It’s been a long time since we’ve posted about illicit drugs, so we’re due! The drug in question is methamphetamine. The Wall Street Journal reports that the gangs making the drug have shifted their operations strategy from having small, US-based labs that produce meth from start to finish to having “conversion labs” in the US that turn meth from a liquid or powder form into crystals that have higher value (Business Plan Remakes Meth Market, Sept 14).

What’s behind the change in production networks? Logistics!

In California’s Central Valley, local labs couldn’t produce as cheaply as Mexican counterparts, in part because they had trouble disposing of toxic byproducts, said Manuel Rocha, who heads a multiagency meth task force in Merced County. Mexican groups that took over the California market tried different strategies, law-enforcement officials said. They sometimes imported crystallized meth, but transportation often crushed the crystals. They sold meth powder in the U.S., but it fetched a lower price than crystals. Conversion labs were the answer. Producing powder or liquid meth in Mexico creates the toxic waste there. Converting the imported powder to crystal in the U.S. creates little waste but adds maximum value. Moving final processing close to the consumer meant drug groups could smuggle large quantities of easy-to-conceal meth powder or liquid, often disguised as products such as antifreeze. Once the product arrived in the U.S., organizations could decide whether to sell it raw for wholesale or add value by converting it.

OK, I admit that it’s a little weird to look to the world of crime for an example of best practice, but I find this story fascinating.

In many ways, what the drug gangs are doing is no different from how many firms are setting up their supply chains. They are moving the sourcing of basic components to lower cost countries (where either labor or regulation is what is keeping costs down) while keeping the high-value steps closer to the market either to preserve flexibility (here, switching between wholesale and retail markets) or minimize shipping costs (here, because the finished product is fragile).

An interesting twist to the problem is that conversion labs introduce a new form of supply chain risk. The article reports that the rise of conversion labs has resulted in much bigger drug busts.

The size of meth seizures is rising as gangs move to conversion labs. California officials have made several large-scale busts tied to the labs, seizing 750 pounds in Palo Alto this spring and 600 pounds in Gilroy in August 2010. A June bust in Washington state found meth from a conversion lab in Stockton, Calif., according to federal court records. “We never saw those kinds of seizures before,” said Erasmo Carrizosa, the head of anti-meth strategy for the California Department of Justice. “Before, if you popped a guy for five pounds, it was a lot of meth.”

If disposing of waste previously limited the size of any one facility, it would require several facilities to serve the market. Now a conversion lab can handle more product without generating too much waste. On the one, that simplifies the network and may add some security if it involves fewer people. However, it also means that losing one lab now means a lot more. That is, there are fewer production locations in the network but each is more essential to keeping the business going.