Small Firm Supply Chains in Latin America the Focus of New SCALE Study

Why is it that most of the micro and small firms that represent 99% of the businesses operating in Latin America survive for less than a year? One of the main reasons is a lack of supply chain expertise – an issue that has received scant attention from researchers up until now. This knowledge gap is being addressed by a new research project from the MIT Global SCALE Network, that involves on-site research at some 500 enterprises across Latin America in collaboration with at least 14 of the region’s top universities.

For the purposes of the project, micro and small firms are defined as those that have fewer than 50 employees and have been in operation for a minimum of two years. These enterprises may be modest in size, but their economic impact is huge. They collectively contribute about 30% of the region’s gross national product and dominate some channels; nano-stores represent 60% to 70% of the Latin American consumer packaged goods market, for example.

Small-sized firms also exert tremendous influence on the efficiency of supply chains in the region. As suppliers to major companies in Latin America as well as other regions including North America, their operational inefficiencies and high failure rates inevitably impact larger players.

A lack of education often prevents micro and small firms from improving their supply chain practices. In many organizations, they don’t have the right people making decisions in key areas such as placing orders, coordinating production schedules with market demand, and selecting suppliers.

Consider, for the example, a firm in Bolivia that manufactures apparel for retailers – one of many already studied by the SCALE research team. Margins are slender in this business and it’s important that the enterprise makes maximum use of its production capacity. However, managers know little about the performance times of production lines – which are rely heavily on manual labor – and are far from expert when it comes to placing orders and planning production schedules. Retaining workers is a problem because work hours are erratic owing to these shortcomings.

Problems like these fuel the high failures rates of small businesses in Latin America, yet they have not been studied in-depth. Past studies have tended to rely on surveys of firms, which often yield inaccurate information that is too general to provide insights into the root causes of small firm supply chain problems. In addition, many smaller firms fall into the “informal” category; enterprises that are set up spontaneously without any official documentation. Government statistics often do not reflect the presence of these off-the-radar firms.

The MIT Global SCALE Network research project, Micro Supply Chain Management for Small Firms, is taking a hands-on approach to studying these enterprises. Students from 14 or more universities in the region will visit some 500 micro and small firms in Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Peru and Uruguay, and document the businesses as well as their supply chain performance. The data will be analyzed by the research team, with a view to highlighting key problems and solutions.

The study team also is working with governments and trade organizations in the region. For example, the SCALE project has partnered with Nueva Economia, a business association in Bolivia that manages 20,000 small firms, and Promotora de Comercio Social in Colombia, which manages some 3,000 businesses.

One solution that is already apparent is the need to include micro and small firm supply chain practices in academic programs at both undergraduate and graduate levels, to build a knowledge base in the region. The participating universities are committed to these goals, and the findings of the SCALE study will provide a foundation for future initiatives.

The first results of the study and recommendations should be available at the end of 2016. It is expected that the project will run for two to three years beyond this initial release of data.

Many of the supply chain issues under review are important for large enterprises, but for smaller players in Latin America addressing these issues can mean the difference between survival and failure.

This post was written by Josue Velazquez Martinez, Logistics Director, MIT SCALE Latin America. The MIT Global SCALE Network study team is actively looking for more partners in the business and government communities. For more information on partnerships and the Micro Supply Chain Management for Small Firmsstudy contact the author at: josuevm@mit.edu, tel: 617-253-3630