On the road again: in a small world, supply and distribution needs become big business.

History is full of examples of ambitious military leaders, Napoleon and Hitler among them, who have come to grief when their armies overstretched their supply lines. Likewise in modem business, logistics plays a critical role in an organization's success or failure.

In Mexico, the landscape of freight transportation, which constitutes around 10% of the gross domestic product (GDP), has changed enormously in recent years. Until the early 1990s, the sector was highly fragmented. Most large corporations were vertically integrated, conducting their supply and distribution internally. However, stung by the high costs of managing their own fleets, firms started to outsource their basic haulage needs to third parties.

Mexico is the world's 11th largest economy and eighth-largest exporter of goods and services. It has entered more international trade agreements than any other country, with deals with 32 nations. Mexico is now in the major leagues of world commerce and more and more of its finns are using the "G" word, or globalization. For many Mexican executives, life in the delivery business is no longer simple. Today, transportation talk is all about linking cheap local labor with distant consumers, employing just-in-time supply chain management practices and optimizing fully integrated end-to-end inter-modal transportation services. In a word, it's about logistics.

ENORMOUS GROWTH OPPORTUNITIES

In this quagmire of complexity, many larger corporations find themselves out of their depths and shelling Out the whole shebang to the experts. "The sector in Mexico is red hot right now," says John Price, logistics and transportation practice director at Infoamericas, a consulting firm based in Miami. "Those who offer such services are growing at twice the rate of basic haulage companies."

Big foreign players (including Danzas, Exel, UPS Logistics, USCO and Eagle) have jumped into Mexico. Alongside regional firms (including LINSA, Grupo TMM and FEMSA), they are enjoying a US$33 billion market, according to infoamerica's website.

The North American Free Trade Agreement (Nafta) has been a key market driver. Most obviously, it has encouraged huge growth in international trade. The number of trucks crossing into the United States from Mexico grew from about 2.5 million in 1997 to 4.2 million trucks in 2001.

"As the Nafta trucking market opens up and crossboard trucking prohibitions ease, more shipments will probably be made directly to the enduser--reducing the need for third-party logistics management of the shipments," says Ken Morris, director of Crossborder Business Associates, a consulting firm focused on Mexico-U.S. border affairs.

U.S. government rules that prevent truckers from traveling more than 20 miles north of the border augment the need for third-party interchange, warehousing and transnational facilities.

COURTING CARMAKERS

With their convoluted and voluminous supply chains, large retailers, hi-tech concerns, carmakers and manufacturers are the logistics provider's dream customers. One such punter is Volkswagen, which in 1998 handed the reins of supply for the production of its new Beetle model at Puebla to Exel, a British company.

The supply chain management specialist now has an estimated 650 employees at its customer's plant, which rolls out some 1,400 vehicles per day. They are not only responsible for primary transport functions but also picking and sub-assembly. Exel, which was formed through a merger between a road haulier and a shipping line, has cast off its fleet of ships and trucks to focus on pure logistics contracts.

In fact, under Mexican law, foreign-owned transportation firms are prohibited from owning inland transport lines and must subcontract local firms to perform the haulage. However, quality of service among the 5,000 or so Mexican road hauliers is generally poor. Compared with the U.S. and Europe, the sector is unrestricted and unregulated.

Due to the high cost of financing, many rigs are aged and uninsured. Furthermore, much of the Mexican highway network is in a sad state of disrepair. Worse still, according to Kroll, a risk consulting firm, a staggering 10% of all loads are robbed.

The alternative, rail freight, has become a safer and cheaper option since lines were privatized six years ago. Tracks such as TFM and Ferromex, which head north, are particularly popular for transporting vehicles and heavy goods to the border. In general, however, with thin rail coverage in Mexico and the extra cost of moving cargo from truck to train, market share has remained below 20%.

CATERING TO THE CUSTOMER

Despite these challenges, logistics firms in the region offer far more value than the glorified middle men that the incumbent transportation firms would have us believe. How so?

Firstly, by lending their weight, they can both reduce customers' transportation costs and also improve basic quality of service.

"We leverage our economies of scale," says Eugenio Sevilla Sacasa, vice president of Ryder Latino America. His firm, which entered Mexico in 1994 and now has 1,100 local employees, enjoyed 23% growth in the region last year. "A customer who sends three crates a week between Mexico City and Monterrey does not have our buying power. We also train drivers and lease quality equipment to ensure that subcontractors provide the best service."

Secondly, with their extended reach, large carriers can remove the headache of handling different providers for each and every leg of the trip. "We used to be an entirely port-to-port based business," says Ashley Mawby, manager of Inland Services at P&O Nedlloyd. "Now, due to customer demand, we offer a fully integrated door-to-door approach."

Once upon a time, an international shipping line's operations were confined to Manzanillo, Veracruz and Altamira, Mexico's major containerized ports. Now, they handle customs, warehousing and inter-modal delivery right to the doorstep on behalf of their customers.

But the most moving part of the logistics story arises more from the sector's brains than its brawn.

Having re-engineered their business processes, most firms' internal operations are exceptionally streamlined and decidedly slick. Their goal now is to make their external supply chain more efficient, which means reducing inventory both upstream (supplies) and downstream (products). This is particularly desirable in Mexico where high interest rates make excess inventory especially costly. However, when an organization has thousands of suppliers and customers and highly time-sensitive production lines, achieving this internally can be a tough and expensive business.

Those seeking such gains are now turning to logistics providers. By developing, or purchasing, logistical optimization techniques and information technology, they can orchestrate and marshal physical goods more cunningly. As a byproduct, customers gain unprecedented transparency across their whole supply chain.

As they take control of such operations, logistics providers are reaching deeper into their clients' core businesses. Besides packaging, labeling and picking, some firms are even offering basic assembly services. Contract manufacturers should watch this space.

In Mexico, the logistics business is certainly going places. Large multinational firms are working hand in hand with mid-sized local haulage providers. It could be the beginning of a beautiful journey.

Domestic Transport Volume by Mode

Air        0.2%
Maritime   2.0%
Rail      15.8%
Trucking    82%

Source: Communications and Transportation Secretariat

Note: Table made from pie chart

Rawdon Messenger is a Mexico City-based freelance writer and columnist for the Evening Standard of London.