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.

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 is VMI?

In short, VMI is the process where the supplier generates the order and manages the inventory level for the customer. Prior to shipment, the supplier sends a delivery notice to the customer. VMI normally includes a combination of hardware, software and the input of people. The system is not tied to specific communication protocol and companies can use EDI (e.g. Wal-mart) ,XML, FTP or any other reliable communications methods.  Emerging methods, such as GSM mobile networks, are significantly reducing hardware cost (see Tanzania’s “SMS for Life” example).

VMI is a collaborative process where suppliers and customers share data and jointly agree on forecasts for each stock keeping unit (SKU). The replenishment of stock is automated and software is used to analyze and adjust changing demand patterns, goals and constraints. However, in emerging markets working with SMEs, it is unlikely that such an automated system is required and human intervention will likely suffice. Once the customer receives the product, the retailer handles payment through their account payable systems. Mobile money such as M-PESA also holds great potential as a payment system.

What are some of the challenges?

Technology - Hardware and software cost are major stumbling blocks when servicing SMEs . Current cost effective mobile technology is reducing costs, as demonstrated by m-health models, but cost remains a stumbling block for many SMEs. Poor system integration can also have a severe negative impact on the system.

Product returns – With SMEs there is the possibility that the system will be crippled by high product returns as cash flow and priorities shift.  Agreeing on inventory guidelines is just the first step of implementing the system. Making the model work can be more challenging.

Buy-in – Getting buy-in from SMEs can be a challenging undertaking and VMI can be viewed with suspicion to force them to buy certain products and SKUs.

Sales force resistance – The sales force makes money by selling product and this can be viewed as an attempted to reduce staff and cut cost.

Production challenges – Where products or SKUs are in short supply, the system can quickly break down and suffer from a credibility loss.

What are the advantages of VMI?

In developed markets the advantages of VMI for upstream (suppliers) and downstream members (customers or retailers) are well documented. The same holds true in emerging markets.  VMI holds some major cost savings benefits for both the supplier and customer. VMI can eliminate the need of a sales person to call on the outlets and reduce cost.

Customers are not always available and fulfillment costs are high due to low drop sizes. By improving visibility suppliers can provide timely and accurate deliveries and, in the process, provide better customer service. VMI can also improve customer retention and reduce stock outs, critical issues for any supplier in emerging markets where demand fluctuates based on cash flow. By closely evaluating the demand, suppliers will also tap into local market insight and get a better understanding of demand patterns.

Partnership and value added services

Building strong partnerships, either through non-profit organizations or Self Help Groups (SHGs), could play a crucial role in identifying retailers and making the model more scalable. Non-profit organizations can also play an important role in capability deployment and organizing micro-credit groups.

Partnering with other organizations that provide value added services such as micro-credit, mobile money and insurance, can share costs and risk with other partners.  VMI technology can also be used to sell other services such as mobile airtime and electricity vouchers. However, companies need to pilot VMI to ensure obstacles are overcome prior to roll-out.  With the mobile revolution in full swing, technology such as VMI, holds great potential for SMEs in emerging markets.

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.

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.

Presentation – The Supply Chain Lab (PDF updated). Presentation at the IFC Inclusive Business conference in Washington, DC.

Case Study – IFC. On overview of the model and IFC’s involvement

Case Study – Social Market Place & The Supply Chain Lab. Reaching untapped markets.

Case Study – Harvard University. Case study about the MDC model and impact

Video (updated 22 Sept 2010) – TED . Melinda Gates analyzed the case of Coca-Cola in detail, and extracted three best practices that have allowed the company to build a global footprint

Video – The Coca-Cola Company. 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

Video (Updated 27th of March 2010) – Business Call for Action. Adrian Ristow, Measuring Results of Coca-Cola’s Micro-Distribution Centers, BCtA Webinar

Video – Business Call for Action. Coca-Cola’s former CEO Neville Isdell talks about the Manual Distribution Centre (MDC) and the impact it has on the community at large

Video-The  Coca-Cola Company. Coca-Cola helps entrepreneurs set up Micro Distribution Centres.

Pictures – The Supply Chain Lab. The MDC model in pictures

Article – next billion. Can Big Companies Drive Development through Enterprise? President Clinton and CEOs Weigh In

Article – AT Kearney. Supplying Sub-Saharan Africa: Bring Common Sense, Patience and Ingenuity

Article - Foodbev.com. The Coca-Cola system advances new solutions for economic development

AHL: Could you tell us a bit more about the background of this project? Why was it initiated?

MV: We have been involved in supporting the government to implement malaria prevention programmes like bednet distribution in Zambia since 2005. However, over the course of our programmes we realised that, although the government was quite successful in preventing malaria, the people who still were infected could not get adequate treatment due to a lack of malaria treatment drugs at the rural health centres. Our analyses showed that those drugs were available at the central level and district level; but somehow they did not arrive at the health centres. Clearly, there was an issue with the supply lines between MSL (the central medical store), the districts, and the centres. We partnered with other major donors like the UK and US governments as well as JSI and Crown Agents as implementers, and with MIT to ensure academic support. Our joint analysis pointed towards placing commodity planners at the district level as the most promising option. When we discussed this with the Zambian government, we were given a strong commitment for for a pilot project to try this out.

AHL: So what exactly did the pilot entail?

MV: The pilot included 24 districts, 8 of which were used as controls (continuing the use of the ‘old’ system), and in 16 districts we implemented either of two models. Those 24 districts represent about a quarter of the whole country, so especially for a pilot project we had very good coverage. Model 1 involved the placement of a commodity planner at each of the districts. Their tasks were to facilitate communication with the health centres about commodity needs and levels and to prepare orders to MSL. Once the orders were filled and had arrived at the district warehouse, they would also be responsible for packing and dispatching the orders to the health centres.

Model 2 was very similar to model 1, but in this model the separate orders for the health centres would already be collated at the central level and would arrive pre-packed at the district level; the commodity planner was only responsible for preparing the order and for forwarding the packed order to the health centres.

AHL: And the results?

MV: They were spectacular, especially in the districts that used model 2. For example, availability of the main drugs for artemisin-based combination therapy (ACT) improved from an average of about 50 per cent to nearly 90 per cent. If we would extrapolate this to the whole country, this alone would prevent more than 16,000 deaths a year. But, of course, the effects have been much wider than just ACT; although the commodity planners concentrated on malaria supplies, availability of other supplies like antibiotics and contraceptives has increased as well.

When I started on this project, I did not know much about the logistics side of public health, but these results have made it very clear to me how important supply chain management really is for the people’s health.

AHL: So what do these results mean for other programmes? And perhaps other countries?

MV: Of course you cannot translate the results one-on-one to other programmes or settings, but what this trial has made clear is that a relatively modest investment in supply lines can deliver spectacular results. In most developed countries, supply chain management takes up more than ten per cent of the cost of the supplies themselves; in Zambia this was less than half that percentage. Whether you should aim for a similar proportions as in developed countries remains an open question, but it seems to be clear that a modest increase could lead to greatly improved health outcomes. However, I must say that we have not yet finalised our cost-effectiveness analyses; although it was fairly easy to to quantify the extra costs involved, it was not so easy to calculate cost savings, e.g. in model 2 the cost of labour that was no longer needed for repacking at the district level. Nevertheless, even if the cost savings turn out to be very modest, we expected that the improved access to medication and the resulting lives saved would make it more than worthwhile.

I think it is important in this sense to think of integrated supply lines. Although this project was initiated as part of the malaria support, the focus was on supporting the supply of all essential drugs.The results for other pharmaceuticals as for example antibiotics or contraceptives was positive as well. I think that shows that we could make even more gain if we could move away from the disease-based silos and work on approaches to strengthen an integrated supply chain

AHL: What happened after the trial ended? Are the commodity planners still active?

MV: Yes, they are; and, in fact, the districts that were not included in the trial as well as the model 1 districts were so impressed with the results that they are now requesting the country-wide implementation, and the Ministry of Health now has committed to a phased roll-out across all districts.

AHL: This project involved a large number of partners: besides the World Bank, people from DFID, USAID, JSI, Crown Agents, MIT, and of course the Zambian national and district governments were involved. Was it difficult to coordinate such a big group of actors?

MV: I think we were lucky in that that Zambian government gave us a clear commitment and took ownership of the pilot. What also helped was that we all had fairly clearly defined and complementary roles with a minimum of overlap. Thirdly, sufficient funding for the whole project duration was safeguarded from the start. And finally, monitoring and evaluation were integrated into the trial from the start, making it possible to present a result that could be accepted by all parties. All this meant that we could work very well together with a minimum of conflicts; it also meant that we could draw upon each other’s strengths to get things done.

Be aware of the distributor powerbase – competent distributors are key to most supply chains and collaboration is critical in expanding your footprint. However, distributors should not hold you and your decisions hostage. In emerging markets, even big distributors are likely to have limited reach in key regions and areas. Distance yourself from you current situation and ask yourself the following questions: If I have to start this business from scratch today, what would the selection criteria look like and which key areas and regions do I want to penetrate?

Take note of the evolution – too often supply chains in emerging markets just evolve without any strategic intend. Modern trade and retailing are expanding in Africa (maybe not as rapidly as Asia) 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?

Invest in people and partners – training budgets should not be limited to employees but must include strategic partners. Develop and invest in your partner base and they will grow with you. Training is gold in developing economies and will also go along way in building relationships.

Don’t be an evil gorilla – when it comes to your distributors in emerging markets, you are likely to be the 800 pound gorilla. Be transparent and handle them with the respect they deserve. There is a lot to learn from even the smallest of partners.

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