Supply Chain Frontiers issue #37
The countless mom-and-pop retail outlets that serve consumers in emerging countries represent a rich source of new business for companies, providing they can build supply chains capable of profitably supporting these micro retailers. A research project under way at the Center for Latin-American Logistics Innovation (CLI) based in Bogotá, Colombia, is creating a detailed profile of these supply chains. One of the project’s participants, multinational food company Nestlé, has successfully developed a supply chain for small retailers in Mexico, and is rolling out the strategy in other countries.
The supply chain built by Nestlé and the CLI research team was described at the Leaders Summit conference in Bogotá, Colombia, May 2010, which was organized by logistics education and consulting firm LOGyCA.
The CLI research team is analyzing supply chains in countries across Latin America as well as in China and India. The researchers are looking at the relationships between trading partners, as well as the types of distribution channels that have evolved in these markets. This summer, CLI plans to release a matrix of capabilities that will help companies to design supply chains for emerging countries.
Enterprises trying to navigate these highly complex markets will find the guidelines invaluable. “There are many different distribution formats among countries, geographic areas, and even neighborhoods,” says Dr. Andrea Torres, head of CLI’s emerging market supply chains research project. Changes in customers’ demographic profiles and income levels, and the state of the local infrastructure, are some of the factors that shape distribution channels.
Supply chain managers have to translate these differences into a new operational language. “In developing countries, you have big box retailing, centralized supply, best practices, and technology that integrate information flows,” explains Torres. Some or all of these features are often absent in emerging markets. Another complication is the presence of intermediaries such as wholesalers and distributors that set product prices opportunistically, creating big variations among local markets.
Still, it is possible to build supply chains capable of delivering products cost-effectively to the myriad small outlets that serve low-income customers in emerging markets. “Perhaps companies need to develop special products for these markets like Nestlé has done,” says Torres.
Multinational food company Nestlé has developed a supply chain strategy in Mexico for delivering products to small shops called Tienda. Trials of Direct Store Delivery (DSD) began in 2005 in Guadalajara. After introducing the model in other Mexican cities, “Nestlé is now trying to replicate its success across Latin America,” says Julio Caballero, a former Nestlé vice president who has managed various product lines for the company in a number of Latin American countries.
During the pilot phase, the company learned a great deal about how to make these supply chains cost-effective. The manufacturer looked at which types of customers are served, how many brands are handled per product category, price and margin policies, the number of SKUs per category, and how the competition approached this strategic channel.
Nestlé’s product mix in Mexico includes about 2,400 SKUs, explains Caballero, and the manufacturer decided to focus on a subset of just 42 SKUs for its Tienda distribution channel. Concentrating the number of products in this way enabled the company to build a critical mass of loads on transportation routes, a key requirement when delivering small quantities of goods in densely populated urban areas.
It also redesigned packaging operations so that the company could break down products into smaller units. This is critical in markets where low-income customers tend to buy in small quantities or in small portions. “We began to understand the behavior of the small outlets,” says Caballero.
In addition, “because we had specific products with specific packaging and volumes, we decided to invest in our own distribution system including trucks and distribution centers (DCs),” he says. The DCs are small and highly automated, and an SAP-based IT system tracks shipments and collects data on retail customers. “We had to spend a lot of time and money to train people to understand the system,” says Caballero.
The investment has paid off in a number of ways. The DSD system has opened up new markets for Nestlé in Mexico, and Caballero believes that the model can be adapted for use in almost any country in Latin America and in many other developing countries as well. Nestlé has established DSD systems in some Asian countries, for instance. Also, the company is building its knowledge about the demands of serving mom-and-pop retailers in emerging countries. “We now have information like how much product they are buying, as well as the frequency and drop sizes of loads,” he says.
The retailers and their customers have benefited as well, Caballero maintains. For example, deploying a single standardized product delivery system in Mexican cities has eliminated many of the price variations imposed by traditional intermediaries such as wholesalers and distributors, he points out.
DSD supply chains also provide convincing evidence that mom-and-pop shops in emerging countries can offer viable business opportunities for companies that have grown up in western markets. And the importance of these supply chains to sellers and buyers will increase as more companies look to developing countries for future growth, and urban centers in these countries continue to expand.
To find out more about the CLI research on emerging market supply chains, contact Dr. Andrea Torres. For more information on LOGyCA’s Leaders Summit and related presentations, please contact Isabel Agudelo, at iagudelo@logyca.org.