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A New Breed of Operations for Emerging Markets. Craig Rawlings, Roque Cifu, Ganesan Ramachandran and Aakash Deep

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A New Breed of Operations for Emerging Markets Craig Rawlings, Roque Cifu, Ganesan Ramachandran and Aakash Deep Most supply chain strategies hail from earlier times of business stability. Of course, there
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A New Breed of Operations for Emerging Markets Craig Rawlings, Roque Cifu, Ganesan Ramachandran and Aakash Deep Most supply chain strategies hail from earlier times of business stability. Of course, there were always business cycles. However, these were often predictable and competent management teams could navigate the challenges and still focus their supply chain strategies on cost reduction. They did so in part by establishing low cost manufacturing in locations far from core markets, improving purchasing leverage by rationalizing the supplier base, reducing inventories by integrating partners into eco-systems, and applying lean principles to squeeze out more time from processes. In volatile times, however, these approaches are ripping at the seams. Volatility is the new norm and predictability has all but vanished. Although unstable circumstances are familiar terrain to supply chain professionals, most supply chains can t accommodate the relentless speed and amplitude of volatility today. To maintain cost and service leadership, companies may need to consider how to make their operations more dynamic by weaving innovation, agility, and risk mitigation into the fabric of their supply chain strategies. In this Point of View, Accenture delves into how this might be accomplished. Excelling at a new breed of operations can be critical for companies that plan to enter emerging markets and optimize the high-risk, highreturn equation. But mastery can also be crucial for enterprises that are already established and successful. Emerging markets won t be emerging forever. Eventually growth will mature and the rapid economic expansion that floats many boats will diminish. When it does, competitive advantage will likely accrue to companies with the keenest ability to innovate and execute in these markets. 2 New Trade Flows and Dynamics Global trade volumes have traditionally flowed from East to West from emerging markets to more mature ones. However, with the rise of affluent consumers in many vastly populated emerging markets, trade volumes are shifting increasingly from West to East, including intra-trade within the zones of emerging economies. As organizations set their sights on emerging markets, they are confronting an environment far more dynamic than that of traditional markets. To excel in these environments, companies may need to explore approaches that challenge many of the principles that have underpinned traditional lean supply chain strategies. Take the Asia-Pacific region (APAC). It is an array of geographically dispersed markets with diverse business and social cultures. Core infrastructure development, as well as regulatory and business maturity, operate at different cadences in each country. Population patterns add more complexity to the mix. Countries such as Brazil, Russia and Mexico, for example, have large urban populations. In the APAC region, by contrast, more people live in rural regions than do in urban areas. APAC operations require flexible supply chains that can reach rural and urban markets with products tailored for customers in each. A one-size-fits-all, cost-driven supply chain can t address any of these complexities. Instead, companies should consider multiple, agile supply chains tailored to specific regions and supported by local capability and talent. Trade flows in the region can be monumentally complex. These flows cross markets with significant differences in areas such as labor market efficiencies, infrastructure sophistication, ease of doing business, and tax structure. 3 Emerging Markets Amplified Challenges Volkswagen is the most popular auto brand in China 4 By emerging markets, we mean economies with lowto middle- per- capita incomes that are poised to become developed markets for example Brazil, ASEAN (Association of South East Asian Nations), India, Greater China, Mexico, Russia and South Africa. These markets are home to 85 percent of the world s population and are on the growth agenda of every major company. Several leading brands have already achieved attention-grabbing success. Volkswagen, for example, is the most popular auto brand in China and the second largest automaker in Brazil. P&G derives 40 to 50 percent of its revenues from emerging markets. Leveraging solid foundations in their home markets, companies based in emerging markets are flexing their muscles by venturing into developed countries. Tata Motors, Tata Steel, Lenovo, China Mobile, Samsung, PetroChina, America Movil and Vale are just a few examples of businesses expanding from their emerging market bases. However, these companies also face challenges in their home markets as these become a competitive battle ground with well experienced players entering the fray. Although companies confront volatility in developed countries, many of these challenges tend to be amplified in, or unique to, emerging markets: In any individual country, the range of consumer needs is far larger than in developed markets. Tech-savvy young adults in Mumbai, for example, have more in common with their peers in New York than with other young adults in rural India. The purchase habits of affluent consumers in Shanghai are more aligned with highincome Parisians than they are with middle class or rural Chinese. Regulations can be vexing and confusing. They are often unclear even contradictory which can hamper a company s ability to determine the exact operating requirements. For example, the 2012 Enabling Trade Index identifies Singapore as the world leader, among 132 countries, in developing institutions, policies and services facilitating the free flow of goods over borders and the destination. However, Hong Kong is ranked second, China 56th, Indonesia 58th, South Africa 63rd, Brazil 84th, India 100th and Russia 112th. Taxation systems are complex and aren t standardized as they are in many developed countries. Import and export restrictions add another hurdle. In India and China, for example, imported cars that arrive fully assembled are subject to a VAT in excess of 100 percent. Even if the car is assembled within the country, the final product is taxed to the tune of 80 to 90 percent. In addition, China prohibits the sale of refurbished electronic devices within its borders. To sell these devices, companies must export them elsewhere. Brazil also has implemented policies that favor local production over imports. Similarly, Russia has enacted a slew of new tariffs that industry has not accepted well. Poor infrastructure is driving up supply chain and logistics costs. Logistics cost as a percentage of total GDP is common indicator of the maturity of a given country s logistics infrastructure. According to a report in Indonesia-Investments, the ratio in the United States is 9.9 percent. In emerging markets, it is much higher: for example, 13 percent in Malaysia, 20 percent in Thailand, 25 percent in Vietnam, and 27 percent in Indonesia. Volatile commodity prices can squeeze the bottom lines of food companies, retailers and any business that relies on pure commodities. By the same token, severe fluctuations in oil prices can drive up manufacturing and shipping costs, which can erode emerging market cost advantages. The benefits of low cost labor, manufacturing and servicing are diminishing quickly. As emerging market economies grow, the cost of living is rising rapidly and pushing up wages. In some countries wages have risen more than 20 percent. Finally, political upheavals can happen at any time and natural disasters can disrupt global supply chains for extended periods of time. 5 Dynamic Operations: Companies Fast on Their Feet Dynamic operations 6 Dynamic Operations Capabilities Demand Volatility Dynamic Operations Supply Volatility Agile Execution Insight to Action Adaptable Structure Flexible Innovation Economic Volatility Economic Value In this world of permanent volatility, Dynamic Operations can create a critical balance between the dual needs of responding to volatility and building economic value. Dynamic Operations Key Capabilities: Insight to Action assimilating internal and external business data into a decisive response with speed Adaptable Structure designing the operating model and underlying operations infrastructure to help capitalize on new opportunities and respond to threats and downturns Flexible Innovation innovating for growth and operational efficiency Agile Execution adjusting quickly to volatility and capturing opportunities 7 By Dynamic Operations, we mean the groups of activities or points in supply chain networks that in response to changing events reorient themselves without upending a company s desired cost/service balance (See Side Bar: Dynamic Operations Capabilities). When a disruptive situation arises such as supply interruptions, financial turmoil, or market shifts the company s processes can be modified quickly. In the following, we look at the four capabilities of Dynamic Operations and how companies have used them successfully in emerging markets. Insight to Action The ability to sense, capture and analyze external and internal data and turn it into business intelligence helps to overcome two pressing emerging market challenges: understanding diverse, fragmented customer groups; and creating clear visibility into supply chain operations. Given the vast differences between customer groups rural versus urban, disparities in per capita income, differences in habits and tastes companies often struggle to develop effective and meaningful customer segmentation schemes. Deep customer insights can also help companies uncover latent demand, both at the bottom of the pyramid and within growing middle class populations. Often, customer needs go far beyond what companies might expect. Successful companies in emerging markets have their ears to the ground. Brazil s Banco Bradesco is a prime example. Because much of Brazil s population in the Amazon rain forest is geographically dispersed, physical banking outlets are impractical. In this region, villagers have to trek for days to reach markets or hospitals. According to the Brazilian Banking Federation, there are as many as 50 million citizens without bank accounts. To reach those along the Amazon, Banco Bradesco operates branch banks on paddle boats that travel 100+ miles up and down the river. When the boat docks, the bank s manager ventures into villages to sign up new accounts. On board, customers can open accounts and access banking services including ATMs, withdrawals and deposits. They can also buy beans, chickens, bleach and other goods offered by the floating bank. Turning insights into action also can shed light on supply chain operations. In emerging markets, data is disparate and supply chain players are often disconnected. Technology and data management plays an important role. P&G, for example, built a consumer driven supply network that includes daily POS updates, providing timely alerts of changes in product consumption. The data is used by internal and external partners to quickly create replenishments plans. Chinese appliance manufacturer Haier has been at the forefront of turning customer insights into market leading products. A classic example is its washing machines. The company noticed that farmers were complaining that the machines broke down. The culprit: farmers were using them to wash potatoes. However, instead of telling farmers not to use the machine for this purpose, Haier revamped the machines to wash clothes and potatoes. Similarly, the company has launched appliances that are rust and rodent proof. In Africa, Haier markets freezers that stay cold during power outages. Supply Chain control towers can help gather insights and timely information by providing real-time monitoring and visibility. They can simulate different scenarios and quickly identify the impact of potentially disruptive events such as weather anomalies, supply disruptions, and drops in demand. Control towers can also be used to discover fastbreaking opportunities, such as evolving markets, technology innovations, favorable currency swings, and competitor intelligence. Nextel, for example, used a control tower to install hundreds of 3G antennas successfully in Brazil. The pressure was intense since regulators wouldn t permit any delays. Nextel s control tower synchronized the activities of dozens of contractors. The tower gave the company complete visibility into contractor work as they built antennas, and installed equipment, including testing and integration. The visibility allowed Nextel to take corrective actions in advance and complete the project on time. 8 Agile Execution With fragmented markets, long distribution chains, consumer diversity and poor infrastructure, companies must be able to adjust their supply chains quickly. Agile execution can provide that capability. It creates tight information links between supply chain partners which can help reduce order cycle times and streamline processes. Agile execution also includes clear defined accountabilities within the supply chain to better enable everyone to know who is responsible for what when situations change. Companies that are carving out leading positions in emerging markets are creating agility by rigorously partnering with suppliers to reduce costs and improve asset utilization. Lenovo is a great example. The company s hybrid supply chain lies at the heart of both its emerging market capabilities and its ability to achieve a leading position in a depressed global PC market. The hybrid model uses advanced segmentation and analytics to help reduce costs and improve delivery performance. In addition, Lenovo has eight in-house plants and 24 outsourced sites in China, Europe and South America. The company has been able to create flexible operations and execute with increasing speed by keeping part of its production in house. As a result Lenovo is able to mitigate potential supply chain risk with relative ease. The talent war in emerging markets is also heating up. Finding skilled supply chain talent remains a major challenge. Even though manpower is readily available, training is easier said than done. Companies struggle to cross-train workers and prepare them for different business environments. The talent challenge hampers operations and leads to waste and low performance. To overcome the talent challenge, a large Asian automobile company created a talent management cycle to strengthen its talent pool and engage employees throughout their careers at the company. The talent cycle includes six phases: identification, assessment, categorization, development, reward and recognition, and succession planning. High potential employees are fast tracked through the cycle and earmarked for critical positions. Similarly, a world leader in construction materials uses its strong brand and global status to lure talent in the Philippines. The company leverages its deep local market knowledge to create a safe and supportive working environment. The organization also offers a wide range of career and development opportunities and promotes a culture of quality, innovation and sustainability. The company also works with local communities to strengthen its bond with the local citizenry. Flexible Innovation In the past, most companies viewed emerging markets simply as new terrain for existing products. To cater to cost conscious consumers, businesses often stripped off features from existing products to make them less expensive. Success in these markets, however, requires redesigning products to meet unique needs. Product development efforts may need to shift from defeaturing to innovations that strike a nerve. For example, in many Western markets, increased market share is often driven by product line extensions that meet the needs of granular sub-segments. P&G took the opposite approach with diapers in Brazil. The company developed a simple unisex diaper that it can offer for half the price of the defeatured diapers it sells in developed countries. In rural markets, product size is very important, since consumers often lack the financial means or storage space to purchase large quantities. P&G tapped the aspirational luxury need of low income consumers by creating small shampoo sachets that customers could purchase once a day. In India, Novartis created significant social and commercial impact by offering small medicine packets at low price points with packaging information printed in local languages. The company also developed a very inexpensive chewable version of its successful Sandoz calcium tablets which it sells singly. As companies innovate in emerging markets, the product ideas they discover are also becoming successful in developed markets. GE s ultrasound machine is an excellent example of reverse innovation. In the United States, ultrasound machines perform very complicated applications and are large and expensive costing anywhere from US $100,000 to $350,000. In India, 60 percent of the population lives in poor rural areas without hospitals. As a result, hospitals must go to consumers with light, portable machines that are much less expensive. To meet the need, GE developed a portable low-cost ultrasound machine that sells for approximately $15,000. The portable device is now finding new markets in the United States. Ford s Ecosport is another case in point. Ford launched this urban compact SUV in Brazil and created an entirely new segment in the auto industry. As oil prices soar, customers are demanding smaller vehicles but with the features of an SUV. Ford provided a small car with precisely those features. It was an instant hit in Brazil and India, where the waiting lists are long. Ford is now launching the vehicle in Australia and Europe. 9 Adaptable Structure When a company s structure is adaptable, it can quickly seize new opportunities. Flexible manufacturing is a classic example: it can provide the ability to respond to currency fluctuations, supply disruptions and sudden demand shifts by adjusting manufacturing volumes, mixes and venues. In emerging countries, adaptable structures play a major role in reaching rural markets. In many countries, the vast majority of the population lives outside of cities and are moving up the income and consumption ladder. According to CRISL Research, between 2009 and 2010, spending in rural India was US $69 billion, significantly higher than the US $55 billion spent by urban populations. In many rural markets, incomes are growing and consumers are buying discretionary goods and lifestyle products such as mobile phones and television sets. A New Mindset for Distribution To reach rural markets, businesses need extensive and flexible distribution networks. Tata Motors, for example, realized it needed to expand into rural areas in order to maintain its market leadership. But the company s dealer network was predominantly in towns and cities with populations greater than 100,000. In cities, dealerships work well since customers can learn about cars and test drive them at a local dealer. Rural customers, however, live too far away and are too dispersed to make traditional dealer networks effective. To reach customers in rural areas, a sales person from a traditional dealer could spend an entire day sometimes two on a single customer. To expand into rural markets, Tata developed alternate channels of distribution. The objective was to funnel potential customers to the main dealership network which had sales experts, inventory and also provided after-sales service. Tata recruited local sales people who were willing to generate leads on a commission basis. They also developed a network of corporate partners that had an established presence in rural areas and could identify and feed prospects to Tata s direct dealer network. Kellogg Food Company also revamped its emerging market distribution approach. After its first unsuccessful foray into China, the company realized it
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