Does your Supply Chain Reflect Market Realities? by eyefortransport

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Business Opportunities in the Developing World: Does Your Supply Chain Reflect Market Realities?

Global business opportunities are heading to the developing world, particularly China, opening a new frontier for multinational companies. Too often, companies try to impose Western models of commerce on developing countries, in turn becoming nothing more than corporate imperialists. (10/15/2003)

That means viewing developing countries merely as incremental sales for existing products. Or not adapting products or distribution networks to the needs of the masses. Or failing to consciously look at emerging markets as sources of technical and managerial talent.

These attitudes prohibit success in developing countries. I don’t believe it’s arrogance that keeps some of us from adapting to emerging markets. It’s mostly misunderstanding.

After all, doing business in developing countries is more complicated than doing business in the West. It’s inevitable that we’ll stumble and step on toes as we learn the intricacies of doing business in an unfamiliar market.

Instead of imposing a familiar model of commerce on emerging markets, we have to reconfigure our supply chains – changing everything from products and pricing to distribution and financing.

Let’s start with differing product preferences. In emerging countries, it isn’t usually possible to transfer over products assigned for Western markets without some custom fitting. The emerging middle class in China might say they want the same products sold elsewhere, but their patterns of use or supporting infrastructure might not fit. Motorola, for instance, had to develop pagers capable of displaying more lines of text for the Chinese market. That’s because Chinese use their pagers to send long messages.

Likewise, customers in developing markets have different pricing expectations. The middle class in China isn’t nearly as affluent as the middle class in the U.S. – they might make one-twentieth the average salary of an American. Therefore, price-performance expectations are much different. They are often unwilling to pay global prices for global products. For this reason, low-cost local competitors offer more of a threat – and global marketers have to squeeze additional efficiencies to support lower prices.

Another special challenge of doing business in developing countries is navigating the myriad of customs requirements and government regulations. Customs can be the primary bottleneck in global supply chains. Failure to pay the right tariffs or follow hundreds of pages of customs requirements can result in shipping holds that bring just-in-time supply chains to a screeching halt.

Another challenge in developing markets involves financing. Getting paid for international transactions can take too long and involve too much risk. In fact, it can take an average of 90 to 120 days for a member of a global supply chain to get paid. This delay can restrict cash flow and prevent further expansion of global trade. The risks of not getting paid at all are also higher in developing countries – increasing the need for third-party financing guarantees like letters of credit and financing of inventory and accounts receivable.

Perhaps the most daunting challenge of them all is distribution and logistics. Poor roads, restrictive air rights and inefficient trucking and rail systems can really complicate the movement of goods in developing markets.

China, for example, does not have a national distribution system. It is largely provincial, under the control of local governments. Infrastructure poses a problem in rural areas, which is precisely where the Chinese government is encouraging manufacturing expansion. Most factories lack rail sidings, and there is no intermodal rail system, nor national network of trucking companies, In fact, the three million trucking companies in China own an average of two trucks each.

These inefficiencies create a drag on the Chinese economy, where logistics represents a staggering 40 percent of general production costs, and 18 percent of GDP.

For multinational companies doing business in China, it means creating large inventory buffers. The total value of inventories in China in 2000 was nearly a half a trillion dollars – or about 50 percent of national GDP. Compare that to inventory value of 1 percent of GDP in developing countries.

Higher inventories mean higher carrying costs for companies. Longer hauling and transportation times also add costs, because goods need to be funded. Assuming funding costs of six percent, every 30 additional days of inventory translates into roughly an extra half-percent in costs of goods sold. That doesn’t even include the costs of aging inventory in an inflationary environment.

Poor transportation infrastructure also means rising product damages and losses. And an unreliable, fragmented network means products can’t be easily tracked and traced along the way.

With all these headaches, you might think that established, domestic logistics providers would be available to handle these tasks for multinationals. But logistics providers in mainland China, for example, deliver only a fraction of the services available in developed markets.

Adaptation is not easy, but is absolutely necessary for companies doing business in developing markets. In addition to adapting, you might also need to adopt. By that I mean, don’t build your logistics network from scratch. Indeed, the best strategy might be to adopt the existing networks of integrated logistics providers.

Adopting the networks and capabilities of global 3PLs can offer advantages in three key areas: single-entity control, customs and regulatory management and financing options.

There are tremendous opportunities for companies doing business in the developing world. At the same time, there are special challenges to overcome, particularly in the area of distribution and logistics.

The global journey is not an easy one, and mistakes will most likely be made. But if you follow a simple concept – adapt and adopt – the chances for success are much greater.

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