SE Supply Chain E M Wh Pa Web[1]

7/31/2019 SE Supply Chain E M Wh Pa Web[1]

1/16

Gaining Supply Chain Advantage in Emerging Markets


2/16

SolvingEfesoWhitePaper

Gaining Supply Chain Advantagein Emerging Markets

Abstract

Emerging markets oer growth opportunities that

FMCG and other brand builders cannot aord to miss,

or to misunderstand. The right approach to supply

chain development is undamental to successul

exploitation o these opportunities. This document

addresses the key requirements to build Triple A Supply

Chains in emerging markets.

Clive Geldard

Solving Eeso

Group Vice President, Retail and Supply Chain

A Chance You Cant Aford to Miss

An Environment You Cant Aford to Misunderstand

Supply Chain Challenges: Upstream

Supply Chain Challenges: Downstream

Developing The Right Supply Chain or Success

in Emerging Markets

4

5

7

8

6


3/16

Solving Eeso White Paper | Gaining Supply Chain Advantage in Emerging Markets

DiversityThe sheer diversity o the emerging markets cannot be underestimated.

Emerging is not a blanket term or a homogenous set o markets.

Fragmentation Reaching mass markets eectively will require the developmentand optimisation o dynamic channels. In many emerging markets, outlet penetration

is challenging to achieve because o ragmentation. India or example has something

in the order o 13 million outlets (the US by comparison has ewer than 950,000). As

they build a supply chain to take their brands and products into the mainstream o

emerging markets, FMCG (Fast Moving Customer Goods) and other players must keep

the ollowing issues ront o mind.

Triple A-rated It is imperative to achieve a triple A-rated supply network -delivering products that are aordable, available, appealing.

One size ts one Success demands awareness that a one size ts all approach isunlikely to work.

Service and cost to serve Close alignment with the needs o individualmarkets must be based on sustainable cost to serve.

Supply chain visibility Successul players need to achieve the same supplychain visibility they enjoy in mature markets. This demands an eective strategy,

delivered through operational excellence.

Grow your own talent There is a need to leverage and mature managementexperience through on the ground involvement. Managers themselves will benetrom personal development and experience gained at the emerging markets sharp end

working closely with, and developing their local and regional talent.

Close the skill-gap The availability o quality skilled labour, whether in the citiesor rural areas, is oten in short supply. Companies must cultivate and progressively train

to succeed in retaining and growing pools o skilled resources supplemented, where

appropriate, by specialist external expertise and input

Buy in Acquisition presents one route to emerging market critical mass, although it isnot likely to be cheap.1

Or settle in A second growth route is development o new distributor networks,supported by modernisation o existing on-the-ground presence.

Supply everybody, everywhere The rapid urbanisation o emergingeconomies creates instant markets that are geographically concentrated. But newly

middle class city dwellers are very ar rom representing the total opportunity. Reaching

the still immense rural population is critical to growth.

Just Getting By Wont Get the Big Prizes Just getting by in the emergingmarkets is no more acceptable than it would be in mature markets. There is a will and

openness to understand and adopt best practices that help organisations to leap-rog the

capabilities o their peers in mature markets as they work to continuously improve their

KPIs around cost, service levels, quality, volume and sustained mass market penetration.

1 Krats initial outlay acquiringCadbury has been compounded

by the Indian governments capital

gains tax stance. Vodaone is still

contesting a claim or GBP 1.6 billion

in CGT ollowing their takeover o

Hutchison Essar. Krat is now acingcalls or liability to a similar charge

Belfast Telegraph, Jan 05, 2011

Key considerations


4/16


A Chance You Cant Aord to Miss

The Potential is Huge

The emerging economies phenomenon is well known in headline terms (although less

well understood in more granular detail, partly because the pace and impact o changeare so rapid and proound).

The so-called BRIC economies o Brasil, Russia, India and China are a major part o the

story, although by no means the whole picture.Their data is nothing short o astound-

ing. They are home to some 85% o the worlds population. Around 77% o Asias popula-

tion lives in just two countries China & India. They are experiencing massive growth

but they remain heavily dependent on external rather than internal demand (although

this is changing).

These exciting, dynamic and challenging countries cannot be treated as i they were

all the same. On-the-ground understanding is vital to successul growth. Such leading

FMCG brands as Coca Cola, Unilever, Danone and Pepsi Co are now earning 20% or more

o their revenues rom the largest emerging markets.

Mass Market Penetration is Imperative

(growth isnt just about serving cities)

The story o China and Indias ast-emerging urban middle class has a high prole. The

move to the cities is prolic. At the end o 2008, around 45% o Chinas total population

(600 million) lived in rural areas. By comparison, the rural raction was around 75% in

1990. But urbanisation is still nowhere near developed market levels.

Companies need thereore to work out how to reach the large percentage o people

living outside major urban areas. In India or example, nearly 75% o the population

remains in the countryside. Put another way, some 12% o the worlds human beings live

in rural India. Much o the need or dynamic supply chains and exibility o approachis driven by big dierences between urban and rural population density. Reaching the

high number o rural communities in Asia and Arica means companies need to maintain

Brasil, Russia,India and Chinaare home to some

85% o the worldspopulation

Source:various,FTResearch,

2005estimates

Coca Cola,Unilever, Danoneand Pepsi Co arenow earning 20%or more o theirrevenues rom thelargest emergingmarkets


5/16

Solving Eeso White Paper | Gaining Supply Chain Advantage in Emerging Markets 5

extensive distribution networks. These oten have to overcome lack o roads, very bad

levels o road maintenance, other poor inrastructure and the sheer challenges o dis-

tance and other geographical eatures. Success involves adapting transport modes. For

example, Unilever utilises a eet o motorcycles to reach customers in remote villages in

countries such as Indonesia.

An Environment You Cant Aord to Misunderstand

The Physical (and other) Challenges

The physical scale o many o the countries involved is immense. Distance, climate and

the other challenges present in mature markets are all magnied and multiplied in the

emerging economies (Sudan alone is approximately the size o Western Europe).

Uneven population densities have implications or manuacturing ootprint, logistics

planning and supply chain development. And geographical scale clearly impacts culture,

as well as setting physical challenges. There are multiple culture variations across largegeographical spaces and within territories as well. A range o even a couple o hundred

kilometres can make a major dierence to market proles and consumer tastes. Volatilty

o price is typically more pronounced in emerging markets, especially or agricultural

crops and perishable produce. Five lettuce heads cost around $1.40 in previous seasons

in the Middle East. Ater prolonged adverse weather, the same money would buy just a

single lettuce in Jordan by the end o 2010.

Weather and water supply is not the only actor to inuence continuity o supply and

drive price volatility. Other contributors include: currency supply uctuations (a major

issue or example in China and Brazil); evolving regulation around production standards

(pesticide residue legislation is closing o some sources o supply); and oil prices, which

impact manuacturing, processing and transportation costs. All these actors need to beunderstood. They should shape the planning and development o operational capability

or a supply chain delivering real advantages and optimal perormance.

Reaching the highnumber o ruralcommunitiesin Asia and Aricameans companiesneed to maintainextensive

distributionnetworks


6/16


How Does Optimal Perormance Maniest Itsel?

In the emerging markets, a supply chain running at optimum perormance and deliver-

ing real advantage will maniest itsel through:

Creating and sustaining a triple A-rated supply network that provides accessible, a-

ordable and appealing products consistently to all its target markets. Maximising operational capability such that high availability is maintained with mini-

mised wastage (India is currently the worlds leading volume producer o resh ruit and

vegetables, yet some 40% o all produce is wasted along the supply chain beore it even

reaches the market2).

Fully leveraging route to market and distribution channel options, so the potential

dependency on and limitations o the organised retail trade are avoided so that margin

share can be retained or the longer-term.

Developing and implementing built-in eedback mechanisms that capture ront-line

data ast and accurately, and enable rapid reaction to emerging consumer demand

trends.

And all o this has to be done in a context o market diversity and channel

ragmentation.

Supply Chain Challenges: Upstream

As emerging CPG markets open up, there is clear strategic need or multinationals to be

close to these major opportunities. They can get into the markets either through eec-

tive integration o local acquisitions, or by developing a base o world class suppliers to

undertake local contract manuacturing and outsourcing. In every case, there will be a

need to manage inputs around raw material specications and technology: what comesout can only be as good as what goes in and the way it is processed. Equally, there is a

need to manage output in terms not just o product quality but o brand consistency

and brand representation as well.

The urbanisation trend creates a requirement to rethink the manuacturing and distribu-

tion ootprints or the big urban centres o demand. A market o tens o millions o con-

sumers in a relatively concentrated area makes a strong case or close proximity manu-

acturing and exible, smaller scale plants. The potential benets include cost efciency,

a shorter logistics chain, and greater product reshness.

Supply chain eectiveness starts with production strategy and there is a need to drive

deep structural cost efciencies to be competitive in the emerging markets. A good

example is Colgates decision in the early 1990s to acquire a substantial stake in theChinese tooth paste company Sanxiao. Colgate discovered a 30% cost advantage and

reduced costs by some 60% through localising production.

The cost argument does have another side however: efciency o the local production

and distribution chain has to be balanced with the prospect o higher margins rom

competitive direct imports. Organized retailers are starting to import more products

(personal care, oods and beverages) because they oer 20-30% higher margins than

locally supplied products. For now, the imported product margin opportunity applies

mainly to longer-shel lie products. Retailers take the up-ront risk on inventory and

they need to be sure they can sell the products out.

The upstream challenges can be even more pronounced in the case o resh produce,

which is subject to ar more supply volatility actors. We are trying to meet the short

supply by establishing new sourcing centres in dierent countries and this has helped us

Accessible,Aordable

and Appealingproductsconsistently

A market otens o millionso consumersin a relativelyconcentratedarea makes astrong case or

close proximitymanuacturingand fexible,smaller scaleplants

2According to the president oWall Mart India


7/16


to an extent to keep the supply and prices steady in comparison to other competitors,

said Asra Ali MA, Executive Director o the Lulu hypermarket chain in UAE. Now we have

direct contracts with producers and armers in many countries which help us to avoid

middlemen and keep our prices low.

Supply Chain Challenges: Downstream

Working eectively downstream in emerging markets requires dealing with a range o

challenges. Typically, these are physically and commercially ragmented markets that can

be demanding in terms o achieving reach and coverage. They display rapidly evolving

market dynamics and high growth rates (sometimes countered by relatively rapid

decline in consumer spend, as observed in Russia during 2009). They are not always

business riendly in that they display inefciencies caused by statutory levies such as

entry taxes, central and ederal taxes and levies etc.

The inrastructure issues to be overcome include planning and construction o reliable

roads, railways, ports and suitable warehousing to support or example the ood cold

chain. Even the ast track approach to inrastructure development seen in some markets

will take many years to x the issues. Yet, in the ace o these multiple challenges, we are

seeing the emergence o new channels and a modern approach to trade which is oten

distribution-led and intermediary-driven. Complex logistics models are being successully

developed using non-standard vehicles and dynamic routes that can cope with such issues

as small order sizes that require aggregation and rapid change in physical conditions. The

objective is always to bring the market what it wants, in the orm it wants it and through

convenient outlets (the triple A-rated network) always at a sustainable cost to serve.

The objectiveis always to bringthe marketwhat it wants


8/16


What Does Good Look Like?

Cadbury India provides an excellent example o business that has its sights set on suc-

cess in emerging markets and getting a (relatively) luxury product into the mass market.

I the market potential is big then so are the challenges. Physical product quality has to

be maintained in temperatures that regularly rise to 43 degrees (chocolate melts at 36degrees). Wholesale networks either dont exist or are unsuitable - being more geared to

non-perishables such as soaps and detergents.

Cadburys distribution network used to comprise 2100 distributors and some 450,000

retailers. But they needed to avoid cannibalizing existing higher price point markets with

their new pack sizes, designed to be more aordable to rural consumers. The solution

was to establish two separate distribution channels, one dedicated to existing key ac-

counts and one specically or reaching the mass markets.

Pricing was seen as absolutely key to making chocolate accessible as well as desirable

and rightpricing was crucial to product success. Cadbury has ollowed a clearly planned

strategy o uelling volume growth through introduction o smaller unit packs, at lower

and market-aligned price points. Cost to serve becomes a critical part o the equation

and economical distribution is essential.

Companies such as Cadbury are now proving that success in the mass markets can be

achieved. But it does demand a ocus on driving sales through the right product mix at

point o sale, supported by signicantly improved supply chain management.

Distribution channels also have to be congured in the right way nancially. To work

and survive, shopkeepers need access to acceptable cost o capital. India provides,

through Micro Kirana Stores, an excellent example o the needs o the poor being served

eectively and sustainably. Micro Kirana Stores are the shops that sell mainly FMCG, local

brands and staple goods. The units or sale are small (either small packs or break-bulk

rom larger pack sizes) and they typically satisy a single days consumption need orcustomers lacking resources to buy in bulk.

This is a distribution system that is scaling ast. One o the key reasons or its growth

(aside rom strong market needs alignment) is that existing and potential store proprie-

tors can gain access to micronance, rom providers such as SKS.3

Micronance is enabling development o an entire root system o retail outlets that

can penetrate deeply, both into urban and rural markets. These outlets are convenient

and realistic or customers. For manuacturers and brand builders, they remove the

expense and logistical challenges o establishing their own points o sale. It is thereore

not surprising this common sense solution is gaining round rapidly, both in India4 and

elsewhere. Indeed even in the most challenging markets, micronance is creating op-

portunities or social advancement and sales development.5

Developing The Right Supply Chain or Success in Emerging Markets

Introducing FMCG brands into the mainstream eectively and achieving mass reach

means three key areas have to be addressed:

Future-proong distribution models

Re-engineering traditional channels Building the triple A-rated supply network

3 SKS has used the Grameen Bankmodel (microfnance -banking or

the poor, origins in Bangladesh) to

provide loans to 4.5 million borrow-

ers in the main entrepreneurial

women. It is one o the microfnance

providers serving the massive de-

mand or micro credit in India4 Since 1998, SKS Micro-fnance-supported Kirana stores have

developed a presence in 105 towns

and cities across 14 states. There are

some 1,500 branches in over 60,000

villages. The model is scaling very

ast based on standard operating

procedures and technology to auto-

mate and lower transaction costs. It

is adding 50 branches and 300,000

members each month

5 Kabul: $831 contributed toAghan mico-fnance schemes

(Microfnance Investment Support

Facility or Aghanistan - MISFA)

For Cadburys,the solutionwas to establishtwo separatedistributionchannels, onededicated toexisting keyaccounts and one

specically orreaching the massmarkets


9/16


Future-proofng Distribution Models

CPG brands need to uture-proo their distribution models in the emerging markets.

This begins with selecting channel options wisely, in order to minimise cost-to-serve and

protect margins. In greeneld markets there is a chance to avoid replicating the over-

dependence on the organised retail trade, which is now the norm in the West.Big Brands have shown themselves to be ar more resilient to retailer pressure than

on home territories. At the end o 2009 Kelloggs, which has 70% share o the Indian

breakast cereal market, ound a retailer was demanding 3-4% margin improvement on

current levels o around 12%.

Having de-listed Kelloggs, Future (the retailer concerned) was seeking to promote its

Tasty Treat own label range instead. Kelloggs response has been to scale up its distribu-

tion ootprint to tier two and tier three towns and cities, using local variants and low-

priced packs. They aim to reach some 2000 towns and cities in the next ew years up

rom about 1200 today.

Todays Distribution Channel StructureThe current picture is typically one o disconnection, with silos rather than linkages

between the main actors. There is no real visibility and a great deal o complexity. To

improve the situation and prepare or protable mass market growth, FMCG brands

must improve their downstream visibility and connect supply chain inormation across

channel silos. The channel structure today is oten a repository o latent knowledge. It

contains disparate data. Joined up, this data can play a much more productive role in key

areas, such as ensuring consistent product availability. When availability and merchan-

dising is poor, demand may not be satised and consumer awareness will be low. And

while awareness remains low, loyalty to and involvement with the brand will be corre-

spondingly depressed.

Brand builders cannot realistically expect the channel to do all this or them. A new

approach is required. It begins with a proound shit in attitude: rom every one o my

products in every outlet (push model); to I want an intelligent product assortment, one

thats appropriate to outlet, customer catchment, route etc. (pull model). In uture, eec-tive distribution channels will need to oer consistent and high prole product visibility

FMCG brandsmust improvetheir downstreamvisibility andconnect supplychain inormation

across channelsilos

SolvingEfeso2011


10/16


Last Mile Visibility - and brands will need to ght or retail shel space. In a uture-

prooed distribution model, the role o the retailer as a key inuencer in most cases will

need to be acknowledged (and leveraged) through the buying process. In addition to

new commercial behaviours within the channel structure, there will have to be opera-

tional advances.

These are needed most acutely in the area o product reshness (especially or short

shel-lie products). The direct impact will be more efcient delivery and replenishment

models, together with greater availability o cold chains where relevant.

Raising Retail Standards

Where legislation and governance o retailing, environmental standards, health and

saety alls short o the basic conditions that prevail in developed markets, it is the Brand

owner that must set the benchmarks and standards or the supply chain improvement.

At a basic level this may include training, audits or provision o equipment such as gen-

erators and chillers.

Wholesale / Distributor NeedsThese should not be neglected and must be steered towards the value-added role thataligns with the mission o the Brand owner. Distributors should be encouraged and

helped towards efciency o operations in practical areas such as planning o delivery

routes, replenishment and requency o calls. Distributors should be distributing. An e-

ective incentive is close linkage o earnings to stock rotation and high inventory turns.

Distributors mustbe steered towards

the value-addedrole that alignswith the mission othe Brand owner


11/16


Re-engineering Distribution Channels

The purpose o this re-engineering is to drive channel perormance, build sales orce e-

ciency and increase replenishment through distributor partnerships. The relationships

involved need to be active, not passive. To be successul, FMCG players need to work

with wholesaler and distributor partners eectively.Again, it is a question o transorming latent data into useul commercial inormation.

For example, to understand demand signals necessitates current and accurate visibility

o what is selling and what is sitting on the shelves. There is a need or real capability to

perorm the analytics around key issues such as product assortment, o-take by outlet

and route.

How Should An Efectively Re-engineered Channel Perorm?A hard working and efcient distribution channel will present a number o positive key

perormance indicators. Outlet productivity, requency o orders and sales call produc-

tivity should all increase, as should bill value and suggested orders. Penetration per

outlet dened by SKU numbers should rise too.

The approach to product portolio will migrate, rom blanket to precision, through ocus

products and must stock items supported by well-executed promotions. Improvements

at individual outlet level need to be matched by an increase in overall outlet coverage,

distribution ootprint and numbers o outlets per route. The positive impacts o these

improvements will include increased inventory/ asset turns and optimisation o sales

territories and delivery routes. All these individual improvements are desirable in them-

selves. But combined, they lead to the oundation or uture protable volume growth:

reduced end-to-end cost to serve.

Transormation Requires Inormation

To achieve mature market levels o supply chain visibility requires radical reappraisal

o current systems and approaches. Knowledge latent in the system must be captured,interpreted and leveraged. This requires a resh look at methods o data capture, at the

timeliness o currently available data (is it too old to be useul?) and at the causes o lack

o visibility downstream.

Every key aspect o sales activity needs to be measured and its impact clearly under-

stood. This will involve monitoring o specic campaigns and perormance measurement

o merchandising & sales orce interventions.

O course it is easy to prescribe these actions in theory. Oten, the reality on the ground

will include disparate systems at dierent distributors (exacerbating the silo eect).

There will be varying degrees o sophistication. There will be assorted technologies that

will have been implemented organically - rather than according to any over-arching

plan. So, in systems terms, there is unlikely to be anything approaching a level playingeld at the outset.

Finally, to add to the technology-based communication challenge, there will be issues o

commercial condentiality. Given that most distributors are non-exclusive in the emerg-

ing markets, there will be obstacles when it comes to cross-silo collaboration & data

sharing.

Can The Obstacles Be Overcome?

Yes. With the right strategy and operational development, enabled by appropriate

technology, spectacular results can be achieved. An example o this is the sales orce

application implemented and supported by ITC Inotech, utilising a hand held device to

improve productivity and inormation capture and to support connectivity and visibilityup the supply chain.

The oundation oruture protable

growth: reducedend-to-end costto serve

The approach to

product portoliowill migrate,rom blanket toprecision, throughocus productsand must stockitems supportedby well-executedpromotions


12/16


13/16


Making a clear and over-arching strategy work in practice may require undamental

changes in approach to logistics, merchandising, pack sizes and production range. Asingle globalized chain will not deliver in every context.

Instead, consider creation o regional or local loop supply chains. This approach will not

only reduce ood miles. It will better accommodate the local tastes and habits that tend

to vary greatly over a range o even 200 kilometres.

Finally the one import that rarely, i ever, works in isolation is expatriate management.

Grow local talent and build their capabilities step-by-step. Locally sourced and nurtured

management oers unique market knowledge and insights. As a result, the organisation

avoids the pitalls that outsiders inevitably walk into and it remains competitive. Dont

conuse tradition with change resistance. Local managers and workorces are very oten

enthusiasts or adapting best practice approaches to good eect on the ground. Given

the chance, they are highly receptive to deploying new methods or technologies. Seethe example rom NewsPage Express on page 12, or consider that a ull 98% o P&Gs

workorce in China is locally recruited.

It is imperative tomaster complexityand overcome

negative impacto localisation

SolvingEfeso2011


14/16


Successul Change Can Require External Input

Many o the changes and innovations discussed in this paper require undamental reap-

praisal o the supply chain and the ways in which it is designed, congured and oper-

ated. For serious competitors, supply chain optimisation opens the route into emerging

mass markets and very appreciable volumes through selling aordable products.

The upside is a undamentally dierent scale o business growth and the possibility o

serious CAGR and protability. But preparing or business on this scale, and in the ace o

all the challenges discussed, has major implications or every aspect o the supply chain

operation rom strategy to detailed granular execution.

Experienced, proven external counsel can make an important contribution to helping

clariy strategy and build internal operational capability. To access a broad base o indus-

try best practice, serious competitors look or advisory partners who can help grow their

emerging markets-based talent step-by-step up the learning curve, and then keep them

at the leading edge. The challenges o supply chain advantage in emerging markets are

such that a nite end point is never reached.

In these dynamic environments, change is a constant. So too is the need to manage

change and to leverage opportunities through continuous improvement. The outcome

should be a move towards a one company standard. This, as has been stressed, is not

one size ts all. Rather, it is one standard

o excellence achieved exibly in all situ-

ations. The triple A-rated supply chain is

an achievable possibility. In the emerging

markets, its rewards are compelling.

In these dynamic environments, change is a constant.So too is the need to manage change and to leverageopportunities through continuous improvement

Grow local talentstep-by-step

For urther inormation, please contact:

Clive Geldard, Group Vice President, Retail and Supply Chain, phone: +33 1 53 53 57 00,

mail: [email protected], web site: www.solvingeeso.com


15/16

Solving Eeso brings strategic,

operations and change management

capabilities in one integrated team. The

company oers proven methods and

proprietary techniques to deliver a truly

world class perormance in strategy

execution and operations.

Solving Eeso brings 30 years

experience and thought leadership

rom across the retail and ast

moving consumer goods value chain,

supporting many o the leading global

brands in both mature and emerging

markets.

Solving Eeso is a Group o some 350

experienced consultants representing

more than 25 nationalities. It operates

rom 24 ofces around the world with a

strong presence in Europe, USA, South

America, Middle East, Arica and Asia.

An international scope and local

delivery capability ensures that clients

have access to the specialist skills they

require whether at national, regional or

global levels.

Our ofces:

Abu Dhabi

Atlanta

Barcelona

Berlin

Budapest

Buenos Aires

Copenhagen

Dakar

Delhi

Geneva

Gothenburg

s-Hertogenbosch

Istanbul

Lisbon

London

Manchester

Milan

New York

Paris

So PauloSeoul

Shanghai

St. Petersburg

Stockholm

Head ofce:

144, avenue des

Champs-Elyses

75008 Paris, France

Phone +33 1 53 53 57 00

www.solvingeeso.com

SolvingEfesoWhitePaper


16/16

Emerging markets ofer growth opportunities that FMCG and other brand builders cannot afordto miss, or to misunderstand. The right approach to supply chain development is undamental tosuccessul exploitation o these opportunities

Documents

SE Supply Chain E M Wh Pa Web[1]