How to Improve Access, Distribution and Profits In Latin America

Updated: April 14, 2010

Why National Distributors Can Be So Problematic - And Risky

Contracting with a national distributor is one of the biggest gambles an offshore manufacturer can make. While distributors claim to have established reliable pathways through the local CAGE factors, execution can be highly inconsistent. When it fails, the distributor's problems instantly become the manufacturer's problem.

Some common challenges that offshore manufacturers experience in Latin America include:

Cargo Held Hostage - Cash flow problems can keep inventory in limbo for weeks, even months, forcing manufacturers to "rescue" it with additional funds and assume liability for recent currency fluctuations.

Difficulty Collecting Revenue - Unexpected challenges in moving funds out of the country.

Lack of Response to Product Issues - Warranty claims and DOA warranties expose the weaknesses of even the best distributors - but it's the manufacturer that takes the hit.

Complete Lack of Transparency - Transparency, in both the marketplace and operations, is critical to future revenue… but easily obscured when a third-party distributor takes the reins. If the distributor mishandles the merchandise, neglects market feedback, or ignores red flags and opportunities, the manufacturer has no way of knowing until the damage has been done.

And, since the manufacturer is unlikely to fly a representative to Latin America to confirm the problem every time something arises, there is no way of knowing whether the problem itself is authentic or manufactured by a shady distributor to increase profits.

The dirty secret among distributors is that many of them intentionally create a "smokescreen" to keep potentially damaging consumer- and dealer-level information away from the manufacturers.

Distributors have an inherent motivation to relay "optimized" information to the offshore manufacturer, instead of the specific feedback that the channel is relaying. While this compromises the brand and development opportunities, it creates a comfortable buffer for the distributors when they present a skewed picture of market conditions to the manufacturer.

Meanwhile, without accurate and true market intelligence, manufacturers cannot capitalize on the opportunities available in Latin America.

With margins growing thinner every year, manufacturers are recognizing that this risky and inefficient distribution system is inherently flawed. Fortunately, it can be modified, even bypassed.

Many manufacturers are now exploring a new distribution model - an outsourced direct-sales model that effectively navigates the CAGE factors, creates transparency, safeguards brand integrity, minimizes risk and maximizes profit. Thoroughly tested and proven viable by Sharp Electronics, Castelmec's SDO platform is changing the way business is done in Latin America.

Castelmec Forges a New Model for Sharp Electronics

When Sharp Electronics first entered the Latin American markets with printer and copier machines, the profits were not nearly as high as first projected. In fact, in time, even these minimal margins were collapsing.

Upon investigation, the following points were determined:

  1. Production costs held firm; research and development costs were fixed.
  2. The introduction of competing products had created downward pressure on market prices and increased competition for market share.
  3. Currency volatility among USD, Euros, Asian currencies and Pesos created downward pressure on profit margins.

As these factors are unlikely to change in the foreseeable future, Sharp was forced to reassess the traditional distribution model it was using in Latin America.

With growing competition, thinning margins and significant risk, it has become clear that the only way to:

bridge cultural differences,

collect valid market intelligence on the competition,

ensure brand integrity and solid customer relations,

maintain a consistent supply chain,

and maximize sales,

…is to flatten the distribution channel, eliminating the distributor's role and placing these realms of responsibility - and profit - back in the hands of the manufacturer.

Until recently, the only way to accomplish this was to establish a fully-staffed local office in each major market or region. Under current market conditions, with margins getting tighter every day, this is simply not a viable option for the majority of manufacturers.

Fortunately, with the introduction of the Sales Direct Outsource (SDO) model, manufacturers have a new option to consider.

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