Key distribution issues in emerging markets

 

Setting up a distribution system in emerging markets can be a challenging undertaking. Below are a number of issues to consider:

Fragmented markets – What is the balance between modern and traditional trade?  Modern trade (e.g. Shoprite supermarkets) in most African countries, with the exception of South Africa and Kenya, is still in the very early stages of development.  The contribution is in the low single digits. Reaching large numbers of traditional outlets (e.g. Mom & Pop, Dukas, Sooks) is a difficult and costly business.

Product flow & reasons for purchase – How do products flow in the market? Often small groceries purchase product directly from the wholesale channel.  The wholesaler is often in close proximity to these outlets (2-5km radius). They provide a basket of goods, and in some cases credit, if they have a good relationship with the small grocery.

Market and key business areas – Define the key market and business areas. Identify feeder markets and hubs for product distribution.

Regional differences – Define the regional, urban and rural differences in distribution.

Channel strategy – How do channels function and operate?  Define the key channels, characteristics and key buying decisions.  Are traditional and non-traditional channels well defined?

Outlet base – In most emerging markets, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base, including the outlet density. A well defined every dealer survey (EDS) is a key component of any successful distribution strategy.

Territory – When working with distribution partners, does the distributor have the ability to service the territory?  Are routes and maps in place?

Service – Assess the service and delivery for each channel and the service partners. Review the key issues with service and delivery and map out the distribution models employed.

Customer service frequency – What is the frequency of product replenishment and reasons for the frequency? Outlets in emerging markets often have limited cash flow and, in some cases, limited space to stock product.  Review the required service frequency and the need for micro supply depots or wholesalers.

3rd Party Logistics –Where do the 3PLs operate in the country?  3PLs often cover the major roads well. However, in emerging markets they normally have a limited footprint in rural areas.

Selection criteria – What are the key components of a successful distribution partnership? Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organisational structure.

Role definition – When working with distributors, are the roles for the company and distributor well defined? It is important to review the organisational structure and how the company will support the distributor. Ensure that each profile (e.g. salesperson) has a clear understanding of his or her role.

Account development – How should account development be managed? This a critical component of any distributor operation. Not all accounts are equal. In most cases, companies need to prioritize and focus their attention on high value or strategic customers. Companies also need to determine how they will split the account development activities between the company and the distributor.

Value chain – Do we understand the value and margin of partner in the system?

Cost to serve – What is the true cost to serve?  The true cost to serve is sometimes underestimated and companies must have a clear understanding of the cost to serve for both the distributor and the company. In many cases in emerging markets, financial cost centers provide limited data and financial modelling is essential to determine the true cost to serve. Many distributors fail because the remuneration is set too low and not adjusted for inflation on a periodic basis.

Low cost distribution – What local distribution solutions exist in the market that can be leveraged?  Often small groceries are situated in congested areas, with narrow gravel roads where trucks can’t enter. In these markets you might find pushcarts, trolleys or motorbikes (e.g. Vietnam). Tapping into their distribution structure can lower cost and increase product availability. Some consumer goods companies, e.g. Coca-Cola and Unilever, have also successfully managed to organize these lower cost distribution models and make it work for their operations and product portfolio.

Warehouse –How will new systems impact on the existing warehouse?  The warehouse function is sometimes overlooked when a company implements a new route-to-market system. Companies need to anticipate how the new system will impact on the warehouse function and what changes need to take place.

Key Performance Indicators – What are the key performance drivers?  By focusing on the key performance drivers of your business, avoid overextending yourself. Sometimes less is more. Include key performance measurements in your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point in tracking something just for the sake of tracking.

Processes- Are processes and systems well defined and standardized?  Always aim to eliminate non-value adding activities where possible. Standard Operating Procedures (SOPs) simplify your business procedures and help to ensure the same quality in all operations.

Skills – What skills need to be recruited or developed?  Emerging market operations often lack critical skills.  It is dangerous to make assumptions about what people can and can not do. For any principal working with a distributor, conduct a skills gap analysis to determine the training recruitment needs.

Complexity – Can the distributor handle the level of complexity in the business? In many cases distributors that distribute all SKUs (Stock Keeping Units) to all channels fail. Always aim to reduce the complexity in the business.

Collaboration – How will the distribution partners share information with the company? Too often critical information is only available at distributor level and not shared with the company. Also consider the role that can technology play in information sharing.

Appropriate technology – What technology is necessary?  Evaluate mid tech solutions and identify the “appropriate technology” for your operation. Don’t overdo it.

Patience– How much time do you have?  Ensure you have management buy-in. A Route-to-Market roll-out requires patience and a continuous improvement mindset. Small incremental changes can sometimes go a long way.

Regulatory environment – Review the regulatory environment including cross county or district tariffs where applicable. In some countries distributors and transporters are subject to multiple charges for crossing county borders.  Assess transport bands (e.g. time truck can enter central business district) and traffic restrictions.

Culture – What are the culture issues?  Take time to understand culture issues and don’t assume anything. Change your thinking when working in other markets.

Take note of the evolution – Are you taking the necessary steps to adapt to change?  Too often supply chains in emerging markets evolve without any strategic plan. Modern trade and retailing are expanding and middle class consumers shopping patterns are changing.  Consider how these changes in the market will affect your business.

Updated:  17th April 2014

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