The logistics outsourcing industry in Brazil continues to grow. According to Fleury (2013), the average annual revenue per carrier in Brazil grew 19% between 2002 and 2012. The industry has also become increasingly concentrated, thanks to an intense movement of mergers and acquisitions. Likewise, this industry has seen the entry of international shipping companies and logistics service providers (LSPs). However, shipping companies and LSPs face many challenges in managing logistics in Brazil, such as the low provision and quality of transport infrastructure, excessive bureaucracy and the complexity of customs clearance.
An aspect not so discussed concerns the challenge of managing logistics outsourcing relationships between Brazilian and foreign companies. Naturally, companies from different backgrounds have different cultural bases and, normally, follow different processes. Thus, when companies from different countries, profiles and practices interact, there is a greater likelihood of conflicts and such differences can be counterproductive. As such, it is always important to understand the perspectives of business partners in order to develop successful relationships.
With a view to identifying relevant differences between logistics outsourcing practices in Brazil compared to practices conducted in the United States – one of Brazil's most important trading partners –, researchers from the Sam M. Walton College of Business, University of Arkansas (USA), interviewed 11 executives (Tables 1 and 2) affiliated with PSLs and contracting companies and with extensive experience in logistics outsourcing in these two countries (BARRANECHEA, 2011). Participants described and compared the process of working with LSPs (or logistics service contracting companies) in Brazil and the US.
Table 1 – Participants based in the USA
Source: Barranechea, 2011
Table 2 - Participants based in Brazil
Source: Barranechea, 2011
It is important to highlight that, as the interviews were conducted with a small number of professionals, it cannot be concluded that such observations represent the reality of all companies. However, similarities in participants' responses indicate that differences exist. Thus, it is essential that Brazilian companies and PSLs understand the expectations, processes and practices of foreign companies in their countries of origin. Likewise, foreign companies operating in Brazil need to understand the logistics outsourcing practices in the country. Understanding these perceptions and practices can facilitate negotiations and the development of relationships between business partners, in addition to promoting a competitive advantage in the market.
Three main categories emerged when consolidating information from all respondents: operations, selection/contracts, and relationships.
Operations: infrastructure, bureaucracy and rate distortions represent serious bottlenecks in Brazil
There are many commonalities related to logistics outsourcing operations in the US and Brazil. First, surveys in Brazil (FLEURY, 2013) and in the US (ARMSTRONG & ASSOCIATES, 2013) indicate that the outsourcing industry continues to grow in both countries. PSLs also offer a wide variety of logistics services, from transport management to more specialized services and with a high use of sophisticated information technologies, such as supply chain management and consulting.
Another point in common is that shipping companies still subcontract logistics services with the main objective of reducing costs and, in general, still consider logistics and the supply chain too strategic to be outsourced. Thus, the most outsourced activities in both countries are those related to transportation. In Brazil, the most outsourced activities are: supply transport, distribution transport and transfer transport (FLEURY, 2013). Transport activities are also the most outsourced in the US, followed by warehousing (ARMSTRONG & ASSOCIATES, 2013). The activities of integrated management of logistics operations and inventory management are the least outsourced in both countries.
The main differences noted by the participants refer to existing structural challenges in Brazil that are not so evident in the US. First, the limitations and low quality of the transport infrastructure, the excessive dependence on road transport and the distortions in taxes on cargo handling in Brazil, lead to suboptimal and low productivity networks. Reduced operational speed and lack of security also promote higher logistical costs, due to higher transportation costs and higher inventory levels. Participants note, however, that improvements and investments in infrastructure are being made and that their companies continue to expand their storage structures in Brazil.
Selection of PSLs and contracts: established relationship is a priority in Brazil
According to the participants, contracting companies in the USA are, in general, more cautious in the selection of their PSLs than in Brazil. In that country, contracting companies prioritize quality, service and cost (in that order). The selection is conducted gradually. First, the responsible team makes a pre-selection of a group of 12 to 15 PSLs. After an assessment, this group is reduced to between two and five companies and a quality assessment continues until the final decision is made.
According to the interviewees, if such processes for the selection of PSLs are adopted in Brazil, it is usually because the contracting company, or even the PSL itself, is an American company following the head office procedures. According to the participants, Brazilian companies put less emphasis on such selection criteria and give priority to the reputation of the PSL in the market, or prioritize PSLs with which they already have a relationship, as noted by one of the participants:
“Many times, we (US PSL industry) try to impose in Brazil the ideology of conducting logistics outsourcing relationships followed in the US and we fail to listen to the Brazilian perspective. Here in Brazil, we need time to meet people and talk before getting into the details of the business itself. In the US, just one meeting is enough.” (Participant 11, vice-president of a PSL responsible for Latin America).
An interesting point to highlight is that, in the US, not only contracting companies but also PSLs “select” clients. One of the participants, director of Global Network Solutions for a LSP, pointed out that they assess the customer's attractiveness before accepting the contract. For example, “if the company only prioritizes freight; does not want any systems integration; if you change PSLs too often; if the product it moves is very low cost, or if it is excessively focused on cost reduction”, then such a company is not an attractive customer.
The idea is that companies with such a low profit margin are unlikely to be able to invest in a relationship with a PSL that would last long enough to be profitable. A second factor considered refers to the profile of the logistics operations of the contracting company. If, for example, it transports containers between China and the US, the service provided would only focus on travel time and freight per container, which would be very repetitive. Likewise, transport would be highly commoditized and there would be a lack of opportunities for the PSL to innovate and increase its profits.
Although contracts in the US and Brazil are, in general, of short duration, another point in common – in the opinion of the interviewees – is that contracts in Brazil are less detailed than in the US. In Brazil, more important than a detailed contract are the same factors that support the selection of PSLs: the fact of having an already established relationship with the PSL or its reputation regarding the desired activity.
Thus, respondents believe that contracts are not as important for LSP customers in Brazil compared to contracting companies in the United States. One of the interviewees, Sales Director of a PSL responsible for all of Latin America, for example, points out that a contracting company in Brazil, in general, does not require contracts in Brazil. When such contracts are required, most of the time it is due to the fact that the company is a multinational company and, therefore, needs to follow the protocols of the headquarters located abroad.
Relationship between PSL and contractor: obstacles to trust and innovation
Respondents agree that, generally speaking, PSLs in Brazil and the US continue to gain a more strategic position in their clients' operations. This evolution, however, is slow and such a strategic partnership, in terms of commitment and collaboration between contracting companies and PSLs, is in the initial phase of evolution in both countries (Figure 1).
Figure 1 – Comparison of the current state of the role of PSLs in Brazil and the USA according to the participants
Source: Barranechea, 2011
In Brazil, in particular, PSLs have not yet developed such a strategic relationship with mid-sized clients. In most cases, contracting companies just outsource simpler services, such as transportation and document preparation. They reveal that, unless there is a previous relationship with the PSL, it is very likely that contracting companies do not have enough confidence to delegate a more strategic role to the service provider. According to respondents, such relationships are more like “a more mature transactional relationship, but still transactional in nature”.
PSLs play a key role in changing this scenario. One of the PSLs interviewed highlighted that “this behavior of contracting companies in Brazil is historic and is rooted in their culture. We PSLs need to train our teams differently. We have to be the first to demonstrate that we are trustworthy and then customers will be more honest with us in return.”
An important point highlighted by the interviewees is that, in the US, it seems to be easier to develop trust between contracting companies and PSLs, as well as having the opportunity to provide more strategic services. This perception can be verified in surveys carried out with global shipping companies (CAPGEMINI et al., 2012), which show higher percentages of outsourced strategic services in the US than in South America (Figure 2). Participants state that, in their experience, it was easier to move beyond simple transaction execution to a role in planning and executing client operations in the US than in Brazil. This is because, according to respondents, contracting companies in the US are more willing and less reticent to share their strategic objectives and work together with LSPs to achieve them.
Figure 2 – Percentage of outsourced services in North and South America
Source: Capgemini, 2012
Likewise, participants note that the process of implementing changes in Brazil is still slower than in the US. One of the participants noted that to implement changes in operations or innovations: “what would take about three phone calls and some memos and analysis in the US, takes between six and eight months in Brazil”. They point out that the Brazilian environment, immersed in excessive bureaucracy and lack of trust in the authorities and government, contributes to this.
Another reason raised by the interviewees was related to the stronger role of the organizational hierarchy in Brazil when compared to the USA. Professionals take less risk in their decisions for fear of making mistakes and likely supervisor retaliation. They claim that, similarly, LSPs in Brazil feel less comfortable than in the US to point out weaknesses in their clients' operations. This behavior, according to the interviewees, undermines the development of a strategic relationship between LSPs and contracting companies in Brazil.
The participants point out that this also exists within the contracting companies. An American PSL operating in Brazil may not even hesitate to point out the need to modify or improve logistics management at the customer, but there is the difficulty of “selling” the idea of the need for change to him. One of the interviewees, vice-president responsible for Latin America at a PSL, stated that, in Brazil, “many times, when we try to sell an innovative idea to a client, our contact may even agree with us, but ends up never passing on the proposal to his boss".
This reality is a contrast compared to the US, where managers and employees are more open when it comes to expressing their opinions. Participant 3, global director of an American PSL for more than 30 years, explained that “in the US, the customer is not God, but just a human being. Even if such a person is the president of the company, there is a respect for his experience and knowledge, but if he says something related to supply chain management, I look him in the eye as an equal – we can both be honest with each other . This does not exist in China, for example”. In fact, in today's highly competitive business environment, contracting companies are under tremendous pressure to achieve a very high performance in the management of their supply chain, and for this reason they need and want their PSL partners to have the ability to have a frank conversation, on an equal footing. for equal; which can only be achieved in a partnership relationship.
Differences exist: what to do?
The solution is not simple, but, in general, Brazilian and American companies operating in Brazil can learn lessons from these interviews. The message of this article is very simple. It is important that American PSLs intending to operate in Brazil or serve Brazilian contracting companies understand that, often, even more important than a detailed contract is the development of a lasting and committed relationship. Likewise, it is important that this PSL be able to develop adequate communication channels for contracting companies interested in outsourcing more strategic services and for those interested only in outsourcing the simplest ones, which is still quite common in Brazil. Trust is built more slowly, but Brazilian customer loyalty will be high. For Brazilian PSLs, it is important to note that potential US customers expect a more detailed contract and want the PSL to be more proactive in noticing deficiencies in their operations, presenting solutions, or offering services that address such solutions. Thus, it is important to develop an environment that encourages independent decision-making. It should also be noted that it is easier for an American customer to end a relationship with a PSL compared to a Brazilian one. There is less loyalty to the PSL.
Are the practices observed in the US better than those in Brazil? Not necessarily. Independent studies carried out in Brazil and the USA (FLEURY, 2013; ARMSTRONG & ASSOCIATES, 2013) observe a high level of satisfaction of contracting companies in both countries. Neither reality is perfect and both sides have positives and negatives. For example, while better contract detail leads to cooperation thanks to a better understanding of the parties' responsibilities, an excessive emphasis on contractual detail at the expense of personal rapport does not necessarily lead to better operational results or higher levels of customer satisfaction. Focus on the long-term relationship or a long-term orientation (which is stronger in Brazil) leads to a reduction in conflicts, as the business partner is believed to have the best intentions in the relationship and its continuity is a priority.
So what's the best strategy to follow? Imposing the culture or practices of your home country on the foreign country without any adaptation would be a mistake. There are notorious examples of companies that failed to implement strategies, whether for products or services, from their countries of origin without adapting them to international markets. It is important and necessary to adapt your business strategies to each market and, over time, seek to improve them through learning acquired from your experience in international markets. Thus, it is important that all companies involved in logistics outsourcing in Brazil, PSLs and Brazilian and foreign clients, understand these differences so that they align with expectations in order to improve the coordination of operations and, hence, build well-balanced logistics outsourcing relationships. successful and satisfactory for all involved.
References
ARMSTRONG & ASSOCIATES, INC. 2013. Trends in 3PL/Customer Relationships – 2013. www.3PLogistics.com
BARRANECHEA, MV 2011. Logistics Outsourcing in Brazil and the US: An Institutional Theory Perspective. www. libinfo.uark.edu
CAPGEMINI, PENNSTATE, PANALPINA, HEIDRICK & STRUGGLES, EYEFORTRANSPORT. 2012. 2012 Third-Party Logistics Study: The State of Logistics Outsourcing. http:// www.3plstudy.com
FLEURY, PF 2013. 10 years of logistics outsourcing in Brazil. XIX International Logistics Forum, Rio de Janeiro.
