Supply chain planning in emerging markets is different. And while each market can be unique, we found a few repeating themes in our own experience and from sources including Gartner and our customers Procter and Gamble (P&G) and Cipla Medpro. Here’s what we found:
1. All emerging markets are not alike, and even within markets there are variances, such as between urban versus rural areas
Generalizations can be helpful when talking about emerging markets, but there is still a lot of variation between markets, especially because the term “emerging” covers a very big swath. And even within markets there is usually a lot of variation. The most often cited is between urban versus rural areas/smaller towns. These usually represent significant and growing markets, but that are often difficult to reach. According to McKinsey, shoppers outside the big cities accounted for 30 percent of the value of online sales, but in less than five years they will account for roughly 50 percent.
Gartner analyst Debashis Tarafdar says that the large size of a country (like India, China or Indonesia) can mean “significant polarization of population between urban and rural with distinctly different buying capabilities and purchasing preferences. Consumption patterns may also vary due to different weather conditions and social/cultural diversity across the same country.” He adds, “Often, last-mile distribution costs to rural areas are high and reliability is low, compounded by the lack of visibility of in-transit shipments.” (Invest in Four Key Capabilities While Developing Your Demand-Driven Supply Chain Strategy for Emerging Markets, 18 September 2017)
Let’s take Indonesia, for example. In previous years, many companies only focused on getting product into Jakarta (the country’s largest city) and satisfying demand there. Now supply chain professionals have another different set of challenges on how to get product to the entire country where consumer-oriented outlets (i.e. fast food or retail) are rapidly expanding.
2. Infrastructure is the most often mentioned challenge
“We are faced with immense logistical difficulties that range from unpaved roads to armed bandits.”
Infrastructure challenges are typical in developing countries. These countries usually exhibit high growth rates, but ability to invest may be stunted by a host of factors ranging from the political climate to the high cost of capital. Gartner’s Tarafdar explains, “Many emerging markets are plagued with serious infrastructural issues/bottlenecks and poor connectivity between urban and rural markets. These include road and rail networks, utilities like electricity and water, as well as technology infrastructure for information exchange and payments. This, together with lack of visibility, poor planning capability and outdated assets due to high cost of capital, results in ad hoc decisions made in functional silos that are more focused on cost and inventory risk avoidance and less on service, thereby contributing to inefficient (and often, inflexible) supply chain processes.”
The challenges can be multi-faceted: High logistical costs. Transfer taxes. Difficulty gathering information. Not knowing how much inventory is at each location. And distances can be deceiving (both internally and importing), causing long lead times. An example is an industrial gas distributor whose customers were as much as 500 kilometers from their supply points, making distribution difficult to execute. These large distances between demand centers increase the inventory exposure to maintain a consistent service level.
Joseph Ludorf, executive director of supply chain at our pharmaceutical customer Cipla Medpro describes their situation this way, “When it comes to transporting medicine, there are strict requirements for each product with regards to temperature control and the type of vehicles in which each can be transported. Routes need to be mapped carefully in advance, taking variables like adverse weather and road quality into account. Long lead times for imported products, wild currency fluctuations and demand spikes caused by government contract tenders all conspire to make planning difficult …. We are faced with immense logistical difficulties that range from unpaved roads to armed bandits.”
Read the full Cipla Medpro case study on delivering medicines in Africa
3. Fragmented markets have less upstream and downstream visibility, increasing the bullwhip
Emerging markets can also be fragmented in terms of their trade structures. For instance, according to Wikipedia, India has some 14 million retail points of sale, compared with fewer than one million in the US. Gartner’s Tarafdar says, “Poor visibility of upstream, downstream and partner processes — A large proportion of emerging-market organizations, particularly the relatively smaller ones, do not have a lot of process and technology investments for information management. Many key processes are manually driven and managed, using disparate systems and spreadsheets and are even paper based.” For example, at a major beer company customer of ours distributing in Africa, most dealers were manually entering their supply chain data at the local Internet café.
Tarafdar further points out that the “presence of such organizations in the ecosystem affects a company’s ability to get timely signals from partners and act quickly in the event of any disruptions. The bullwhip effect of demand propagation (the distortion of the demand signal as it travels upstream) is common, and that impacts the speed of response to changes to demand. Planning becomes difficult and inconsistent, and lack of readiness to unforeseen events triggers unplanned costs and expedited shipments, or increases the risk of default that ultimately reflects itself as impaired reputation or increased liability.”
4. Sometimes it’s just different than you’re used to
There are a host of other differences that can impact demand and demand variability, such as greater exchange rate variability that impacts both prices and product costs. Another unique feature is that many emerging markets are “mobile first”, meaning that most consumers started with a mobile phone rather than evolving from a land line. This can mean more on-line demand (the “endless aisle”) which brings additional product and SKU complexity. It can also impact payment systems and cash cycles.
Growing domestic demand can also cause supply chain strategies to change. Early on companies may employ a push strategy from the factory to utilize resources and get their product on the market, then over time evolve to a more efficient pull-based approach to address true demand.
Despite all these variations another common refrain we heard is that service level and supply chain business metric performance expectations are not necessarily lower in emerging markets. Ludorf at Cipla Medpro says that despite all the challenges they face, running out of stock and not being able to fulfill an order is a cardinal sin in their business. Today for his team, “stock outs are less than one percent of our total inventory and this is purely due to situations beyond our control.”
A Procter and Gamble Example
Procter and Gamble operates one of the most vast, complex distribution networks on earth. In order to manage it more effectively, the $65 billion consumer giant spun out a separate Global Distributor Markets (GDM) to manage regions where P&G does not operate its own sales and/or distribution organizations. GDM now serves more than 100 distributors on five continents and in 180 countries from Argentina to Zimbabwe.
For P&G serving smaller, under-harvested GDM countries represents a sustainable volume growth opportunity. But equally they pose huge supply chain planning challenges as described earlier. These and many other variables meant GDM needed extra supply chain resilience and flexibility to combat more extreme “bullwhip effect” consequences, like over- and under-stocking, transportation bottlenecks and cash flow issues. P&G’s existing planning system, designed for its main supply chain, couldn’t support GDM’s complexity.
Speaking at a Gartner Supply Chain Executive Conference in London, Onofrio Caradonna, P&G’s product supply director, said, “All our planning variables added up to a very long, risky, complex supply chain and poor visibility. The GDM supply chain was constantly operating in crisis mode in order to cope with actual demand.”
To address the situation, P&G conceived a new online planning system aimed making it easy for distributors to collaborate in the sales and operations planning (S&OP) process and delivering hard financial benefits through more accurate, predictive forecasting. It included an advanced planning algorithm, a self-tuning forecasting engine, SAP ERP connectors, and S&OP capabilities. They have a powerful demand-driven planning system, but with a light footprint.
P&G initiated its new cloud-based, SaaS-deployed system with an eight-month pilot project in one of its most challenging markets, followed by Russia and the United Arab Emirates (UAE). In its next implementation phase, P&G will roll the system out to the French Overseas Territories, Tunisia, Cyprus, and Malta.