I recently spoke with a CFO in charge of building a global value chain into India and Russia, who shared with me some of his insights on the differentiated supply chain approach needed to move into these regions. While I hear many executives complain of the challenges of entering these markets, this executive was truly innovating, and leading a radically different and very successful approach which he called a “lean volume channel” model. Elements of this interview follow.
As a CFO I was responsible for logistics and manufacturing, and when I came in to see what was happening in emerging countries, I found several things that were going wrong. To begin with, we closed a manufacturing plant in India, as it was located in the wrong state to do business, and the volume couldn’t justify the investment. Having imports from the Far East was more sustainable. This was because we didn’t have the volume to justify local manufacturing, and so now we have economic contractors in free trade zones. We started in India in 1985 – and that was one piece of the puzzle in our success there. The other piece was how we import products. We needed to develop specific requirements inside India to do specific things – e.g. stickers that indicate the retail prices to apply, and set up processes to import them and customize to the Indian market. And where do you bring these products? Shipping across boarders has an impact on the effectiveness of the channel – so our team needed to carefully choose distributors and selling locations. This was extremely important. A supply chain strategy involves making decisions: How do you distribute: into your own warehouse structure or another – and how many distributors do you select for the territory? You have to optimize and understand local legislation and conditions to effectively make these decisions.
So we introduced the “indirect channel approach”. This involves direct shipping of products to distributors, which allows you to generate savings. You take those savings, and you put them on the table, and tell your distributors that they can share in these savings if they will work with you to change their processes. We bring the promise of the savings to drive the underlying change principles in developing market countries. And that gets things going! Seeing the savings on the table gets customers going, distributors going, as they see the strategic advantage of a different working environment.
It is important to show the savings upfront, as it is very inconvenient to utilize multiple channels. But this strategy allows us better reach to our customers, by using existing distributors who already have a presence in countries like India and Russia. These distributors allow us to get a better reach into the market, but at a cost of having them handle our product. The only way to do that effectively is to eliminate touchpoints into the supply chain going in to that country – what we call direct chain. It is costing you money to unload a container, so the idea is NOT to touch it, and to ship it directly to the distributors. But the only way not to touch it is to control the sales process, and to control your marketing process, and look for consistent growth for volume flexibility inside the model.
I have managed the supply chain for 3.5 years, and I am pushing for supply chain differentiation across the globe. We work with many accounts: service-driven customers, large accounts, small accounts- and multiple flavors, but it is only inside the infrastructure that you can really begin to differentiate your setup and costing. With the new lean volume business model, it is very different than our large volume customer models. We are trying to differentiate what our supply chain has to be, and set up new processes from scratch to differentiate it inside India. Lower prices for example comes with a responsibility for distributors that they can sell for us in the way that we want them to sell our product. Our value chain setup when we go to market comes withrequirements, including the way we order and plan products, how we work with our supplier base, and get them on board, and the way we do pricing – it is all different! It touches all disciplines, and more than supply chain differentiation, it impacts everybody.
The idea of creating differentiated, customized supply chains is an emerging trend that will be documented in more detail as I continue to interview executives, and continue our research into global logistics trends and strategies going forward.