With trade between the United States and Mexico setting records when valued through cross-border truck traffic statistics, questions come up as to improvement opportunities for the NAFTA trading partners.

For Erik Markeset, Chairman Mexico City Roundtable, Council of Supply Chain Management Professionals, and managing Director, TSOL, a boutique consulting company focused on logistic operations and strategy, logistics questions such as this happen on a daily basis.

HOW WOULD YOU ASSESS THE STATE OF LOGISTICS IN MEXICO IN 2013?

My assessment would be that the state of logistics serves the country well, but there’s a lot of room for improvement. By that I mean I hear a lot of skepticism about logistics in Mexico, particularly around infrastructure and some of that is justified but not completely. We’ve got decent highways. We’ve got a vast railroad network. We’ve got a number of important ports. From an infrastructure perspective we’re OK; we have to improve.

I don’t think we need more highways. I think we need better maintenance of highways. For example we won’t have additional railroads because those were tracks that were set a hundred years ago, but we need to improve the service on those railroads.

YOU SAID THAT MEXICO MAY NOT NEED NEW ROADS. YET WE SEE GROWTH FROM THE AUTO INDUSTRY WHICH IS CENTERING IN CENTRAL MEXICO FOR ASSEMBLY. WHY DON’T YOU SEE A NEED FOR AN EQUIVALENT OF THE U.S. INTERSTATE SYSTEM IN MEXICO?

When I first arrived in Mexico as an adult, as a professional with somewhat of an intention to stay, I crossed the border in El Paso and I drove through Chihuahua down to Mexico City. I thought that highway was pretty good and that was 10 or 11 years ago and it’s a toll road. I think there is a need for a national highway system. I think we have a lot of it. There are some gaps; for example there’s an important highway that’s being concluded between the Gulf and the northwest. We have a lot of vertical if you look at the map both in terms of rail and highway.

BUT WHAT ABOUT MEXICO CITY AS THE HUB FOR EVERYTHING?

Mexico City is the hub. Everything comes in and out of there. We don’t have a lot of cross-sectional transportation infrastructure — neither railroads nor highways. There’s one that’s either concluded or soon to be concluded that will allow someone to get from the Gulf to the west coast without having to go into the center of the country. I think it does close an important gap. I recently did a survey of some peers because of this whole program of national development that the government is embarking on.

It was the World Bank or the Inter- American Development Bank asking opinions or feedback on what does the country need to do in terms of infrastructure. The feedback I got from logistics executives was,”We need to do a better job of maintaining our roads. We don’t necessarily need more roads.”The maintenance could include widening some of the highways from time to time.

AS YOU TALK ABOUT THESE HIGHWAYS YOU ALLUDED TO THE TOLL ROADS. TO WHAT EXTENT DO TOLL ROADS HELP OR HURT THE TOTAL COST OF LOGISTICS THROUGH MEXICO?

I think the toll roads are good because they’ve allowed us to build highways where we might otherwise not build them. Some toll roads are pretty expensive. There’s some question about what the funds from those toll roads should be used for, either create additional infrastructure or maintain the highways. Some of those highways are already paid for so the revenue from the toll roads, I don’t know if it goes to the state or the federal government. The toll roads, some of them are great.

ARE THEY DISPROPORTIONATE MORE EXPENSIVE WHEN IT COMES TO TOLLS VERSUS WHAT WE SEE IN SOME OF THE U.S. TOLL SYSTEMS?

I agree the tolls are higher in Mexico, proportionately. On the other hand gas and diesel are subsidized so it’s probably cheaper. You compare us to the United States and toll roads are going to be more expensive. Gas might be about the same or in some cases a little bit less. You compare us to Europe and we’re going to be a lot less both on tolls and gas prices.

WHAT ARE ONE OR TWO KEY MESSAGES YOU SHARE WITH POTENTIAL FOREIGN DIRECT INVESTORS IN MEXICO OR THOSE THINKING OF GETTING IN LOGISTICS IN MEXICO?

I tell them that if we look at logistics costs as a percentage of GDP in Mexico we’re higher than we should be. The numbers that I’ve often heard are 13 percent or 14 percent of the products’ cost is related to logistics. In the United States and Canada that number is around 7 percent or 8 percent. In Europe it is about the same but we’re better than some emerging countries against which we are compared. In India or China that number is actually significantly higher but that number 13 percent or 14 percent leaves room for improvement.

Why is that number high? It’s high for a number of reasons, not just related to the cost of moving goods. It’s a full supply chain. It has to do with the cost of inventory. For example with logistics in Mexico we deal with more uncertainty than you might deal with in a fully-developed country like the United States. As a consequence companies tend to stock more inventory than they might otherwise need if they could trust that things would move fluidly. The fact that everyone keeps more inventory than they might need increases this total cost, the cost of doing business.

WHAT OPPORTUNITIES DO YOU SEE THAT WOULD REDUCE NONVALUE ADD WAIT TIMES AT THE BORDER WITH SECURITY BUT RESPECT THE INTENT OF SECURITY?

From a philosophical point of view, I would argue that there has to be, it’s a statistical question. You have to. How do you turn your dials on the risk efficiency trade off? If the issue is slow entry into the United States because of the inspections, you say it’s because of security. But the truth is this predates any security question, I mean. Hasn’t it always been trouble?

FROM A LOGISTICS VIEWPOINT, WHAT ARE CONSIDERATIONS OR ACTIONS THAT SHOULD BE TAKEN IN THE NEAR TERM TO HELP REDUCE THAT TOTAL COST OF DOING BUSINESS?

I think both countries need to implement what was agreed to in NAFTA regarding trucking. I think it’s absurd that we have the situation that we have today. We have an incredibly inefficient border because there are people who prosper from that inefficiency. There are constituencies on both sides of the border.

Number one, let’s respect NAFTA and let’s let the trucks go back and forth. Two, I think that, I’m a supply chain person, I’m a technology person, I think that using technology to bring efficiency and visibility to the supply chains will help address both security issues and inventory issues. The more visibility you have the better you can plan and you can better execute your justin- time supply chain the more you know and the more you see. You don’t have to stockpile inventory all over the place just in case something goes wrong.

WHEN ONE OBSERVES THE EUROPEAN UNION THERE SEEMS TO BE NO PROBLEMS FOR LOGISTICS AND NATIONAL BORDERS. WHY THE DIFFERENCE WITH THE UNITED STATES AND MEXICO?

You’re talking about the European community, which did make a lot of progress in the 90’s. Outside of the European community you do have countries like Turkey. Turkey and Mexico have a huge number of similarities. You don’t have that fluidity between the European community and Turkey. We might never have that same fluidity between the U.S. and Mexico.

I think there are ways to improve. NAFTA is a great agreement and has done a lot for both countries but I think we can take advantage of it further. I think the business of trucks, of each other’s license plates going across, provided the right equipment and the right driver, which is not impossible, should be happening.