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.

Resilience is important. Emergencies have been growing in scale. According to the Munich Reinsurance group, the real annual economic losses have been growing steadily, averaging US$75.5 billion in the 1960′s, US$138.4 billion in the 1970′s, US$213.9 billion in the 1980′s and in 2004, the World Bank estimated that the annual global economic costs related to disaster events average $629 billion per year, five times that of 20 years ago.

This is about local impact. There is something else; global impact – because of the nature of integrated, and stretched, global supply chains. This takes us to the third dimension or phase of any Humanitarian response – RECONSTRUCTION.

We are all familiar with the harrowing images of a devastated Haiti, a flooded Pakistan and less so with those quiet disasters – in terms of media exposure – like Niger. If humanitarian efforts are geared to put a country “back on its feet” then, arguably, these countries have never been on their feet in the first place. They suffer from croney governance; corrupt practices; huge inequalities between rich and poor but, the fact remains that markets are a crucial component of how people survive in these places. Then, there are those places hit by similar earthquakes or meterological disasters this past year such as Japan; Queensland, Australia and Thailand. These disasters, because of their part in any number of integrated global supply chains – have had a wider global impact. Again on markets.

• Queensland, Australia. The floods closed 34 coal mines; knocking out 75 per cent of Australia’s 120 million tonnes. Queensland coal is high quality with < 15 per cent ash. On the 29/10/04 price per tonne was $53.90. After the floods in Queensland, this shot to over $300 per tonne. Power stations in Japan and India were badly affected and from this a number of industries dependent on coal fired power.

• Fukushima, Japan.27,000 people were killed and over 202,000 homes wiped out. Damages have been estimated at up to $305 billion – Greece GDP is $330 billion. Companies like Sony Ericsson record losses as a direct consequence and global GDP drops by an estimated 0.5 per cent. For example, 25 per cent of global supply of silicon wafers used in semi-conductors collapsed.The cost to insurers well may rival the record $62 billion that followed Hurricane Katrina. The rebuilding efforts will create more fiscal strain on Japan, where the ratio of debt to GDP already is 200 per cent, compared to 90 per cent in the U.S. Japan is “chronically under insured and that means that the government will pick up the tab for a particularly large part of the recovery effort, pushing the level of public debt perhaps even higher. In supply chain terms, South Korea and places like Thailand – for a short time – benefited from Japan’s misfortune.

• Thailand. Over two-thirds of the country’s 77 provinces have been flooded during the four-month-long crisis. The floods have had an impact on the following companies: Honda; Toyota; Nissan; Isuzu; Nikon; Sony; Canon; Nidec; TDK and various food companies. Some have had production suspended and are actively looking for alternatives. This means that many will not return to Thailand.

Building back opens up a number of issues. Fundamentally, the mindset has to shift from making sure that humanitarian needs are met; that essential shelter, food and medical supplies are made available  to a bigger and more long term picture – survival to sustainable livelihoods. This means a clear view of what is possible within a global economy and, a commitment to improved resilience going forward.

At the Policy or macro-economic level, there has been a significant impact on the economy as a whole. This is where the opportunity to RE-THINK purpose , scope and approach matters. What can we do to recover and what can we do to build back a sustainable future? Disasters wipe the slate clean in more ways than one. Then, at the micro or operational level, we have businesses and the market. This is not just about MNCs; it is more about SMEs or micro firms. These are often in the informal sector and have no insurance; they do not have any assets and, yet are a vital part of reconstruction.

The issue that needs to be addressed in the third phase of the Humanitarian effort is how to bridge the gap between the macro and the micro levels. This is the transformational agenda; a focus on business models themselves. That has to move beyond MNCs and into the details of SMEs and micro firms; informal as well as formal business relationships.

Let’s look at the  core issues related to building back; starting with the neutrality of humanitarian efforts; the “second tsunami” and, moving to the need for logistics and supply chain thinking more adaptable to local context and, a transitional agenda.

1. Purpose. There are many interpretations of a humanitarian action but the principles of Humanity, Neutrality and Impartiality first developed by Henri Dunant after the battle of Solferino (1859) stand the test of time. See: Tomasini and Van Wassenhove (2009). The issue is to balance local, national and global priorities by respecting these key drivers and the challenge – as we move from Emergency Response to Post Emergency Reconstruction – is how can this be achieved and monitored?

Moving from Emergency to Reconstruction is not an easy transition.

Beware the power of the media to shape priorities. For example, International news and governments will not hesitate to allocate significant sums to rescue a loan yachtsman lost at sea but, the same sum is unlikely to be found for an improved weather forecasting system that could prevent future tragedies for many more sailors. This was very much the case with the Tsunami early warning system.

Then, as the transition from emergency to reconstruction and sustainable growth (or, better said, livelihoods) takes shape there is a need to ensure that the hard won neutrality and impartiality is maintained. This is a huge subject and important work has been done on Rwanda, Cambodia, Nicaragua, Iraq and Afghanistan. See: Terry (2002); Uvin (1998); Klein (2007) and much more. It does not remove the imperative – any place devastated by whatever needs to be helped to fend for itself and this is no short term fix. But by its very nature, what is done in the name of reconstruction is not the same as that effort to respond. It is the difference between a 100 metre sprint and a marathon.

2. Re-think & re-model. I recall a BBC Radio interview when the head of an NGO was asked what the goal was in Haiti. “To get Haiti back on its feet” came the reply. Paul Collier, the Oxford Economist, was in the studio and snapped back: “Haiti was never on its feet in the first place.” This is important. The word reconstruction implies building back to a model. No post emergency effort should be on automatic pilot. There is a real opportunity to RE-THINK the approach. Let’s not forget that after the Great Fire of London, Wren submitted a comprehensive plan to re-build London in a different way. Vested interests won and the City went back to what Le Corbusier would later describe as “the zig zag of donkeys”. Should we build back Port Au Prince or build a Port further along the coast? Should we bother with land line telephony? Is there an opportunity to challenge the energy mix? What industries will work? How can we ensure that we train and retain our people?  Above all, how can we balance the market in an inclusive way? This means a focus on more than better, cheaper and faster ways of exiting the country with commodities etc and more value added in country. And this does mean an effort to champion traditional as well modern; micro firms as well as MNCs.

3. The second tsunami. After every disaster there is a risk that “build back better” can be the trigger to a second tsunami – what Naomi Klein has called “blanking the beach”. This is when a disaster takes place where the poor live; a favelha, a shanty town or, in the case of the Indian Ocean tsunami of 2005, on the beaches where fishing communities had lived and worked for years. As Seth Mydans puts it: “The tsunami that cleared the shoreline like a giant bulldozer has presented developers with an undreamed of opportunity, and they have moved quickly to sieze it.” (IHT, March 10, 2005).

The Tsunami that struck on 26/12/04 took the lives of 250,000 people and left 2.5 million people homeless throughout the region. The relief effort was enormous. In Indonesia alone this meant a US$684-million Multi-Donor Fund for Aceh and Nias that has helped to build or rehabilitate 18,600 houses, to build 43 community health clinics, to build or repair 282 schools, to repair 975 bridges, to rebuild 2,881 km of village roads, and 199 km of urban roads, to finance 1,581 irrigation and drainage projects in rural areas, to rehabilitate 178 km of drainage in urban areas, to build 1,148 clean water systems, and to build 1,032 sanitation units.

In other places, the impact has not been so constructive. In Sri Lanka and elsewhere, hotel developers used the tsunami as a catalyst for their efforts to stake a claim for land that would be ideal for leisure facilities. Suddenly, the beaches were off limits for communities that had been there for years and, because of the fact that they had no title for the land, there was to be no compensation. In legal terms, they had lost what they did not own. Herman Kumara, the head of Sri Lanka’s National Fisheries Solidarity Movement, which represents small boats, referred to this reconstruction as a “second tsunami of corporate globalization”.

Let’s keep with the fishing communities around the Indian Ocean. Our work at Rushikonda, South India, illustrates the point that, generating over 1 per cent of Indian GDP, the traditional fishing industry has a role to play in the economy. We need to understand and explore how best to develop these traditional markets. It is unhelpful to assume that these are irrelevant to globalisation. As Mauro Guillen makes plain “globalisation … does not compel countries, industries and firms to converge toward a homogenous organisational pattern of “best practice” or “optimal efficiency” – those who fail to conform are doomed to fail”.

4. Transformational Logistics. As detailed on this Blog, we see the need to develop logistics and supply chain thinking and practice beyond the mainstream of the developed world to understand and reflect reality in emerging, developing AND devastated markets.

Rightly, the focus of any emergency response is on saving lives – ensuring that the local impact in terms of human suffering is assessed and, that vital food and medical supplies reach the needy as fast as possible. This is performance based logistics focussed on getting the job done. This is not about a better, cheaper and faster response to consumers in order to return greater dividends to shareholders; so much for an emergency response.

And yet, Logistics in the Developed world costs between 5 to 8 per cent of most products; this figure rises to over 13 per cent in India and, in the case of Humanitarian efforts can be as much as 50 per cent of total cost; 70 per cent in some cases. There has to be a way to reduce these costs after the Emergency or, consumer markets – not NGOs – will not be able to foot the bill.

We will not be able to move straight to a state-of-the-art approach in many markets post devastation and need to move from an obsession with better, cheaper and faster supply chain models to an agenda rooted in agility, adaptability and alignment – the three A’s. This means agility to respond to short term changes in demand or supply; adaptability to local context and, alignment with other operators or NGOs. All these factors in synchronisation can deliver improved performance. This means INCLUSIVITY – an effort to maximise job creation by building back and developing traditional markets as well as exploring global markets for more modern products and services.

Take agriculture. Few of these disaster hit markets have modern day agriculture but the opportunity is open for many in a world climbing from 7 to 9  billion by 2050 and needing to increase agricultural production by 70 per cent to achieve this.

Take infrastructure. In mature markets the ROI on infrastructure is $3 for every $1 invested. The impact figures after a disaster are significantly more. This is where, strategic decisions can be taken on urban layouts; affordable housing and connectivity. Above all, we need to move beyond hard infrastructure and explore “soft” – broadband etc; as well as “intermediate” – warehousing, truck fleets etc.

Take logistics. All too often Governments and International agencies fail to see “the multiplier effect” of this cross cutting theme. Governments will often have a Minister for Transport; another for Ports; another for Aviation; Agriculture etc. Post emergency, there is a real opportunity to build a Logistics and Supply Chain capability to combine with Infrastructure. This thinking needs to extend to the small players too. Don’t forget that truck fleets will be small and the effectiveness and efficiency of road transport will be critical. Warehousing is another area to focus.

Take retail. It is not all about the modern trade. The impact of building back small traditional outlets and serving them by cash and carry’s is considerable. Much more needs to be known about all sorts of supply chains from perishable to FMCG from source to consumer and back through waste and recycling.

Other sectors. This depends on local context. A Chemicals industry is useful to agriculture in developing fertilisers etc.

5. The flows. As with mainstream logistics, we need to consider the flows: physical; information; cash and skills.

• Physical movement of goods. Coca-Cola have opened up their distribution networks for medical supplies and more companies need to explore the win-win of such initiatives. Nestle are using a floating supermarket, Nestle Ate Vocee (Nestle comes to you), to take products to remote areas of the amazon; Unilever use small armies of door-to-door vendors in several markets and Nestle has set up a network of over 7,500 resellers and 220 micro-distributors to reach people in the favelhas of Rio and Sao Paulo and many other Brazilian cities. Many companies are using manual handling systems in urban areas as a means to reach consumers in crowded places. More needs to be done to reduce empty trucks by sharing distribution systems – a dramatic shift to 3 PL and the growth of consolidation hubs.  Then, there are a number of simply modal options from adapted bikes to the South African street trader stalls made up of water carriers. the integration of packaging thinking into this will help enormously. Shelf ready packaging designed around motor rickshaws for example.
• Information flows. From wireless technology to cloud computing, more can be done to enable populations after a disaster. For example, mobile phones are being used increasingly to aggregate demand and supply in all sorts of contexts. Then, we have ideas like eChoupal – computer terminals deployed in villages to offer information, advice and on-line sales to rural communities. TVS have used this to sell motrocycles to rural areas – 37,000 in 2009.
• Cash flows. Not many ATMs – let alone bank branches – survived any of the disasters from Pakistan to Chile; Fukushima to Thailand and, many disaster zones are populated by what conventional banking would describe as the un-bankable. More needs to be done to explore mobile banking. In Haiti, companies like yellow pepper have developed the subscriber base and this improves the dispersal of monies. In contrast, look at what happened in Libya after the fall of Gaddaffi – a massive operation to print banknotes followed by a dubious effort to distribute the notes. It is like scrap metal dealers in the UK – keep it at cash and there is no traceability. Surely, more can be done to develop mobile cash options.
• Labour mobility and skills. All the very best equipment can be donated but someone locally has to be able to operate it – buy a man a fish and feed him for a day; teach him how to fish and feed him for a life time. We need to be realistic. Everyone in micro firms and SMEs is a key employee – there is little or no slack or, in the jargon, redundant equipment or resource. We need to take a view on training – standards; content and the use of technology for delivery. This is a huge area. Ironically, the developed world persists in selling legacy systems into markets that can’t absorb them and don’t need them. We need to respond to context.
• Energy and Utilities. Intermittent supply of electricity is hugely significant and every effort has to be made in the transition to look closely at the mix of energy available, developed and used. This is the oppotunity to explore “leap frog” technologies and green supply chains.
• Water. This is increasingly scarce and there is a need to focus beyond source and to include use. For example, embedded water. It is estimated that the average Briton drinks between 2 and 5 litres of water per day and will use about 145 litres for cooking, cleaning, washing and flushing. If the embedded water used in the production of the goods people consume is also taken into account however the daily use per person in the UK may be nearer 3400 litres (Source: Waterwise). So, encouraging a given location to produce and sell something that does not reflect an understanding of real water use is foolhardy.
• Feedback loops. What are we learning? Over the summer, we worked on seven traditional supply chains and since then we have opened this up. There are more to follow. I have been struck by how weak developed world process mapping skills are in these traditional contexts. Procedures don’t exist and, due to financial constraints, improvisation is key and a constant feature. It is like asking a concert pianist to play in a jazz quartet with no notes written down. Few can do this.
• Innovation. As Paul Polak maintains, 90% of design resources serve 10% of the population. His point is that more needs to be done to serve needs and livelihood rather than feed expectations and lifestyle. This means a shift in emphasis from product to process innovation. And this may mean more jugaad (a hindi word meaning make do and mend) than on an obsession with blue sky and “new to the world” invention. It may mean championing second hand equipment for supply chains. And it may mean developing a comprehensive maintenance programme to maximise life-time value of assets. And this brings us back to skills and a need for huge innovation in learning and knowledge transfer. For example, the work that Pearson Group are doing in Africa or, Airtel are doing with mobile phones.
• Firms. The developed world needs to wake up to the fact that the Public Sector and Multi Nationals do not employ the majority world. The informal economy generates over 1.8 billion jobs worldwide and far more than this depend on what is earned in this way. We need to explore ways in which we regulate and develop employment across all types of firm – one regulation does not fit all circumstances.
• Transition. Any shift from Emergency to Reconstruction will take an enormous effort and, as we have noted, it is not an area well served by academic research or analysis of actual cases. As we have noted elsewhere in this T L Blog, there is a case building to extend the World Bank LPI to open up more the transition between the Modern and fully developed mature market and, the Traditional ones at the opposite end of the spectrum.Equally, there is a need to dis-aggregate large geographies into their constituent parts – logistically speaking. For example, we cannot compare Shanghai with a Western Province within China in much the same way that it is not helpful to aggregate logistics capacity, capability and delivery of a Region within a larger unit. We need greater granularity and, a recognition that micro firm capability needs to be tracked as well as bigger operators.This should explore ways in which a wider geographical radar can be of real benefit to accelerate reconstruction efforts. For example, Haiti being able to avail itself of adjacent Santo Domingo. This is especially significant when we factor in conflict hotspots in Africa where 15 countries are landlocked and 20 states have more than 4 neighbours. Tanzania and Zambia have 8. Try borrowing milk from a next door neighbour whose house has just burned down or, whose inhabitants are being dealt with by social services. An expanded LPI could provide a vital insight into this area and place an emphasis on external contingency as well as internal structures, performance and monitoring. Witness the implementation of a Tsunami early warning system in the Indian Ocean post tsunami – ignored by the Junta in Myanmar as if to prove the point.
• Inclusivity. Low growth in mature markets is driving MNCs to look to emerging and developing markets for growth. In 2010 39 per cent of acquisition deals by consumer companies were in emerging markets, compared with just 1 per cent in 2008 according to the Grocer’s OC&C Global 50 league table. There needs to be some way in which recovering regions can be re-built in the best interests of local people. We need to look at how Singapore, Taiwan and more significantly South Korea could be transformed over time. In logistics terms, we need to shift the emphasis from supply chains to what Malcolm Harper (2009) has called Inclusive Value Chains – a focus on linking small growers and producers to modern markets. This is the route to sustainable livelihoods and not just sustained growth for the developed world. As recent events demonstrate closing rather than widening the gap between rich and poor makes commercial sense.

….

All of the above merits a renewed effort to develop a research agenda to underpin global policy. The Humanitarian effort is underserved in any case but, what happens after the Emergency is most certainly the Cinderella at even that rather badly served table.

Each disaster area has a unique challenge – its own ground zero; and, a set of options that need to be understood; prioritised and delivered. Citizens need to be given the security of a job and a home; International business protected from corruption large and petty and, small business from government corruption and big business exploitation alike. Enabling strategies need to be developed and implemented to build the platform for sustainable growth and this does mean a long term vision far from the bottom line of quarterly shareholder reports.

We need to develop strategies to witness, understand and explore transitions from emergency to reconstruction. This is vital and so many governments; major international corporations; international agencies and specific trade associations can only benefit from this effort. At the very least it will improve value for money and result in wider impacts.

Article by: Rob Bell, Transformational Logistics Blog

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 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.

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.

For many Chinese and Vietnamese consumers, frozen food is still a foreign concept. Large retailers in China and Vietnam continue to focus on fresh food options such as live chickens and in-store fish tanks. However, consumer shopping and buying patterns are changing. Chilled products, including juice and frozen foods are increasingly becoming popular in emerging markets such as China, Vietnam, and India.  Young people, in particular, are driving consumer demand.  This is true especially in cities that are undergoing rapid urbanization.  The growth is fueled also by new legislation in the retail environment that gives foreign investors and retail chains greater access to these markets. In all this retail frenzy, the cold chain is becoming a hot topic.

The challenges

One of the key challenges in emerging markets is a dysfunctional supply chain that is highly fragmented in the retail section.  In a fragmented retail segment, companies struggles to achieve economies of scale on both the retail and supply sides. With the projected growth in these key emerging markets, even given the current financial crisis, there are great opportunities for both local and foreign investors. Unfortunately, a lack of cold chain facilities is hampering expansion into these markets, especially in second and third tier cities. Even in first tier cities, such as Shanghai, Ho Chi Minh City, and Mumbai, multinationals struggle to find the right cold chain partners and facilities.  Foreign investors currently view the lack of an established cold chain as one of the major barriers to market entry.

How does the traditional system work?

Agricultural produce typically travels from farmer to trader to agent to wholesaler to retailer. In some countries local administrators add extra distribution layers. In some cases, state-owned companies will distribute products to provincial distributors before reaching local markets.  Each step in the process adds additional handling and cost.  Often products are transported without boxes and with limited or no refrigeration. Products are exposed to the elements and, consequentially, many products end up as waste. Quality suffers as products travel down the chain with limited cold storage and frequent processing delays. China currently accounts for 13 percent of global fruit production and 40 percent of the world’s vegetable output. However, it is estimated that around 30 percent of the total production of fruit and vegetables are wasted due to an inefficient cold chain. In India it is estimated that about 60 percent of the value of agricultural output is lost between the farm and market.  An A.T. Kearney report on China estimates that only 15 percent of products that require chilled handling are currently handled that way. This compared to 85 percent in Europe.

What is required?

For any company, it is critical to evaluate and understand the cold chain system. Temperature control is important as it is a key requirement to keep products within a specific temperature range throughout the supply chain.  This can be particularly challenging in emerging markets.  One solution is investing in packaging that can protect products against temperature variations and improve product quality at the final destination. Companies also need to have a clear understand of the product flow and routing dynamics, including the transportation modes and refrigeration capability.  Delays in delivery and processing can have severe effects on the quality. Companies should have a back-up plan as transportation normally takes longer than expected in emerging markets.

The key to any cold chain is driving end to end processes and efficiency. It requires direct delivery with temperature cold trucks, warehousing and advance technology tracking and traceability for food safety.  Companies need to account for geographical aspects as they truck products for one end of a country to the other.  Distribution centers (DCs) can play a key role in a company’s cold chain strategy. DCs have the ability to service several layers of the distribution system. This can further improve distribution and supply efficiencies.

Collaboration is important

Cold chains are expensive to operate and in many cases a coordinated effort is missing.  Local companies that try to establish their own facilities often lack capital and expertise.  For such companies, a key first step to developing a cold chain is to seek out or create a consortium.  The consortium will be responsible for creating industry standards with government authorities.  As standards are set, more companies will join the consortium.  It is critical to include all key stakeholders in the process.  Effective cold chain consortiums will include logistics providers, cold chain equipment suppliers, multinational and local companies within their membership.  Stakeholders can collaborate during various projects and at the same time share risks. The entry of foreign retailers such as Mal-Mart, Carrefour and Tesco can add cold chain expertise and help to reduce margins and improve efficiency in the overall system.

Rethink technology

Technology investment is a key element of establishing a cold chain.  Companies need to have a long term perspective in relation to technology investments.  In many cases the technology and equipment are available, but companies find the investment too substantial and lack the economies of scale to make it a viable option.  Finding companies to make the investment can be one of the key challenges during market entry. In emerging markets, companies seek simple and cost effective solutions to problems. For example, some companies now are using pressure-sensitive labels.  Once the label is exposed to specific conditions, the label changes colour and alerts the supply chain of a disruption in the cold chain.

Focus on education

Education is also key to creating a cold chain. Trainings and workshops can be used to educate and inform partners about challenges and how to overcome them. For example, A.T. Kearney has run a series of conferences in China the UK and the US to improve China’s cold chain distribution systems. The conferences bring parties together that are interested to enter or expand their cold chain distribution in China. Such conferences and workshop are great venues to inform companies and authorities about the health and safety risks, an increasingly important topic.

The cold chain is critical to global trade in almost all commodities. With a growing demand among emerging market consumers for chilled products, the cold chain is becoming an increasingly important part of the supply chain strategy. One of the key requirements will be to reduce waste and improve quality. Recent food shares in China and the rest of Asia have highlighted the importance of food safety and health during the process. With all this attention on the cold chain in emerging markets, the cold chain will likely heat up even further.

The market handles more than 450 different types of seafood at the markets more than 1,500 stalls. The first market in Tokyo was established by Tokugawa Ieyasu during the Edo period to provide food for Edo castle (now Tokyo). Around $20m dollars of fish and other foodstuffs are bought and sold at the market on trading days. The tuna auctions are a particular attraction and are a series of auctions in various parts of the market. Traders can sometimes be seen closely examining the fish with torches prior to bidding.

I recently spoke to Patsy Day, an intellectual property attorney from Rouse Legal based in Ho Chi Minh City, Vietnam. Rouse is a leading global intellectual property firm, with offices in more than twenty countries. Rouse has been handling IP cases in Vietnam since 1997.

TN: Which sectors are most infringed?

PD: The sectors where we see most infringements are alcohol, clothing and pharmaceuticals. As the Vietnam market becomes more sophisticated, so do the infringements. Infringers have also become more IP savvy and we are seeing a move away from direct copying to “lookalikes”.

TN: What is important for companies entering the country?

PD: Vietnam has made considerable progress over the last couple of years with regards to intellectual property rights. However, there is still a gap between the law and the implementation of the law. This is important, as companies need to have confidence that their IP rights will be protected.  Franchising is essentially an IP driven business and franchisors are concerned that they won’t be able to control their franchisees or stop third parties from imitating their brands.

TN: What advice would you give to franchisors?

PD: Protect your intellectual property.  Register your trademarks, domain name and any copyright. Do your due diligence and pick a partner that understands the importance of IP. Get a strong contract in place with your franchisee. Many international franchisors use their standard agreements which have been developed over the years. This is a good thing as it makes it easier for the in-house legal department to manage. However, it is important to run it by a local lawyer. For example, some standard agreements have very detailed insurance provisions. The insurance market in Vietnam is still developing and the franchisee may not be able to obtain the level of insurance you require. You could be putting an obligation on them that, from a practical point of view, they cannot adhere to.

TN: How can franchisors assist franchisees with regards to IP rights?

PD: Education is very important. Communicate to franchisees the key objectives you would like to achieve with your brand. Franchisees need to have clear guidelines on how to use your brand properly.

TN: How can you track your brand?

PD: Do regular audits and keep an eye on the use of your brand. Ensure that the standards are being maintained. For many companies, their brand is essentially their biggest asset. You want to have control over your brand.

TN: For many companies, parallel imports are also a big issue. What can they do?

PD: It is very difficult to stop parallel imports because it is not illegal. Products are just imported through a different channel. Some brand owners will identify the weak link in their supply chain by tracing back the parallel products and then rely on contractual obligations to control the flow. It is, however, critical that you register your own trademarks.  In the past a more relaxed attitude was to allow the distributor to register your trade marks in their name. However, when the relationship goes bad it is very difficult to recover your trademarks.

TN: The Danone and Wahaha trademark dispute in China was followed by many industry observers. What are the lessons for Vietnam?

PD: Do your due diligence carefully and deal with intellectual property disputes as they arise. Ensure your contracts have carefully drafted IP transfer clauses and that any intellectual property rights that are meant to be assigned, are in fact assigned and any licences registered, as appropriate. It is also important to look at the structure of your business in Vietnam and what role you will play in the company. In some cases a joint venture might not be the right option so companies should explore, for example, licensing agreements.