Prime your supply chain for emerging market growth
9 min read
11 October 2013
Crispin Mair says that as businesses expand more into emerging markets they need to consider how their supply chain will cope.
Supporting emerging market growth is a key consideration for consumer goods companies today, and although many claim to be, most are actually not doing nearly enough to prime their supply chains to support this part of their growth strategy.
Although many say it is a major part of their focus, the reality is that supply chain directors don’t spend enough time thinking about distribution from the factory gate to the end customer. If you really wanted to challenge them you could ask ‘Can you describe, with some acceptable level of accuracy, how many distributors with stock holding points there are between your factory and the end customer in the deepest, darkest part of China?’ That’s really how they need to think about it these days.
The last ten years have been spent espousing the end-to-end supply chain, from the customer all the way back to the supplier. Nowadays the spotlight is shining brightly on the customer distribution channels within this whole end-to-end view, especially in emerging markets.
The most innovative companies are direct sales businesses, who are leaps and bounds ahead, not necessarily in terms of having rigorous processes in place, but certainly in terms of creating innovative ways to deal with the complexity of mass product distribution and getting to the end customer, with exceptional levels of service and quality. They are right at the extreme end of customer propositions, where they have very limited comparable demand history, crude forecasts, sales periods in weeks not months or years, long lead-times, very rapid NPD and yet are still required to deliver item fill rates of over 99.5 per cent.
That has driven them to conceive very clever ways of servicing the customer and interacting with them, giving them the latest information on what products are available, understanding what it is they are likely to want in a few weeks’ time; planning the whole business on a day-by-day, hour-by-hour basis. It’s the fact they are actively managing a consumer relationship, rather than selling through a retailer, for example, which has driven these companies to be so good.
Similarly, consumer goods businesses are not looking at the wider picture and understanding the need to plan for potential supply chain disruption. It is essential that whilst organisations race to innovate their product / customer service propositions and improve their supply chain processes, they also assess the increased risks that this complexity creates. We find very few companies that have carried out proper supply chain risk assessments, whereby they sit down and brainstorm all of the things that could possibly go wrong in both their own and their suppliers’ businesses.
A proper risk assessment should prioritise all possible damaging events, based on likelihood and potential impact. A series of mitigation plans should then be drawn up, highlighting how risk can be reduced, or dealt with effectively if it were to arise.
Companies might, for example, have a site mitigation plan in place, outlining what they would do if they couldn’t use a particular production facility for a couple of weeks. They will also take part in exercises, which will help them to prepare for this potential problem occurring. They rarely, however, take the time to evaluate very specific risks within the length of their supply chain.
It is often the case that the procurement department carries out financial risk assessments on their suppliers, ensuring that the supplier has a robust and sustainable business model in place. What they often don’t consider, though, are the operational contingencies, such as what they would do if that supplier’s production facilities were suddenly unusable, or what the impact would be if they couldn’t source a particular product, or if a train carrying materials got held up at a border. The best risk assessments include understanding ‘Plan B’ for the operations; it’s not just about minimising potential financial losses but about making sure that the opportunity from getting the product to market isn’t lost.
If you use international suppliers then you obviously have longer lead times, different payment terms and many other complexities to deal with. A lot of companies are being forced down the route of outsourcing or sourcing from the Far East. They’ve often done it purely based on purchase price but failed to work out what the ‘full cost to buy’ is, factoring in all of the ancillary costs the business will incur while dealing with a long distance supplier. This will cover increased working capital, increased obsolescence, quality issues causing delays, poor reactions to changes in demand, and so on. A lot of these costs are not built into the initial supplier agreement.
What we’re finding is that a lot of organisations are still happy to place base-load supply on longer lead times from companies in the Far East, but also dual-source with suppliers closer to home, often in low cost Eastern European countries, who can guarantee top-up volumes at short notice, if and when required. We’re still amazed at how few companies have really done a proper ‘full cost to buy’ analysis.
Another big challenge for FMCG is that all of the capability within the supply chain has traditionally been focused within manufacturing and production. That’s where all of the really good people typically are, and often the rest of the supply chain, including vital points of customer contact like logistics, have been outsourced.
Today, however, because the biggest margins are in emerging markets, businesses are faced with the challenge of moving all of the most capable people at the back end of the supply chain to the front, to focus on developing smarter distribution channels into underdeveloped regions. The companies that are able to do this effectively and capitalise on the opportunities in emerging markets are the ones that will be the ultimate winners.
The supply chain has the potential to deliver competitive advantage for organisations who are willing to invest in its innovation and responsiveness, and are prepared to think outside of conventional norms to effectively support emerging market growth. Those who understand the importance of embracing innovation, assessing risks and potential pitfalls and ensuring the right people are in the right place doing the right things are those who are succeeding and leading the pack. Those not taking this on board need to up the ante or face losing out to more innovative competitors.
Crispin Mair is co-founder and director ofCrimson & Co.