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.

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.

What are feeder towns? – Feeder towns are hubs for product distribution, e.g. Mercato in Addis Ababa. Customers and retailers collect products from feeder markets or arrange for distribution to their various towns and villages. Some feeder markets are also category specific. Feeder markets can cover a wide geographical area. For example, Kano in Nigeria also services neighbouring countries such as Niger and Chad.

Coverage of feeder town – The coverage of the feeder town depends on product category, price and availability. In Accra, Ghana, I met retailers selling satellite dishes purchased from markets in Lagos, which they profited on even after factoring in the bus fare to collect the dishes. Smaller towns, including third and fourth tier cities, can also act as feeders, servicing smaller communities and villages with a range of products. Infrastructure and trade routes play an important part in determining the location of the feeder town.

Value added services – Feeder towns provide customers with a range of products. Category clusters in markets also make it easier for customers to compare prices. Distributors and wholesalers in feeder markets can also arrange for transport and provide other services such as credit.

Wherever you are in Africa, feeder towns play an important part in your distribution network. Understanding your product and category flow is critical to your business.

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?

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.

Photo: Marcia Zoet Bloomberg

Nestlé is planning to sail a supermarket barge down two Amazon River tributaries, namely Pará and Xingu rivers in Brazil. Nestlé wants to compete with Unilever in Brazil and aims to reach customers isolated from branded goods. Consumer goods companies are increasingly focusing on the one billion people in emerging markets estimated to exit poverty in the coming decade. These consumers will have the disposable income to afford packaged goods.

The distribution model – the barge will journey to 18 small cities for three weeks, docking one day in each city. From Belém, the vessel will sail to the region of Marajó Island to the city of Almeirim, into the Baixo Amazonas, or the Amazon Lowlands region, before returning to Belém.

The barge – Eleven people, including supermarket’s employees and crew members, will work on a daily basis on the 27.5m long boat housing three stock areas and 100m² store space.

Smaller package sizes – Nestlé has adapted its product portfolio by offering smaller, lower price point products including Alpino ice cream and Ninho milk powder.

Social Responsibility question

The distribution model is already ringing alarm bells in certain communities as Nestlé aims to penetrate deep in the Amazon forest. Nestlé’s product offering is unlikely to satisfy all, but how can Nestlé make their business model more inclusive and add value to communities?

Community development – Nestlé has the opportunity to include medicine, vaccines and other necessary products to their existing product range.

Micro-credit – Banco Bradesco SA in Brazil has already started to offer banking services in December via the Solimoes River, also in the Amazon. Nestlé can potentially tie-up with Banco Bradesco or other institutions to provide much needed micro-credit to potential entrepreneurs and distributors in the area.

Training and health information - Nestlé can provide training and development to local entrepreneurs and also include health and wellness education.

Pictures of the distribution model can be viewed here.

A look at how Coca-Cola’s Manual Distribution Centres (MDCs) offer a commercial opportunity for local entrepreneurs across the developing world, as part of its Business Call to Action strategy.