Reasons distributors in emerging markets fail

Implementing a 3rd party distribution system in emerging markets can be a challenging undertaking. Below are some reasons why distributors in emerging markets fail, and warning signs to look for.

Financial management – A few years back, we ran a project in for a consumer packaged goods company in Sri Lanka. During our assessments, it became apparent that most of the distributors were going out of business due to poor cash flow and working capital management. Many distributors provided credit to smaller outlets to expand their business. The distributors struggled to keep track of debtors, and when a few customers failed to pay, it had a severe negative effect on the already limited cash flow available. Cash is the lifeblood of any businesses but even more so in emerging markets where it is hard to access capital.

Distribution cost– Often, new management fails to understand the true cost to serve. On a recent project in East Africa, I was struck by the fact that distributors are expected to cover a large territory, but nobody in the organisation took the time to determine the true cost to serve the total customer base. In the end, service levels dropped off, and the distributor only focused on the profitable segment of the market. As one distributor put it, “we can go, but where is the margin?” Putting pressure on distribution partners to reduce cost is one thing, but when service partners fail, it can have a severe effect on the whole supply chain.

Design – Poor model design can severely affect productivity. In 2010 we ran a distribution benchmarking assessment in South and East Africa for a beverage company. We conducted time studies to get a better understanding of value-adding and non-value adding activities. We also wanted to get a better understanding of which activities and processes needed to be streamlined or eliminated to reduce time and costs. During our assessment, the time studies indicated long travel time for peri-urban entrepreneurs to and from bank branches. The supplier required money upfront before delivery. Unfortunately, due to limited bank branches, entrepreneurs spent excessive time on banking activities. A simple rethink of the payment system eliminated a lot of travel time that was normally wasted.

Development – Finding the right distribution partners with the right skills is challenging. However, in many cases, distribution roll-outs are bundled together with support in terms of training, account development and business modelling. Without the necessary support and development, many distributors will fail.

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