Zambia Study Shows Stronger Supply Chains for Key Drugs can Reduce Child Mortality from World Bank on Vimeo.

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.

History is written by the winners and, similarly, many Retail and Logistics textbooks are written from the perspective of developed economies and, as the LPI highlights, key segments of the global logistics industry are dominated by no more than 25 large corporations – especially in the maritime, port and air freight segments. This contrasts starkly with the fact that 85% of jobs in the USA and 65% in the EU are generated by small to medium sized companies and in the majority world – that is 75% of world population – few jobs are even formal or covered by regulatory and welfare schemes. Few workplaces are even covered by legal title and health and safety is a pipedream. Conventional Logistics analysis just does not grasp the essential asymmetrical (informal / formal) nature of global sourcing, value addition, distribution and points of purchase. We see Transformational Logistics (and retail) being a better way to describe reality in the emerging and developing world.

Retail and logistics in the emerging and developing countries is largely fragmented, unorganized and dependent on traditional outlets such as mom & pop stores with an average footprint of under 100 square feet. Modern style retailing accounts for no more than 15% of the market across the BRIC countries with the top 5 retailers in each only accounting for 9% of the market. This compares to 80% across the developed countries.

In India, an estimated 90% of warehousing space is of low quality with manual handling and basic equipment being the norm. Moving cargo by road – which accounts for an estimated 36% of logistics costs – is a similar story. The transport industry is highly fragmented and informal in nature with 74% of operators owning a single vehicle. This fragmentation and inefficiency is compounded by India’s tax system. To avoid multiple taxation, companies typically have warehousing operations in every state. The result is a large number of small warehouses across the country that lack the latest warehousing processes and technologies and don’t offer economies of scale. National highways form only 2% of India’s road network, but they handle more than 40% of road freight traffic – which is 36% of total freight in all modes. This naturally leads to severe congestion and, as the Last Mile video depicts, this is most acute closest to Ports.

However, a World Bank Report highlights that despite all too visible inefficiencies in road infrastructure and smaller and less powerful vehicles – Indian trucks travel at an average of 20 mph versus 60 mph in the developed world – India’s surface transport sector is one of the lowest in the world. India’s average costs per tonne kilometre at $0.019 to $0.027 compares to China at $0.04 to $0.06. Ironically – given the state of the roads – this is an argument against modernisation in much the same way as the traditional sector’s ability to beat modern retail at home delivery. An Indian friend of mine in Mumbai cautioned me on the growth of modern retail by pointing out that local street traders offered his family virtual room service and, didn’t even expect immediate payment!

End-to-end supply chains in places like India, Africa and South America are not smoothly linear and many start out in the fields and move slowly through several pairs of hands until they reach a modern format store via a fully racked and intelligent warehouse – sometimes. Logistics, just like Retail outlets themselves, is not a zero sum game with the organized taking over from the informal all along the line. This is unrealistic and, transforming developing world logistics will depend more on hybrid models combining what works in different regions and, with different partners.

Transformational Logistics (and retail) is based on a hybrid view of the world. This is not even a transitional stage – since many markets will never evolve into a fully functioning and stable modern state across the board. Traditional outlets will not disappear and many will benefit greatly from the cash-and-carry model – acting as a virtual regional distribution centre for mom-and-pop outlets to grow their business without the capital investment. For example, the German owned Metro chain have worked hard to create incentives for rural traders to bypass the mundis, or local markets, and visit their outlets. In Bangalore, this has resulted in a 20% drop in tomato prices and 10% for cauliflower. Because sales were only to registered traders the impact has been far greater. There has been greater standardisation on products such as fresh foods and, greater transparency on revenues – meaning more taxes and less exposure to the informal market.

The LPI can be used to characterize the relative status of each country, or region within, as follows:

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We have not specified the specific numerical thresholds for the above classification – more research is required – though the modern contingent seems to be the first 25 countries in the LPI sample seeing  Spain at 3.63 with the lowest LPI score of this group. Spain is 88% of the leading LPI performer, Germany. Here’s a comparison of the BRIC economies compiled from the Report.

World Bank Logistics Performance Index: 2010

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The need for greater understanding of transformational realities is even more acute when we take account of the nature of supply chains worldwide. As Martin Christopher makes plain; supply chains, not companies compete and, the fact is that in a world increasingly dependent on outsourcing of non-core activities many companies are part of a complex eco-system of demand, supply and aggregation that draws from both informal and formal enterprise models. The emerging auto industry model will see far less vertical integration and more dependence on suppliers way beyond a primary tier. The informal economy is not going to fade away and, as long as it remains the need for clarity on the true nature of logistics in the global economy persists. After all, modern retail and modern logistics are not the promised land and, as green supply chain perspectives assume greater significance; manual distribution on adapted bamboo bikes will not be dismissed as a better yesterday. Modern and traditional; organised and disorganised are words that come from a binary perspective and, in an asymetrical world this view of logistics is not fit for purpose.

The Retail and Logistics sectors have played a major role in shaping the economies of the developed world. Now, as the LPI demonstrates, there are significant variations from top to bottom of the near 130 sample and such measurement can catalyse change. For those obsessed by unit costs, the LPI is a timely reminder that any advantage on production costs will be wrecked by the high costs of shipment and market access. Whilst well functioning market economies have a measureable logistics cost of under 10% the sale price of manufactured goods; places like Afghanistan exceed 25% on packaged goods and even 50% on commodities such as grains and cement. India stands at over 13% and this will impact any export initiative versus competition. We advance the case for Transformational Logistics as a means to sharpen the focus of research and shared practice across the fast growing and developing world is strong.

Article by: Rob Bell, Transformational Logistics Blog

Vietnam’s textile industry has increased significantly since normalizing relationships with the United States in the 1990’s. Vietnam was granted most favoured nation status (MFN) in December 2001, which led to a dramatic reduction in import tariffs in the US market. Vietnam’s induction to the World Trade Organization (WTO) in 2007 and the Vietnamese government’s strong support of the textile and garment sector, have provided strong incentives to attract foreign investors.  The textile industry is now the second biggest exporter in Vietnam and is expected to become the biggest in 2009. However the financial crisis has had a severe affect on Vietnam’s textile industry, which has suffered from a slump in demand from key export markets in the US, Europe and Japan.

Labour cost advantage

In the textile industry, companies are increasingly looking for lower cost countries that can provide outsourcing opportunities. The rising cost of land and labour are diminishing China’s labour cost advantage and Vietnam is increasingly seen as a low cost sourcing alternative to China. Estimates are that wage levels in Vietnam are about one third of those in China’s coastal region.  Companies that are chasing lower labour costs are increasingly moving production to Vietnam. In a 2008 Booz Allen Hamilton survey 88 percent of companies originally chose China for its lower labour costs. Of the companies surveyed, 55 percent believe China is losing its competitive edge to countries such as Vietnam. The survey also indicated that 63 percent named Vietnam as their top low cost sourcing alternative to China. However, costs may be rising.  The Navigos Group, a leading recruitment solutions provider in Vietnam, announced early in the year that there had been a 16.47 percent increase in Vietnamese workers’ average gross salaries between April 2008 and March 2009.

Low cost location

However, low cost labour is hardly a competitive advantage in the long term. Labour cost keeps changing and today’s low cost location is not necessarily tomorrow’s viable outsourcing location. If it is not China or Vietnam, it could be Bangladesh or Cambodia. Ig Hortsmann, a professor of business economics at the University of Toronto’s Rotman School of Management notes that Nike originally off shored manufacturing to Japan.  As labour costs increased, manufacturing was later moved to South Korea and Taiwan. When labour cost increased in South Korea and Taiwan, it was moved to China and later also to Vietnam.  Justin Wood, a Director of the Economist Intelligence Unit Corporate Network in Singapore makes the point that in the last 15 years Vietnam has moved from a low to a middle income country. The move towards a middle income will likely put additional pressure on Vietnam’s low cost labour status.

The Vietnam advantage

Elisabeth Rolskov, founder of ER-Couture in Vietnam, notes that manufacturing advantages in Vietnam go beyond labour cost and the country has some competitive advantages compared to China. “Vietnam has very good embroidery skills and needle work”, says Rolskov. “A lot of designers and manufacturers need embroidery skills and Vietnam has kept in touch with its traditional roots,” she adds.

However, for local designers, Vietnam has limitations as a sourcing location. “Sourcing material, buttons and zippers from Guangzhou is much better,” says Rolskov.  In Guangzhou you can find everything in air-conditioned shopping areas and the shopping experience is less hectic.” This can have a negative impact on a designer’s creativity as the designer is restricted by what is on offer in the local market.

Rolskov thinks Vietnam is currently a great location for smaller manufacturers as the market is more flexible. “China is more volume focused”, adds Rolskov, a view supported by Rebecca Lebold, director of apparel product and technical development at Lilly Pulitzer. “Vietnam has higher production minimums than many other countries. Lower minimums would allow smaller companies to source their product in Vietnam”, Lebold notes.

Intellectual property threat

For many companies outsourcing to Vietnam, intellectual property (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. Designers can “take inspiration” and it is seen as a major driver for setting trends in the industry.   The World Intellectual Property Organization (WIPO) has called for stricter intellectual property enforcement within the fashion industry to better protect companies and promote competitiveness within the textile and clothing industries. “It is a hard thing to take care of and you just have to be faster than everybody else”, says Rolskov.  For smaller designers and labels it is much easier to switch manufacturing.  However to prevent the copying of designs is a challenging undertaking.

Infrastructure development

For Vietnam to advance as an outsourcing location, the textile industry supply chain needs to be considered.  Local logistics are influenced by direct and indirect cost.  In Vietnam’s textile industry raw materials are often imported, which increases cost compared with those countries able to source locally. Managing reverse logistics can also be a challenging undertaking in Vietnam.  Procedures, processes and infrastructure are sometimes not in place to manage repairs, returns and warranties.

According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Vietnam. According to TI analyst John Manners Bell, logistics costs are estimated at 25 percent of Vietnam’s GDP. Even with cheap labour cost, poor infrastructure remains a major barrier for entry.   This is largely due to Vietnam being in the early stages of infrastructure development.

Many experts believe that China’s advanced infrastructure gives it a major competitive advantage. Electricity and transportation costs will likely come down even further and and  this will have a significant impact on the total cost, even if their labour is more costly. The Vietnamese government is aware of this dynamic and has invested billions of dollars in the country’s infrastructure.  The government is actively encouraging foreign direct investment in the country’s infrastructure. This is visible with projects such as the Cai Mep Container Port in the Mekong River Delta and the new Long Thanh airport that’s projected to be completed by 2015.

Through assessing the overall supply chain, rather than a singular focus on labour costs, it is easier to identify where Vietnam’s opportunities and challenges lie in the textile industry.  While small scale designers and manufacturers take advantage of a flexible environment, infrastructure and logistics processes will need further investment to make Vietnam an outsourcing destination and source for tomorrow’s fashionista wardrobes.

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.