Best Practice Supply Chains Adapt to Local Conditions

Stephen DeAngelis

April 23, 2010

Lora Cecere, while working at AMR Research, posted a blog about a keynote speech she heard at a supply chain conference given by Gary Maxwell, Senior Vice President of International Supply Chain for Wal-Mart [“Best-In-Market Supply Chains,” 22 September 2009]. She wrote:

“With Wal-Mart’s philosophy of ordinary people doing extraordinary things, and a passion for everyday low cost to drive everyday low price, the focus of Wal-Mart’s international expansion is to think local and design best in market supply chains. Wal-Mart is no longer a North American retailer. The company has 228 global distribution centers supporting 10 different store formats driving 23 global banners. Wal-Mart is the genie behind the curtain for ASDA in the United Kingdom, Amigo in Puerto Rico, Seiyu in Japan, MAXXi Brazil, and Pali in South America. While the name is different, the supply chain is best-in-market, the strategy is consistent. Be local in the right way. Start with shopper expectations and work back. Build a supply chain design based on land/labor costs and laws/regulations. Hold the core values of continuous improvement, respect for the individual, and customer service the same. For many in the audience, Gary’s speech on best-in-market was a stark contrast to their definition of best in class. The speech was a great testimonial that winning supply chains start with the customer back. That the response needs to be local and tailored based on the shopper and local business drivers. As a result, Wal-Mart can successfully sell an over-wrapped $2 peach in Japan and be equally good at supplying a bulk aisle with locally-grown vegetables in India. It is a story of:

Outside-in
Customer first
Design from the shelf back

How can what seems so simple and work so well be so OUT OF TOUCH with conventional practice? Thank-you Gary for reinforcing the supply principle that to be global, we must start local. For sharing the story that we cannot win internationally when we broad-brush markets and super-impose a common design. Your provided a spark in a conference that was largely missing the mark.”

Walmart, of course, is not the first company to learn the importance of tailoring products to local markets. It’s a lesson that Unilever learned the hard way as well. For more about Unilever’s story, read my post entitled Tailoring Products to Emerging Markets. Another company that has learned the importance of adapting to local markets is Costco [“Costco Cracks Taiwan Market,” by Andria Cheng, Wall Street Journal, 1 April 2010]. Cheng reports:

“The Costco Wholesale Corp. store [in Taipei] could easily be mistaken for one of its giant U.S. outlets, except for the long line of customers one afternoon snaking outside the store, waiting to enter. Inside are aisles of merchandise stacked floor-to-ceiling. But mixed in with such familiar U.S. products as Tide detergent and Pepperidge Farm cookies are local favorites such as sea cucumber, mahjong sets, and stewed and braised beef noodle soup. Offering an experience that’s authentically American while cultivating local tastes has proved a successful formula that has made the store, located in Taipei’s high-tech Neihu district, the 567-store chain’s second most profitable, behind a Korean outlet.”

Large companies are not the only organizations that have learned the importance of maintaining local connections and adapting to local conditions [“The importance of a local connection,” by Sarah Murray, Financial Times, 27 January 2010]. Murray writes:

“Traditionally, the task of feeding the world’s poorest people and raising incomes for small-scale farmers has been seen as the preserve of multilateral institutions and development banks. But in recent years, a new wave of social entrepreneurs has entered this arena. Many are coming up with products and systems to serve poor communities through everything from the production of nutritional foods to systems that improve milk yields from cows. Social entrepreneurs use a variety of business models. Some might be for-profits groups with a social mission. Others could be nonprofit organizations embracing a revenue model, while many are hybrids, in some instances with support from governments. However, they are united in their aim to use market drivers to tackle social and economic problems. Often, too, they are locally based. When it comes to issues of food and agriculture, this is critical.”

Although agricultural development programs may seem to have little in common with multinational corporations, both groups must concern themselves with supply chains, i.e., how products move from supplier to consumer, and how local conditions affect operations. Murray indicates that social entrepreneurs are concerned, just like Walmart, with lowering costs for suppliers so that consumers can pay lower prices. She writes, however, that unlike Walmart, maximizing profits for smallholder farmers while simultaneously offering affordable food products to impoverished communities has proven elusive. She concludes:

“To sell food to the poorest communities, the objective is to create products with the lowest possible prices. The aim when it comes to small-scale farming is to maximize profitability. ‘Most of the things we saw that tried to both provide a customer goods and provide livelihoods by building local distribution or local production, ended up pricing themselves out of their market,’ says [Mike] Kubzansky, [of the Monitor Group]. ‘It’s conceivable that someone has cracked the code on how to do both but it’s not obvious how to do that.'”

Even Walmart has had to adjust when local tastes come into conflict with its vaunted supply chain. When Walmart tried to simplify its stock-keeping unit (SKU) selections, it initiated a program it called Project Impact. Overall, “Project Impact … led to increased sales, decreased inventory, and a more positive customer experience” [“Unintended Impact of Walmart’s ‘Project Impact’,” by Adrian Gonzalez, Logistics Viewpoints, 11 March 2010]. Gonzalez reports that Walmart’s U.S. Chief Operating Officer, Bill Simon, noted that Project Impact objectives had to be adjusted to meet local needs. Gonzalez explains:

“Simon also said that Walmart has brought back about 300 items it had discontinued. Why? ‘You can discontinue items that don’t sell anything, but get you a [customer] trip [to a store]. We did discontinue some things…mostly in food and consumables, there were flavors, items, sizes that customers are very accustomed to and like very much and we disappointed them by taking them out.’ The net result is that if a customer knew they could no longer find a favorite item at Walmart, such as a one-pound bag of brown rice, they would go to a competitor and do all of their shopping there. ‘[We’d] lose an $80 basket or a $60 basket and not just the dollar for the one-pound brown rice,’ Simon commented.”

An article in the Financial Times notes that there are nine emerging market nations “poised to play an important role in retailing”; and, if retailers want to succeed in those countries, they must adapt to local conditions [“Global view with a local focus,” by Andrea Felsted, 21 April 2010]. Felsted reports:

“According to Ira Kalish, consumer business research director at Deloitte, … the consumer today … [is] ‘more price-conscious [and] more value-oriented.’ … Emerging markets such as China continue to offer considerable opportunities for international retailers. A report from Deloitte and Planet Retail, an information provider, says the Chinese middle class ‘offers the promise of great riches for the world’s leading retailers and their suppliers.’ While the Chinese retail market is huge and growing rapidly, competition is fierce, margins are razor-thin for many store groups, and the sector remains highly fragmented. But according to Deloitte and Planet Retail, there are eight other key emerging markets that are poised to play an important role in the globalization of retailing: Brazil, Egypt, India, Indonesia, Mexico, Russia, Turkey and Vietnam. ‘These otherwise disparate countries have one thing in common: they are all on the radar screen of some of the world’s leading retailers,’ the report says. Brazil, Mexico and Turkey hare already attracted substantial foreign investment, while others – Egypt, India and Vietnam – are only beginning to see serious activity, the report says. India and Vietnam remain poor, while Russia and Mexico could be considered middle-income. Some countries, such as Brazil, Mexico, and Russia welcome foreign investment, while others, such as India, are hesitant. … Foreign retailers cannot directly invest in India unless they sell only a single brand, or if they were present before 1997. Food and mass merchandise retailers are permitted to invest in wholesaling but cannot open their own retail stores, although there are hopes that this may change. … Given the importance of emerging markets, this means getting it right at home and abroad.”

By “getting it right” abroad, Felsted means that retailers must appeal to local consumers. She goes on to explain that this means more than simply appealing to local tastes. It sometimes means being able to get sales people to market goods with which consumers might not be familiar or sell them something they didn’t think they needed. In other words, the sales floor is again becoming a battle ground. She explains:

“[Richard Hyman, strategic retail adviser to Deloitte,] points out that retailing is not just about strategic vision. Having the right staff in stores will be a key weapon. ‘One of the things that is really going to sort the men from the boys is store managers,’ he says. ‘More and more, this battle is going to be fought on the sales floor, not in the boardroom. So having a brilliant strategy that is articulated in a compelling way in the boardroom is academic, unless it can actually be executed, which means … your regional management and store management, and staff loyalty, never mind customer loyalty, will play a much bigger part.’ Terry Finerty, a director at ReConsulting, which undertook a project to work with the area managers of Mothercare, a UK child clothing and accessories retailer, agrees that having the right store staff is especially important when consumers are cautious in their spending. ‘Every time a customer comes into your store, and someone treats them well, your [sales] conversion rates go up. That is hugely important when overall spending goes down,’ he says. … According to Deloitte’s Richard Hyman: ‘Getting it right will still be rewarded with very good returns on investment. I think this is the kind of market that really magnifies the differences between the strong and the weak. … A lot of businesses are going to do really well. They are just going to have to run a lot faster.'”

There will always be an inherent tension between suppliers (who want to maximize profits from their products) and consumers (who want to buy products at the cheapest possible price). Both groups understand the concerns and desires of the other, but that understanding won’t lead to less pressure to achieve desired goals. The one thing that connects the two sides is the supply chain. A resilient supply chain can help mitigate the tension between suppliers and consumers by ensuring that products continue to flow despite occasional disruptions. The Roman playwright Titus Maccius Plautus, once wrote, “Good merchandise, even hidden, soon finds buyers.” Generally, retailers work out a win-win situation for suppliers and consumers and, as a result, good merchandise does find its way to buyers. Those win-win situations are maximized when retailers remember that all buyers are local.