Infrastructure – Anybody that has tried to move goods from point A to point B in Sub-Saharan Africa (bar South Africa) has realized the challenges associated with transportation and infrastructure. However, in many African countries (e.g. Tanzania & Ethiopia) there have been great improvements in infrastructure. However, reaching lower tier cities (not to mention rural markets) remains a challenge.

Distances – African commercial centers are often far apart, increasing cost and making economies of scale difficult to achieve. For example, many low cost distribution models piloted in Asia (e.g. India) and Latin America (e.g. Mexico) will likely fail, as distances are greater and the numbers of commercial clusters are not comparable with these continents.

Fragmented markets – Modern trade (e.g. Shoprite supermarkets) in African countries (with the exception of South Africa and Kenya) is still in the very early stages of development and the contribution is in the low single digits. Reaching large numbers of traditional outlets (e.g. Mom & Pop, Dukas, Sooks) is difficult and costly business.

Distributors – Finding the right distributors to reach the vast numbers of traditional outlets is difficult (if not impossible) and it requires enormous development and training. As with many emerging markets, the outlet base keeps evolving as outlets open and close. Keeping the outlet list up to date can be a difficult undertaking.

Access to capital – Finding a good distributor is just a start as sources of capital are limited. Many organizations need to support their distributors and partners during the start up phase and in many cases also provide loans or bridge capital to support their cash flows.

Risks – As recent events in Nigeria have demonstrated, there is still significant political risk in a number of African countries. Some of these countries, including Nigeria, hold significant potential in a number of sectors. However, companies need to have a good understanding of the political risk and potential impact on their business.

Technology – When navigating the business landscape in Africa, you realize that most companies operate on a combination of software (e.g. ERP), Excel, pen and paper. Mobile technology holds great potential, but few companies have viable commercial models. Finding the right solution for your company will take time, money and innovation.

Electricity challenges – In many countries electricity is in short supply and power cuts are common during peak periods. Even more advance economies such as South Africa are experiencing major challenges. In some countries (e.g. Guinea) the generator remains a major source of energy and energy cost can be a major consideration.

Lack of visibility – Poor information technology also leads to a lack of visibility in the supply chain with increased out of stocks (OOS). Increasing visibility can take time and might include a combination of technology and manual processes.

Lack of an organized Third party logistics (3PLs) and skills gaps – In many countries organized 3PLs revolve around independent transporters with limited number of vehicles.  Many 3PLs might also lack the required skills and professionalism. Normally, ongoing training and support are required. Due to poor remuneration, staff turnover is high, and this will also have a negative impact on cost.

Incentives – Many distributors and 3PLs also lack the required incentives schemes to motivate workers. Companies sometimes need to play an active part in setting incentives and rewarding partners.

Warehouse – Many warehouses for rent are also poorly designed, with poor yard management, ventilation and equipment. Finding a professional warehouse operator can be a daunting experience.

Counterfeit and parallel imports – For many organizations, counterfeit and parallel imports remain a major concern. African markets remain a dumping ground for many importers and exporters that buy expired (or close to expired products) from European retailers. Large trading groups, operating out of the Middle East (e.g. Dubai), are normally a great source for importers. Pharmaceutical companies are also fighting an uphill battle against counterfeit products on the continent.

However, even with all these challenges, Africa holds great potential and companies ignore the continent at their own (and shareholders) peril. A number of multinationals and large numbers of SMEs have overcome or mitigated these challenges. And as the saying goes, if it is easy to do business, it is probably too late for entry.

Advantages of Micro-distribution

Entrepreneurial spirit –A micro distribution system allows companies to tap into the entrepreneurial spirit that is so evident in many emerging markets. However, entrepreneurs must have a long term view to ensure the same consistent quality service is provided to customers.

Flexibility – Micro distributors tend to be more flexible in responding to customer needs. For example, they trade longer hours and can also provide weekend and night deliveries. They can act as a credit provider to low income customers. They “live and breathe the streets” of the communities they work in and are in a much better position to control accounts receivables.

Issues to consider prior to implementation 

Channel Focus – A micro distribution model is not a one size fits all solution for all channels. Micro distributors generally focus on selected channels in traditional trade e.g. mom & pop shops, Dukas (East Africa) and Spazas (South Africa).

Complexity - Due to the complexity of sale and distribution, micro distributors will likely struggle to service modern trade effectively. It is best to reduce the complexity (e.g. reduced stock keeping units) for the micro distributor, including expected tasks and activities. It is important to understand what the micro distributor can successfully take care of in the supply chain.

Role definition – Companies needs to determine which aspects of the business they would like to control. For example, the Coca-Cola model separates order generation from delivery. This allows the company sales person to focus on more value adding activities (e.g. meeting customers, getting orders) and the micro distributor to focus on warehousing (neighbourhood warehousing) and distribution.

Supply Chain impact – When implementing a micro distributors system, companies must assess what impact the distribution model will have on the rest of the supply chain. For example, compared to larger distributors, micro distributors will require smaller drops sizes that will impact the warehouse and transportation infrastructure and processes.

Shared infrastructure – Profit margin are normally thin and it is important to determine if there are any opportunities to share infrastructure (e.g. warehouse, transport) with other non competitive manufacturers and distributors. This can significantly reduce cost and make the distribution model viable.

Regulatory issues – Companies also need to assess the impact that regulatory issues will have on the micro distribution system. This could include business licenses, zoning and transport bands (e.g. restrictions on delivery trucks during peak hours).

Standardization – During the design phase, companies need to standardized processes and systems as it will reduce set-up and training costs. For micro distributors, distributor turnover (the number that close down) is high and it is important to evaluate how set-up and training costs could be reduced.

Support – Micro distributors also have limited resources (e.g. capital, employees) and normally require a bundled approach (e.g. training, finance, process design) to ensure their operations are sustainable and viable.

Cynics may claim that traditional corporate social responsibility (CSR) initiatives were about throwing money at a problem and being rewarded with a glossy brochure and a few great photo opportunities for the annual report. Whether or not this perspective is fair, today’s public private partnerships (PPPs) are far more engaging as companies play an active part in project teams and provide technical skills focused on their core area of expertise.

Partnerships are not necessarily formed at Davos. You don’t need a prime minister or president that is passionate about development and no rockstar is required to initiate a successful partnership . There are great opportunities to form partnerships at local levels, which are likely more sustainable and certainly less susceptibility to shifts political or popular culture.

What can MNCs bring to the table?

Financial – In addition to financial support, increasingly companies are supporting project teams and are also involving other players. These players could be other large multi-nationals or even local players with a footprint in the respected country. MNCs can act as connectors between companies, bilateral donors and academics. For example, The Coca-Cola Company actively engages with academic institutions such as Yale and Harvard on PPPs.

The right fit – Not all companies will be a good fit for every workstream, but if companies focus on their core skills (e.g. Coca-Cola & distribution, DHL & supply and cold chain, IBM & technology), great value can be added to projects. Most workstreams will likely focus on solving everyday problems and will not require groundbreaking technology (e.g. drones responsible for “last mile” logistics).

Local networks – One of the great advantages of MNCs is their ability to tap into local networks and connect project teams with local operations and expertise on the ground. Local operations understand local trading conditions and can access local cost structures. In my experience, this is also invaluable exposure to international project teams, who witness how these companies operate in a difficult operating environment and solve problems at local level, often with limited resources. In one of our projects we received great insight from SabMiller about transportation management in South Sudan. They shed light on some of the technical difficulties when importing vehicles and the challenges with recruiting qualified technicians that might have otherwise been missed.

Point of engagement – MNCs can opt for a number of points of engagement that can include boards, technical advisers, imbedded projects teams and shared resources. In some cases MNCs might also decide to appoint a resource to liaise between the project team and the local operation.

MNC as the superhero?

It is important to note that MNCs will be unable to solve all challenges and also struggle with some of the same challenges as humanitarian logistics organizations. MNCs have yet to write the definitive guide on “last mile” logistics Africa. Some have been successful in certain areas (e.g. Coca-Cola micro distribution in Africa) but there is still a lot to learn for most organizations. However there are a number of areas where MNCS can add value, including:

Demand planning & procurement – As humanitarian organizations move from emergency to development modes of operation, there is an increased need to understand demand planning and procurement.

Routing and scheduling – Information is not always well documented and good network design can add significant value in the long term. MNCs can also bring unique insights about “last mile” logistics and working with distribution partners.

Transportation management- Scheduling and vehicle maintenance remain areas of opportunities for many organizations. Riders for Health, a non-profit organization, has made this their core focus. However, there remain significant opportunities in this area for many organizations. Furthermore, MNCs can also provide great insight on 3rd party logistics and negotiating transport rates.

Incentives insights- There is increased interest how MNCs employ incentives to motivate employees and increase productivity.

Benefits to MNCs?

Employees and community – Most employees love to give back to the community. Local employees have a vested interest in what happens in their community and they take great pride in their ability to solve problems. Companies also become a more desirable place to work as employees take an active part in solving humanitarian logistics challenges.

Learnings – There is also lot to learn from humanitarian organizations. For example, in mobile technology, the not-for-profit sector has been on the forefront of adopting and piloting a number of projects that could be of interest in the business world. MNCs sometimes have limited knowledge is certain areas. For example, very few MNCs will have a clear understanding of rural distribution and employees can learn a lot of solving complex problem in challenging environments.

Shared infrastructure - There is also a real opportunity to share infrastructure, especially in rural areas where it is always hard to make the numbers work. Too often ambulances act as delivery vehicles in Africa, when idle capacity is available in the vicinity. With the right partnership, shared resources can bring mutual benefit to parties involved.

Update:  01 Jan 2012

See presentation slides.

South Sudan – questions to ask prior to entry

I recently visited South Sudan as part of a Public Private Partnership project. For any private partnership, alliance or investment, entering an unknown country with limited or no experience can be a daunting undertaking. For example, in South Sudan the infrastructure is weak and there are less than 200km of paved road in the country.  But, even after considering all of the challenges, emerging markets such as South Sudan hold enormous potential. An entry done in the right way, can be rewarding . Here are some questions to consider prior to entry, either through an investment, partnership or an alliance:

Partners

• Who are the partners that we would be working with?
• What are their strengths and weaknesses?
• Are there certain areas that we could support them and are there areas that they are more capable and we could learn from them?

Management

• What do we know about their management and the supervision on the ground?
• Where the areas that we would need to strengthen?

Expertise

• What are the current capability gaps in the organization/operation?
• Which areas of capability building are a priority?

Culture

• What is the current culture in the organization/operation?
• How does this differ from our current organizational culture?

Security

• What is the current security situation?
• Where are the no-go areas?

Infrastructure

• What are the infrastructure challenges?
• How long will it take to import goods in the country?

Regulations

• Are there any regulatory issues we need to be aware of?
• How will this impact the supply chain?

Alignment

• Could we align with the organization/operation?
• Which areas need attention?

Visibility

• How much visibility is there in the existing supply chain?
• What technology is in place to help to create visibility?

Facilities

• What is the state of the current facilities?
• Do we understand the investment required to get the facility up to standard?

Technology

• What software are they using?
• Would we have any integration challenges?

Processes

• How aligned are our processes?

Cost

• Do we understand the cost to serve and total cost?
• Do we understand the investment that is required?

Efficiency

• Where could we improve efficiency in the supply chain?
• Which areas are of highest priority?

Flexible

• How flexible is the supply chain system?
• How quickly can the organization/operation respond to changes?

Implementation Risk

• How long would it take to become fully operational?
• What are the guarantees that we have?

Barriers

• What challenges and risks will we encounter?
• How do we plan to mitigate the risk?

Quality

• How will we maintain or improve quality standards?

Trust relationship

• Do we trust the organization/operation?
• What can we do to create a trust relationship?

There is a lot to learn from the Coca-Cola system. However,  it is also important to take into consideration some of the challenges and differences. Here are a few points to consider:

Material handing – The Coca-Cola System (TCCS) generally use standardized containers and pallet size in their local operations. This simplifies material handling and improves distribution speed.  In Africa, most sales come from returnable glass bottles and crates and material handling is mainly manual labour, handled with less care than what you would require for medicine.

Stock Keeping Unit (SKU) complexity – TCCS in emerging markets manages a limited number of SKUs (20-60), dominated by a handful of SKUs.  For example, in some markets, Coca-Cola 300ml contributes a large percentage of their sales. The situation is far more complex for medicine.

Reverse logistics – TCCS’s reverse logistics in emerging markets mainly focuses on returning glass bottles and limited expired products. For medicines, expired products are a far bigger risk and there are normally detailed processes (or there should be) in place to deal with the reverse logistics and destroying of expired products.

Product flow – For medicine supply chain, service points (e.g. heath clinics, hospitals) are well defined and there is limited growth, with clear product flow. The TCCS outlet base is constantly changing with new shops opening and closing. Seasonality also plays an important part, especially in the sub continent (e.g. Bangladesh) where a large number of outlets close during the rainy season.  In many cases TCCS has limited control (and even knowledge) of products flow from distributors, sub-distributors, wholesalers and other stock points to retailers and eventually consumers, especially in peri-urban and rural areas. The product flow is driven by the brand, margins and incentives.

Here are some additional links, including our own articles on this topic:

Johns Hopkins Bloomberg School of Public Health. Improving Access to Essential Medicines Through Public-Private Partnerships. By Kyla Hayford, Lois Privor-Dumm and Orin Levinev.

The Coca-Cola Company. Facing up to an epidemic. Coca-Cola is using it’s distribution expertise to help the Medical Stores Department (MSD) of Tanzania, which coordinates the cross-country delivery of key medicines and HIV anti-retroviral drugs.

INSEAD. Always Cola, Rarely Essential Medicines: Comparing Medicine and Consumer Product Supply Chains in the Developing World. A working paper by Prashant Yadav, Orla Stapleton and Luk N. Van Wassenhove.

The Supply Chain Lab. The last Mile of Logistics for medicine supply chains.

The Supply Chain Lab.  Public-private partnerships- Where can companies contribute?

Financial management – A few years back we ran a project in for a consumer packaged goods company in Sri Lanka. During our assessments it became apparent that most of the distributors were going out of business due to poor cash flow and working capital management.  Many distributors provided credit to smaller outlets to expand their business. The distributors struggled to keep track of debtors and when a few customers failed to pay, it had a severe negative effect on the already limited cash flow available.  Cash is the life blood of any businesses but even more so in emerging markets where it is hard to access capital.

Distribution cost– Often, new management fails to understand the true cost to serve. On a recent project in East Africa, I was struck by the fact that distributors are expected to cover a large territory, but nobody in the organization took the time to determine the true cost to serve the total customer base.  In the end, service levels dropped off and the distributor only focused on the profitable segment of the market. As one distributor put it, “we can go but where is the margin?”. Putting pressure on distribution partners to reduce cost is one thing, but when service partners fail, it can have a severe effect on the whole supply chain.

Design – Poor model design can severely affect productivity. In 2010 we ran a distribution benchmarking assessment in South and East Africa for a beverage company. We conducted time studies to get a better understanding of value adding and non-value adding activities. We also wanted to get a better understanding of which activities and processes needed to be streamlined or eliminated to reduce time and costs. During our assessment, the time studies indicated long travel time for peri-urban entrepreneurs to and from bank branches. The supplier required money upfront, prior to delivery. Unfortunately due to limited bank branches, entrepreneurs spent excessive time on banking activities. A simple rethink of the payment system eliminated a lot of travel time that was normally wasted.

Development – Finding the right distribution partners with the right skills is challenging. However, in many cases, distribution roll-outs are bundled together with support in terms of training, account development and business modeling. Without the necessary support and development, many distributors will fail.

Rethink the business strategy

The company clearly had to rethink its business strategy in order to compete. Voltic realized that transporting water from centralized bottling facilities to the respective markets and high traffic areas was costly. Furthermore, with smaller package sizes the transportation cost per liter would increase, as sachets (or pouches) are not really known for stowability. Poor infrastructure and transport utilization in emerging markets likely compounded the problem. So, Voltic took a radical step to decentralize its bottling through more than a dozen franchisees and in the process, brought their water product closer to the market.

Selecting the right partners & sharing cost

Franchisees are local entrepreneurs with the ability to invest and grow the business. This includes bottling (including quality control) and distribution. In this partnership, Voltic pays for just over half the capital cost, with the rest of the costs covered by the entrepreneur. Voltic and the franchisees split the operating margin.

Branding & Pricing

Voltic introduced a new brand called Cool Pac and priced it at a slight premium above the numerous informal competitors. In the BoP segment where water functions more as a commodity, Voltic changed all of that with a strong emphasis on the brand and quality. Even though Voltic outsourced bottling and distribution, the company maintains close control over all brand building activities.

Route-to-Market

The sachets are distributed using a network of informal street hawkers. Sachets (500ml) are sold to consumers for $0.03 per sachet  on a cash and carry basis. Today more than 10,000 street hawkers sell nearly 480,000 Cool Pac sachets daily.  Following Voltic’s success, in 2009 Voltic was acquired by SABMiller.

For more information on Voltic, download the the Montor Group’s report; Promise and Progress: Market-Based Solutions to Poverty in Africa.