Supply Chain Frontiers issue #42
Markets in emerging nations differ in many respects, but one characteristic that they generally have in common is a high degree of fragmentation across the supply chain. The pipes and fittings business in Brazil is a good example, and the way leading supplier Amanco Brasil has achieved significant growth in that market offers some important lessons for global supply chain leaders.
The company is the subject of an MIT SCALE case study by Dr. Edgar Blanco, Research Director, MIT Center for Transportation & Logistics, and MIT Alumnus Jaime Garza, SCM ’2009 and SDM ’2011. Their work is part of the innovation in an emerging markets research initiative, and is due to be published in the fall of 2011.
The pipelines and fitting business in Brazil is highly competitive, with some 58 companies competing to supply PVC pipes and fittings to buyers in home building, industrial, infrastructure, and agriculture market segments. The products are used in a variety of applications, such as transporting water and sewage.
Demand has climbed steadily over the last decade, thanks largely to Brazil’s vibrant construction industry. In 2010 approximately 430,000 tons of pipes and fittings were sold in the country, a 6% increase over the previous year. The largest segment is home building, which accounts for about half of the total business volume.
The top two suppliers are Grupo Tigre and Amanco, but their relative fortunes in the market have changed dramatically over recent years. Tigre was the long-established leader, and commanded a share of 56% in 2005, compared to Amanco’s 16% stake. In 2010 the market shares were 41% and 32%, respectively.
Amanco owes much of its success to a new management team that was brought in to redefine the company’s business model and position it to compete more effectively with Tigre. Five strategic objectives were set for Amanco executives: create a strong brand, introduce innovative products, implement a service-oriented go-to-market strategy, develop value-added services, and improve operational efficiency. The case study describes how the team approached these goals, but “there are two elements of the strategy that are of particular interest to supply chain professionals,” says Blanco.
The first element is the detailed study carried out by Amanco that provided a much clearer picture of the company’s distribution network and channel requirements. As Blanco explains, in highly fragmented markets a thorough understanding of the cost-to-serve on each route and retail outlet, and of the available delivery options, is essential to building a competitive supply chain. For example, in the construction materials distribution channel alone there are more than 105,000 points of sale (POS) across Brazil. Creating a distribution network capable of meeting the needs of every POS can be a daunting challenge.
Some of the study’s findings were surprising. For instance, small retailers and large retailers had a margin to serve of 18% and 12%, respectively, while the margins for constructors and wholesalers were 4% and 9%, respectively, a substantial spread.
The analysis “helped us understand our costs and margins, as well as the best way to create a competitive advantage while maximizing profits throughout our sales and distribution network. Moreover, the cost-to-serve analysis helped us identify profitable and non-profitable products, regions, and channels,” says Humberto Dominoni, Supply Chain Director for Amanco.
The second element is the team’s decision to develop a much closer relationship between sales and logistics operations. In 2006 the company contracted with more than 180 sales representatives in Brazil. The majority of these representatives did not work exclusively for the organization. Although the arrangement enabled Amanco to serve its diverse customer base, customers were relatively remote and the sales force was not controlled. The contractor system was scrapped and replaced with an internal sales team of 200 representatives.
From the outset the new recruits were made aware of the inventory and logistics cost implications of their sales decisions, as well as the impact on competitiveness. The sales folks explained to customers how Tigre, through discounts and promotions, was increasing their cost of capital and building up to six months of inventory at the points of sale, for example.
In addition, a robust Sales & Operations Planning (S&OP) process was introduced that helped to break down functional silos and improve demand planning. Once the S&OP process was fully implemented, Amanco was able to reduce its working capital and total inventory by 17% and 15%, respectively, while increasing on-time order fulfillment by 51%.
“The S&OP process is not a fringe activity. It is very powerful in the organization and central to the corporate strategy,” notes Blanco. The CEO has an intimate knowledge of the process.
Having narrowed Tigre’s market lead, Amanco now has to “find creative ways to professionalize sales and distribution channels as well as to continue to provide superior service to customers,” says Dominoni. Increasing the breadth of its product range is one option, although this will increase supply chain complexity and require improved coordination between functional areas.
Whether or not the company achieves these improvements has yet to be determined. Regardless, the company’s efforts to better understand its distribution channels and to marry sales and logistics activities are key takeaways for any organization that aims to expand in emerging markets.
For more information on the Amanco case study contact Dr. Edgar Blanco.