Personally, I am not very fond of the term, slums. I think it is loosely defined term for a type of informal market. However, with all their problems and challenges there is a lot to learn from slums from a business perspective.

Entrepreneurism – slum areas are highly entrepreneurial, with a high degree of business activity. Most houses also double as business premises. While this is often out of economic necessity, there are some interesting models coming out of these organic (and often unregulated) businesses. During my first visit to Lagos’ Makoko, I was impressed with the supply chain of Nollywood movies (Nigerian films). Nollywood hawkers were everywhere, with no shortage of supply (and demand). The lack of law enforcement also provides some advantages to entrepreneurs. Because the market is informal, most businesses trade without bothering to fill out any paper work, keeping start-up costs low and speeding up the notoriously slow process of starting a business in Nigeria.

Low cost distribution – slum area are normally densely populated. Because such areas often have poor infrastructure, a conventional route system is normally ineffective in these areas. However, with some ingenuity, high density can be converted into quick delivery and turnaround time. For example, in Dhaka’s Motijheel Thana there is a highly effective cold chain (ice) distribution system catering to fish mongers. Deliveries are made with pushcarts and completed before 11 am. In 1999, while working in the Coke system in Ethiopia, my team and I rolled out a low cost manual distribution system to cover our outlet base in an informal market area. The model was by no means unique to Ethiopia or Africa. However, what made it different was that it was a managed distribution system that required detailed planning and implementation. The distribution model also created a high number of jobs in this poor area, about which The Harvard Kennedy School wrote a case study. The distribution system has since been adopted by a number of companies operating in Africa.

Environmentalism – poverty inspires frugality as well as innovation. When walking around in slums, you notice the importance of waste recycling. From computers to packing material, nothing gets wasted. Soda cans are hammered and reshaped into toy airplanes to sell to tourists. Grain sacks become patches on frayed clothes. Individuals living in slums already understand fully the environmental call to “reduce – reuse – recycle”.

Community projects – the extreme social and economic challenges faced by those living in slums has inspired innovative social programs and partnerships. In Nairobi’s Kibera there are a number of NGO projects focusing on how to convert waste recycling into stable income generation, as a means to lift individuals out of poverty. A number of organizations are also evaluating the potential of distributing “social products” such as condoms and vitamins to such areas. Simon Berry and his highly visible Cocalife campaign, is a great example. Escaping the slum is an unlikely reality for most and companies and NGOs need a fresh approach to operate in these areas.

Robert Neuwirth writes about the informal economy in Lagos, Nigeria, and its importance to the local economy. Local governments mostly view these informal markets in a negative way, even though they contribute significantly to the economy.

Some interesting points:

The demand for economic activities takes over everything as bridges are transformed into informal markets. The informal sector is the most dynamic and fastest growing segment of the economy. With very high unemployment, it is the informal sector that holds the country together. Cities need to be designed to accommodate street traders. This works a lot better that expecting traders to obey some sort of government rules.

Channel strategy – companies must map out a clear channel strategy and identify which channel the selected distributor will service. A poorly defined channel strategy can severely damage any distributor roll-out. It is critical that companies understand how channels function and operate. One size does not fit all.

Selection criteria – companies need to understand the key components of a successful distribution partnership. Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organizational structure.

Management – do we have management buy-in and is the distributor fitting in with our strategic goals? A distributor roll-out requires patience and a continuous improvement mindset. Small incremental changes can sometimes go a long way.

Territory – is the territory well defined and does the distributor have the ability to service the territory? Companies must build distributor capability and schedule joined training sessions. Companies must also ensure they have detailed territory maps and a clear understanding of the outlet density.

Outlet base – are traditional and non-traditional channels well defined? in most emerging market, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base. A well defined every dealer survey (EDS) is a key component of any successful distributor roll-out.

Customer service frequency – Are they over or under servicing their customers? Companies must have a clear understanding of the service frequency that both the distributor and the customers require.

Role definition – do we have a clear understanding what the company and the distributor are responsible for? What does the organizational structure look like and how will the company support the distributor? Does each profile (e.g. salesperson) have a clear understanding of his or her role?

Account development – account development is a critical component of any distributor operation. Not all accounts are equal. In most cases companies need to prioritize and focus their attention on high value or strategic customers. Companies also need to determine how they will split the account development activities between the company and the distributor.

Cost to serve – the true cost to serve is sometimes underestimated and companies must have a clear understanding of the cost to serve for both the distributor and the company. In many cases in emerging markets, financial cost centers provide limited data and financial modeling is essential to determine the true cost to serve . Many distributors also fail because the remuneration is set too low and not adjusted for inflation on a periodic basis.

Transportation – is the distributor making use of low cost distribution? For example pushcarts or motorbikes. Is the vehicle or cart load configuration inline with our requirements?

Warehouse – the warehouse function is sometimes overlooked when a company implements a new route-to-market system. Companies need to understand how the new system will impact the warehouse function and what changes need to take place.

Key Performance Indicators – focus on the key performance drivers of your business and don’t overextend yourself. Sometimes less is more. Include key performance measurements in your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point it tracking something just for the sake of tracking.

Flow- are the processes and systems well defined and do we have a clear understanding of the product, cash and information flow? Are processes and systems standardized?  Always aim to eliminate non-value adding activities where possible. Standard Operating Procedures (SOPs) simplify your business procedures and help to ensure the same quality in all operations. Emerging market operations often lack critical skills and don’t make any assumptions what people can and can not do.

Complexity – can the distributor handle the level of complexity in the business? In many cases distributors that distribute all SKUs to all channels fail. Always aim to reduce the complexity in the business.

Collaboration – how will the distributor share information with the company? Too often critical information is only available at distrbutor level and not shared with the company. What role can technology play in all of this?

Take note of the evolution – too often supply chains in emerging markets just evolve without any strategic intend. Modern trade and retailing are expanding and middle class consumers shopping patterns are changing. How will these changes in the market affect your business and are you taking the necessary steps to adapt to these changes?

In a competitive environment, Consumer Packaged Goods (CPG) companies are increasingly forced to get within arms’ reach of the retailer and consumer. CPG companies that have a Route-to-Market strategy that includes a direct focus on mom-and-pop stores are the most successful in reaching the “base of the pyramid”.

The buy-in-bulk mentality is unlikely to have a major impact in developing markets, as transport limitations, poor cash flow and infrastructure will restrict purchasing options. Nielsen’s research has indicated that modern trade is on the increase in a large number of emerging markets. However, even with the increase in Modern Trade, mom-and-pop stores will continue to command a major share of the retailing environment.

Some of the advantages of well designed Route-to-Market strategy dealing with mom-and-pop retailers are:

Increased outlet penetration – the Route-to-Market strategy is designed to penetrate small, high frequency retailers, and increase availability within such outlets. The strategy allows “trial” SKUs entry and assists companies in controlling the SKU range in their identified strategic channels.

Improved merchandising – even though merchandising space in quite limited in these outlets, companies will find it easier to negotiate merchandising space compared to modern trade retailers. Multi-nationals have more leverage with mom-and-pop retailers, and can negotiate better space allocation and control the message in these outlets. Innovative merchandising designs (e.g. hanging shampoo racks) will further support this strategy.

Improved retail and consumer Insights – by removing the supply chain layers, CPG companies gain a better understanding of retailers and ultimately the end consumer. This grassroots approach will improve communication between the various parties and provide the company with valuable insight about their consumer base.

Improved profitability – a well designed Route-to-Market strategy will yield improved margins and reduce incentive and retailer discounts being paid to Modern Trade retailers.

However it is important to highlight some of the challenges that companies will face with such a strategy:

Increased Route-to-Market complexity – increasing the outlet base to include mom-and-pop outlets adds complexity to the Route-to-Market and the business. Drop sizes will be much smaller and the increased outlet base could put additional pressure on resources.

Information flow dilemma – penetrating smaller retailer distribution networks is unlikely to justify investment in information technology. e.g. mobile devices to support Enterprise Resource Planning (ERP) systems. CPG companies will be forced to reevaluate sales data processing and information gathering.

Increased personnel count – managing, controlling and monitoring an increased outlet base will require additional human resources. Employee turnover tends to be higher for employees dealing directly with mom-and-pop outlets. Market conditions are tougher and increased and specialized training will be required.

Companies can benefit immensely by expanding their retail base and penetrating smaller retail outlets. For companies to succeed, market development and training activities must be on the forefront of Route-to-Market strategy. Such strategies will require a major rethink and redesign. Changing to a Route-to-Market strategy that includes smaller mom-and-pop outlets will affect all aspects of the business, including supply chain, sales, marketing and human resources. A strategic shift should not be taken on lightly. However, for the winners, the rewards will be large.

Article fist published in 17th of July 2007 for the Gerson Lehrman Group Councils website

What is a two-tier distributor? They buy from manufacturers and sell to resellers.

What are their competitive advantages? Two-tier distributors can expand the retail footprint in emerging markets. They normally sell a diverse range of brands and control a large percentage of the local distribution in the telecom and the computer industry. Two-tier distributors understand local conditions and can negotiate much better lease terms with proprietors. In some cases they might even own their own buildings.

How can they add value? Smaller distributors understand the needs of retailer and have well established practices and systems to deal with local customers. Because they are closer to the customer, they are also a valuable source for customer feedback.

Do they provide additional services? They normally provide credit terms to small retailers. In a current credit tight market, this can be a big advantage.

How will it affect lead times? By making use of two-tier distributors, manufacturers can reduce lead times by moving goods closer to retailers.

How can manufacturers support two-tier distributors? Manufacturers can assist them with route planning and help them identify the potential outlet base. Training workshops can go a long way in developing the business and building relationships.

How can they avoid channel conflict with their own sales force? Manufacturers can restrict salesmen activities to certain channel, and avoid conflict with distributors.

Sri Lanka is currently waking up from years of civil war. There is a sense of optimism in the air and the country is most certainly open for business. In September I spent two weeks in the country and also had a chance to review a FMCG company’s distributor network.  I jotted down a few distributor issues I spotted in the market.

Visual management- distributor staff can benefit enormously from Visual management. For example, a clear distribution process mapped out with required documents can be hugely beneficial to the distributor.

Focus – in most organizations in emerging markets, it is critical to focus on the absolute basics. In many cases, distributor management lack skills and knowledge. Don’t try to do too much. You are likely to lose focus and confuse distributor staff in the process.

What gets measured gets done- unfortunately this is not always the case. If you don’t follow-up and take action on what you are tracking it will not get done. Some companies are simply tracking too much information. Ask yourself the question, what is absolutely critical to our business right now?

Standardization makes simple – eliminate the guess work. Every time someone has to think about a process it takes time. Standardized processes will increase quality standards and ensure the same consistent service. Standardized processes will also make it easier to visualize processes with pictures and photos.

Complexity – if you keep adding SKUs to your business it will add to the complexity for the distributor. For example, an increase in the number of SKUs sold will increase the complexity of estimating sales and load forecasting. Can the distributor handle the level of complexity in their business? What do you need to do to assist them in the process?

Wholesalers - like most of markets in Africa, FMCG companies rely heavily on wholesalers for distribution capability. The market is extremely fragmented with no clear dominant player. Key accounts and organized distribution is limited. Warehouse space is limited with no clear layout principles.

Outlet base – with the current political instability, the outlet base has been on the decline. Once thriving wet markets have seen a visible decrease in traffic and sales. Informal outlets are closing down as merchants are returning to the country side.  The economic upside of living in the city does not hold the same allure anymore.

Transportation – delivery in the city revolves around low cost distribution such as pushcarts with a few Chinese tricycles roaming the street. Tricycles also are being used for ice distribution (e.g. fish and beverages) and some tricycles even act as ambulances.

Pushcart operators – most wholesalers have limited interaction with their customer base and rely exclusively on independent pushcart operators to distribute their products.  Pushcart operators visit the same outlets every day and are not necessary in close proximity to the wholesaler. None of the wholesalers I visited have any outlet information.  As one wholesaler put it, “You better have a good relationship with your pushcart operators, because if they go, so does your outlet base.”

SKU complexity – All sales are conventional selling, with pushcart operators only carrying the SKUs that they think will sell. Carrying low yielding SKUs simply takes “too much energy” and launching a new brand can be a challenging undertaking.  A few companies are starting to explore pre-selling.

Cash collection - pushcart operators handle all transactions and normally have to provide some security prior to doing business with the wholesalers. Family members and friends often assist in this regard. Cash is normally collected at the end of the day and is, in effect, one day credit.

Electricity – Conakry is suffering from chronic power outages that make refrigeration limited and the cold chain challenging at best.  In the words of one FMCG supervisor “When the power goes on at home, I iron all my shirts at once. Delaying my ironing duties can be a fatal mistake.”

However through all the difficulty, companies are launching new brands and an increasing number of suppliers are looking for ways to improve distribution. Guineans have a fighting spirit with hospitality unmatched by many in the region.

• In Ethiopia 75% of owners are new business owners
• 80% of the owners rely on the MDC for their sole income
• 80% of the staff and 95% of the owners indicate they make more money now
• On average, 3.9 people are employed by each MDC
• 19% of owners and 8% of staff are female
• 80% of owners and 90% of pushcart operators report receiving training

Kudos to the Ethiopian team for making it such a success!

1. Knowledge- they know their customers and distribution area very well and can provide you with valuable customer insights.
2. Provide credit- many distributors provide credit to smaller outlets and they have the ability to collect regular payments.
3. Stockholding- they provide warehouse space and it reduces your personal warehousing space requirements.
4. Delivery- delivering bulk to your distributors will reduce transport cost as distributors will deliver smaller quantities to their outlet base.
5. Frequency- distributors provide regular delivery services and in some cases can provide daily delivery upon request.
6. Trading hours- distributors can provide delivery services after hours and over weekends.
7. Complementary products and services- in some cases distributors provide complementary products and value added services.
8. Promotions- dealer initiated promotions can further increase your sales.
9. Competitor activities- having established a good relationship with your distributor they can also provide you with information about competitor activities.
10. Feedback- distributor sales team can discuss new ideas and product offerings with their customer base and provide you with valuable feedback.

“The concept involves putting up a network of rural billboards around Kenya, using them as a way to gather and create a nexus point for community information. Anyone in the village can put up a notice, news or advertisement on a village billboard by going through a site manager. There is an opportunity to sell message space on billboards in other towns, using the mobile information pathways open by these operators. Billboard operators can be connected locally, regionally and nationally. End users will have the ability to find goods and services available via digital format. The concept marries the worlds of non-technical rural Africa with that of modernized urban Africa.”

This concept holds real potential for companies and non governmental organizations (NGOs) from a supply chain perspective as the need for increased visibility is one of they key challenges in emerging markets.

Reduce out of stock – visibility will allow distributors and suppliers to determine product availability and potential demand.  Mobile information can provide an important inventory management system for companies struggling to understand the demand in their rural outlet base.

Load consolidation – many companies do not deliver to rural areas as companies normally struggle to make the financial numbers work with less than truck load (LTL) deliveries.  With increased visibility, logistics companies can consolidate loads from various suppliers and reduce distribution cost in the process. A central location can also be used as a cross-docking site serving a network of villages in the area.

Sharing of information – this will hold real benefits to farmers  in the various villages as they can share knowledge about market prices and carrier costs (distribution). Companies and NGOs also will have an improved way to communicate with villagers on the ground.

Market days – African village trade revolves around market days. Many suppliers and service providers are unaware of market day schedules and the billboard(s) will make it easier for buyers and sellers to find each other.