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The Conference Board

The World Bank

Integration of Poor Countries in Global Supply Chains

A Global Buyers’ and Producers’ Perspective

January 28, 2010

© 2009 The Conference Board, Inc.1 www.conference-board.org

Introduction and Overview:

GLOBAL BUYERS/PRODUCERS ARE ACTIVE

PARTICIPANTS IN INDUSTRIAL DEVELOPMENT

Identification of industrial operation bottlenecks

Global players are increasingly proactive in identifying public goods bottlenecks affecting their operations, articulating policy measures and seeking public sector and NGO collaboration to address them

Forming PPPs to take necessary actions

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CASE STUDY FOCUS:

business decision-maker formulas in balancing geographic and economic considerations such as a country’s public policy and its institutional and private sector capacity

company- or industry-specific strategies used by the global buyers in dealing with MDC and LDC government and market failures and the lessons that can be learned from best practices in these challenging markets

public-private sector collaborative efforts can lead to reforms that maximize buyer, seller and LDC benefits. How to overcome transportation, logistics, innovation and quality bottlenecks. How decision making criteria of global buyers and sellers can be taken in account in the design of national policies and assistance strategies by international organizations.





Three Case Studies

Team Foods – Moving up the value chain

Unilever Andina – Upgrading Supply Chain technology

Hindustan Lever – Unlikely supply chain partners




© 2009 The Conference Board, Inc.4 www.conference-board.org4

Supply chain minimizes two types of costs

• Physical Production/Distribution Costs– Manufacturing costs– Transportation costs– Facility utilization rates– Inventory carrying cost on pipeline and cycle stock

• Supply/Demand Mismatch Costs– Lost revenue when demand exceeds supply– Product scrap when supply exceeds demand– Inventory carrying cost on safety stock





… through three management activities

• Trade-offs– Lot-size vs. Inventory, Inventory vs. Transportation,

Lead-time vs. Transportation, Product Variety vs. Inventory, Cost vs. Customer Service

• Relationships– Market (Price), Transaction Cost, Leverage

(Cooperation), Strategic (Win/Win)

• Risk

5





Case Study: TEAM Foods

Edgar E. Blanco & Ken Cottrill

MIT Center for Transportation & Logistics


TEAM Foods

• Products derived from vegetable fats and oils– US$385 Million Revenue– 10% of LatAm Market– R&D

• Joint venture since 1999– Partners operating since 1950’s

• Palm Oil key raw material– Commodity– Indonesia & Malaysia top world producers– Colombia 40% of LatAm, fifth in the world





Palm Oil Supply Chain

Crude OilExtraction

Oil PalmGrowers TEAM

Coops

Weighing

Other Buyers

Vertical Integration

Pre-arranged price

IndustrialCustomers

Price Band

Crude OilImports

Extraction

Contracts

(Option)

North America

Latin America





Sourcing - Key Insights

Crude OilExtraction


Other Buyers

IndustrialCustomers

Crude OilImports

12 hour limit

Vertical integration- Cooperatives

- Technical

assistance

Remote areas-Violence

- Labor shortage





In-Country Logistics – Key Insights

Crude OilExtraction


Other Buyers

IndustrialCustomers

Crude OilImports

Fragile

infrastructure

Regulated carriers

Unreliable import

processes- Strong operational

capabilities





International Logistics – Key Insights

Crude OilExtraction


Other Buyers

IndustrialCustomers

Crude OilImports

Fragile infrastructure

Unreliable lead times- Transportation

- Import/Export

Lack of visibility-No regional 3PL





TEAM Foods – Learnings

• Shaped by local conditions– Vertical integration at sourcing– Internal operational capabilities

• Logistics environment constraints value-added strategy– Infrastructure– Unreliable regional logistics partners– Uncertainty in government processes– Embraced mobile technologies





Case Study: Unilever AnCam

Edgar E. Blanco & Ken Cottrill

MIT Center for Transportation & Logistics


Unilever AnCam

• Fast Moving Consumer Product Goods– Personal Care, Food and Home Care

• Global multinational– Andean & Central American Division (AnCam)– 11 Countries– €876 Million Revenue

• Three tier SC strategy– Centralized Manufacturing: Global scope– Regional Supply Chain Planning: AnCam scope– In-country operations: Local scope





Manufacturing

Secondary Manufacturing

Water port

R&D LatAm





3-tier model shapes operations in AnCam

• Global Manufacturing– State of the art technology & processes– Global & Regional R&D

• Ex: Sachets for LatAm, Special detergent packaging

• Independent in-Country Operations– Local Distribution & marketing– Varying capabilities– Independent P&L

• AnCam– Links Global Manufacturing with In-Country Needs– S&OP Process





Varying in-country strategies

• Level of sophistication varies significantly by country– Colombia has sophisticated DC & 3PL, Perú basic

warehousing and small carriers– Shaped by local acquisitions

• Common problems– Lack of logistics capabilities

• warehousing, transportation

– Different distribution models• Direct-store delivery• Intermediary network

– Infrastructure limitations





Changing political landscape, creates regional supply chain uncertainty

Source: Blanco & Cottrill

based on regional interviews





Coping with regional & local risk

• Strong reactive capabilities– Local teams verify changing regulations & laws

– Informal knowledge network

– Complex organizational structures

• Excessive inventory levels at in-country distributors– Unreliable transportation network

– Uncertainty of import processes





Unilever AnCam – Learnings

• Achieved global/local balance– Informal knowledge transfer

– Risk management increases cost

– Investment in state-of-the-art SCM processes at regional level

• In-country logistics environment creates inefficiencies– Infrastructure

– Unreliable regional logistics partners

– Uncertainty in government processes

– Un-even business practices





Case Study: Hindustan Lever

Ronald Berenbeim

The Conference Board


HINDUSTAN UNILEVER – WHEEL HOUSEHOLD

DETERGENT

Three Household Detergent Markets: (1) base; (2) middle; and (3) highest. 90 percent of the Indian population is in the lowest category (98 percent of the UK is in the top section)

Product: 10rs “sachet” – two week supply – wean consumer off of 5rs bar (“dying format”) that consumer uses for “tough stains”. Instead, the market pitch is hygiene and health

Competition – Local Brands: Nirma (minimized manufacturing costs such as electricity, no sales force –instead used wholesale distributor network) and Ghari

Strategy – Wheel Smart SHRIMATI: (1) single message –cleanliness is critical for hygiene message delivered through consumer peer endorsements, local street fairs; (2) reduce logistics and manufacturing costs





Local competition and business strategies





Market Shares – India Laundry Mass Market

Market Shares – India Laundry Mass Market

Source: HUL, 2009





Mass Markets Model

Mass Markets Model





HUL STRATEGY

Use community volunteers and local spectacles (street fairs) to raise personal hygiene awareness and attract new BOP clientele

Reduce logistical costs through strategic sourcing to minimize warehouse costs, trucking and warehouse maintenance and training, reducing production costs (e.g., packaging and dye)





Business Operations and Systems – HUL v. Latin

America

Latin America: S & OP Model – Relational contracting with tightly knit local manufacturers/distributor networks based on logistics sophistication, cost effective production, local partner contingency handling

India: Source factories close to markets. Reliance on Shakti network of local housewife/entrepreneurs for retail distribution in rural areas





Bottlenecks and Solutions

South America: – requires quick adaptation to market and trade policy changes. Negotiations with local governments and distributors are key to keep market penetration. Use of sophisticated production scheduling systems and electronic data interchange

India: - develop in-depth understanding of needs of the poor and promotion of products through educational outreach (e.g. clean garments can improve health). Sophisticated reward/penalty systems to avoid local distributor default





Enterprise-related Issues

Skills: – significant logistical skills gap (e.g. warehousing) –India’s growth rate is not sustainable without significant upgrade. Opportunities for PPP and joint efforts with NGOS

Local Partner Sophistication:

Latin America: need for robust financial checks among local counterparts

India: need for business sophistication in limited partner agreements

Business Service Providers (e.g. designing, packaging):

India: special need to focus on packaging and labeling because of high unit costs for small “sachet” packets





Infrastructure, Factor and Backbone Services

Factor Costs and Systems

India: Microcredit key need for Shakti entrepreneurs, small shopkeepers, truckers and consumers

Connectivity (Land, Air, and Customs):

Latin America: cobwebs of transportation network is core. Biggest challenge is lack of physical infrastructure, transportation services. Difficult to fix because of bureaucracies, political instability

India: roads and ports key challenges – inferior to those found in comparable countries (China, Brazil)

Supply Chain Management (Latin America): financial checks and balances – core of supply chain sophistication





Public Private Collaboration

Skills Development

Latin America: few formal skills needed

India: need for Shakti/small shopkeeper financial literacy and consumer education re: hygiene value of cleanliness

Transport/Trade Facilitation

Latin America: collaboration with government and other buyers can reduce costs by 10 percent but little done so far

India: need for road and port improvement and for logistical hubs

Regulation/Standards/Certification

Latin America: light health, environment regulation. Little public/private collaboration





HUL: LESSONS LEARNED





+38%

Bottom of the Pyramid Consumers/Workers Are Vital to

World Economic Sustainability

Source: HUL Interviews, March 18, 2009

BOP market is large. As consumers/suppliers are

attracted the pyramid will evolve into a diamond shaped

market structure





Need to Achieve Both Supply Chain Efficiency and Effectiveness





Efficiency – Cost control is key: Need to absorb short-

term cost pressures

MASS MARKETS MODEL

Utilization of strategic sourcing to minimize warehouse costs





Effectiveness – Affordability, Acceptability; Availability,

Awareness (FMCG)

Affordability is the degree to which a company’s good or services are affordable to consumers at the low end of the market

Acceptability is the extent to which consumers and others in the value chain are willing to consume, distribute or sell a product or service

Availability is the extent to which customers are able to acquire and use a product or service

Awareness refers to what customers know about he products or services you sell

Source: Jamie Anderson, Costas Markides, Strategic Innovation at the Base of the Pyramid, Sloan Management Review (Fall 2007, Vol 49, No. 1), pp. 83-88 at 87.





WEAK TRANSPORTATION INFRASTRUCTURE AND LOGISTICAL SKILLS IMPAIR

SUSTAINABILITY OF GROWTH RATE





+38%

ROADS/TRUCK FLEET CONDITION

India’s High Cost of Surface Transport

Source: G Vaidhyanathan (JNPT), ICS World Bank, Cygnus, KPMG Analysis

*Source: World Bank report: “Road transport service efficiency study “November 2005

US Cents/ Km

5.5

3.7

2

7

0 1 2 3 4 5 6 7 8

Europe

Japan

Canada

India

US Cents / Km





+38%

PORTS

77

84

0 10 20 30 40 50 60 70 80 90

Singapore

Hong Kong

India

Turn Around Time in Hours





+38%

WAREHOUSING

Source: G Vaidhyanathan (JNPT), ICS World Bank, Cygnus, KPMG Analysis

19.9 24.2

32.5

0

5

10

15

20

25

30

35D

ays o

f In

ven

tory

Brazil China India

Average Inventory Days





+38%

TRANSPORTATION/LOGISTICAL SKILLS GAP

Dearth of talent

• Dearth of trained manpower to cater to growth

Significant shortage in

Warehouse management & operations

Trucking

Shipping

Cold Chain / Chilled Chain

Source : KPMG study on “Skill Gaps in the

Indian logistics sector

Size of the bubble represents

the size of the segment

In 2015 India will need

•4.7 Million trained drivers

•400,000 loading supervisors

•35,000 Ware house managers





Conclusions and ways forward

New collaborative arrangements between global and local partners

Logistics for transport and retail distribution is breaking new frontiers

Supply Chain efficiencies are not enough - need to focus on Supply Chain effectiveness




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