Thursday, June 05, 2008

Rosewood Case Study: Logistics Is The Glue

Rosewood Case Study: Logistics Is The Glue

If logistics is the glue that holds Rosewood Cabinets and Furniture Ltd. together they may need to reassess their entire business strategy, let alone market entry into Mexico. Let's start with adapting and refining the base product: rosewood.

Not a native species of Canada, its costs are invariably increasing as its sources are limited to vastly depleted forest regions in Brazil and South America or India and the south-east Asian tropical regions. As its costs increase Stone and Willis may find their profits eaten up. It might be better to source veneers in greater quantity and local availability in Canada. Failure to do so may implicate corporate image and loss of market share as many veneers now fall under CITES protection laws.

Oak, cherry, walnut and maple would make great environmental and competitively priced available substitutes. In addition, labour costs in Canada are increasing with the inflation rate. So regardless of the amount of primary research that needs to be done regarding Mexico as a consumer market for their products, its free trade zones must be considered to provide flexiblized labour and overall lower variable costs of production. Several US and Canadian based agencies and consultancies specialize in contracting turn-key manufacturing start-ups in the border regions spilling over into the Rio Grande valleys where a small or medium sized company like Rosewood might recoup the costs of relocation in as little as two to three years.

In the development of a streamlined customs-free NAFTA superhighway Stone and Willis may find their market accessibility in the US could offer positive share of total market growth there regardless of a decision on Mexico where their production and inventory would be closer to the US market which provides more opportunities for growth. While it would be tempting to develop a full strategy targeting Mexico City, Gudalajara and Monterrey the anecdotal evidence of one Mexican politician's suggestion might not be enough to sustain an economy of scale which supports profits, sales and growth. Infrastructure in Mexico is not yet fully efficient and contacting freight forwarders from port transfer to inland destination might be very expensive due to high communications and or interpreter's fees, travel and meetings which also eats into profits. The fact that there are only three freight forwarders listed makes it very difficult to determine comparative quality of service which can often be extremely variable dependent upon quality of common carriers.

Furthermore market entry costs could be extremely high due to unforseen customs regulations, snags and pitfalls and current lack of major furniture imports to Mexico from Canada. The Mexican economy does not currently support a large monied class of rich politicians, nor has it ever done so, as compared to Canada or the US per capita for example. Mexico could represent a black hole for the company logistically and it might make sense to follow my prior recommendations first or lose big and lose fast.

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