Outsourcing to Latin America: Beware of the value chain threats

Filed in archive Point of view on May 29, 2007

Anyone interested in outsourcing market and its current trends would agree that Latin American countries such as Chile, Mexico and Brazil are now becoming important players in the stage and at least in the next five years, the structure of the market won't be as it is today (today the situation is highly favorable for India and China).

I also wrote a short piece stating this change in "Chile outpasses China and India as an offshoring option". Countries like Chile provide an attractive mix of economic stability, good infrastructure, competitive cost and potential market which makes them the ultimate choice for many firms and investors.

On the other hand, decision makers should be aware of the risks associated with the Latin America. While the source of offshoring risk for a country like India is typically infrastructure, the problem with Latin America goes back to issues such as fluctuations in foreign-exchange rates, regulatory issues and reliability of suppliers.

McKinsey and Co., management consulting firm, recently conducted a survey focused on the identifying supply chain risks in Latin America and their study revealed that changes in foreign-exchange rates topped the list of concerns for supply chain managers. This was specially the case in Brazil where 48% percent of the managers ranked this factor as their No. 1 risk.

Of course this doesn't mean that companies shouldn't go into this region and there are a number of remedies for the above mentioned challenges:

Using quantitative models which incorporate cash flow at risk and integrating them with decision-making process and contingency plans help to mitigate the potential negative outcomes.