Much of the working capital available to Latin American companies lies dormant in sluggish supply chains and customs cargo warehouses.
BY MANUEL ARAGON
The modernization of customs clearance procedures in Latin America and the Caribbean can unlock a potential source of growth capital for small- and medium-sized businesses engaged in international trade. Time is the ruling metric for modern global logistics and just-in-time supply chains are the goal. Just-in-time logistics require the basic condition of short, transparent and predictable customs clearance transit times where they cross international borders.
This enable firms, large and small, engaged in international trade to use just-in-time air and maritime supply chains to recover and reinvest their working capital more quickly. The Working Capital Reinvestment Cycle measures the time between the outlay and the recovery of the money a company uses as working capital to finance the production of its products or services and accounts receivable. The shorter the cycle time, the higher the level of sales that can be supported by the improved working capital liquidity available to the firm because it can multiply its number of reinvestment cycles per year. Improving the liquidity of the company’s working capital is equivalent to an injection of new capital into the firm.
Michael Dell financed his company’s growth by concentrating on “liquidity, profitability and growth" and achieved extraordinary results. In 1993 Dell sales were $2.9 billion with $220 million of inventory. By focusing on liquidity through the institution of capital efficient logistics Dell achieved 1997 sales of $12.3 billion with $223 million of inventory. Dell increased its sales by 425 percent with a 1 percent increase in working capital.
Unfortunately, fluctuating customs clearance transit times in most Latin American and Caribbean countries create unpredictable bottlenecks in the logistics process, thus undermining the operation of capital-efficient supply chains. In comparison with other regions of the world such as Asia, whose customs authorities measure clearance times in minutes, most Latin American and Caribbean customs authorities still measure customs clearance time in days and weeks. As a consequence much of the working capital available to Latin American and Caribbean companies lies dormant in sluggish supply chains, customs cargo warehouses and just-in-case material inventories. Meanwhile, entrepreneurs elsewhere on the globe are able to use their working capital more productively, becoming more competitive and by so doing, are able to attract new outside capital.
“Money trapped in dormant working capital is money not being used to grow the company,” the CFO Magazine Working Capital Survey 2000 said. “Burlington Northern Santa Fe CFO Tom Hund, Vastar Resources CFO Steven Shapiro, Casey's General Stores CFO Jim Shaffer, and their counterparts place a high priority on converting sales to cash flow," the survey said. "Different as these three firms are, they all make cash-conversion efficiency one of the primary metrics by which they measure financial performance.”
Presidents, Prime Ministers, Finance and Development Ministries in Latin America and the Caribbean seeking to stimulate the growth of small and medium sized enterprises are faced with undercapitalized economies and a scarcity of bank credit and investment capital to finance business growth. They might consider the alternative strategy of overcoming the barriers of undercapitalization by improving the liquidity of the capital already in the hands of these enterprises.
Toyota Motor Company faced the possibility of abandoning the car manufacturing business in the early 1970s because it was undercapitalized as compared to Mitsubishi and Nissan. The automobile manufacturing model of the time required the capital-intensive maintenance of large inventories of the parts needed to build cars. In order to survive as a car manufacturer Toyota would have to find a way to offset the financial superiority of its two main rivals. Toyota’s engineers developed a new supply chain, premised on time definite parts deliveries from suppliers within a few hours driving distance from the assembly points. This supply chain which became known as Just-In-Time did away with the need for parts inventories and eliminated the 10 percent cost of the capital to maintain them. Thus Toyota overcame a critical weakness, gained a competitive advantage and was able to grow the company with the capital already in hand. It is now considered as one of the worlds most successful companies and may soon surpass Ford as the second-largest car company in the US market.
It is evident that the efficiency of the supply chain logistics of any economy will be dependent upon several fundamentals including the capacity of the transportation infrastructure, adequate port facilities, reliable internal communications, transparency and a capable workforce as well as modern customs procedures among others.
However, the low-hanging fruit among these is customs modernization because it can be accomplished more quickly and less expensively than any of the others. The World Customs Organization can provide globally accepted customs procedures and training and UNCTAD (UN) can provide the electronic information system needed to modernize the customs clearance process to make it fast, transparent and reliable.
What is urgently needed is the political will of the proper authorities to use these tools for the benefit of national economic growth and job creation by empowering entrepreneurs to more quickly reinvest the working capital they already possess. Latin American and Caribbean customs clearance transit times must be accelerated and stabilized in order for its small and medium sized businesses that depend on international trade to be able to finance their growth and to compete in the global economy and to create desperately-needed new jobs.
Dell and Toyota have proven the case. Guatemala and Chile have made a good start. In fact Guatemala’s World Economic Forum Competitivenes Index standing improved by 20 points from 2005 to 2006 after instituting major customs reform measures which have brought their clearance times down to hours and minutes at its air and sea ports. Other countries in Latin America and the Caribbean might take note.
Manuel Aragon is president of Teqflor and executive director of Conferencia de Companias Express de LatinoAmerica y el Caribe (CLADEC). He wrote this column for Latin Business Chronicle.
© Copyright Latin Business Chronicle