Winning Strategies For Emerging Markets In Asia

[WINNING STRATEGIES FOR EMERGING MARKETS IN ASIA]stand and account for the unique supply and demandchallenges of the region. Demand in these markets iscomplex due to the need to provide a wide range ofstock-keeping units (SKUs) covering multiple pricepoints. It is also volatile, as channel partners oftenstruggle to sense and forecast changing consumptionpatterns. Reliable supply, meanwhile, can be hard toestablish because of challenges posed by infrastructure limitations, taxation policies, and a shortage ofneeded employee skills. In light of these conditions,many international companies are deliberately creating different business models for Asian markets. Forexample, consumer goods companies that are traditionally configured by product categories in Europehave adopted geography-based structures in the moreheterogeneous Asia region.The influence of diversityAsian economies are in different stages of maturityand therefore are very diverse. For example, Indonesiais a member of the influential “Group of Twenty”(G20) countries, while Myanmar, emerging fromdecades of isolation, is still an underdeveloped market working to build its institutions. At US 51,000,GDP per capita in Singapore is more than 30 timeshigher than in Laos and more than 50 times higherthan in Cambodia and Myanmar; in fact, it evensurpasses that of the United States. The standarddeviation in average incomes among Association ofSoutheast Asian Nations (ASEAN) countries is morethan seven times that of European Union (EU) member states. This disparity in purchasing power meansthat even multinational companies need to customizetheir products to meet a wide range of target pricepoints for countries within Asia, thereby increasingSKU complexity.This diversity extends to political outlook andpolicy. India, for example, has historically adoptedprotectionist policies that have controlled businesssectors and the extent to which foreign corporationscan invest in the country. It still does not allow100 percent foreign direct investment in the retailsector. As a result, while international retail chainsare booming in South Korea and Japan, they stillaccount for less than 25 percent of sales in India.Multinational companies like Amazon operate inIndia purely as an online marketplace for other companies’ products, since they cannot set up their ownwarehouses or retail operations. Similarly, complextax structures in the country mean that even localcompanies often have to set up multiple logisticsfacilities across the states.The infrastructure differences in Asian countrieshave made it necessary for companies to experimentwith alternate routes to market. Markets like Japan,42CSCMP’s Supply Chain Quarterly[QUARTER 3/2014]South Korea, and Singapore, with their well-plannedcities and superior infrastructure that allow for economies of scale, operate in a completely modern tradeenvironment. In countries like India and Indonesia,by contrast, burgeoning populations, less-plannedurbanization, and developing infrastructure haveresulted in a largely distributed trade environment,where the majority of sales are conducted throughsmall, family-owned “mom and pop” outlets served bymultilayered distribution networks with high logistics costs. Other markets, like China, Malaysia, andThailand, are split roughly equally between distributed and modern retail channels.Asia’s diversity extends into social, linguistic, andcultural dimensions, all of which may require carefuladaptation on the part of manufacturers. Some examples: Indonesia is almost 90 percent Muslim, while thePhilippines is more than 80 percent Roman Catholic,and China is more than 95 percent Buddhist. Indiais 80 percent Hindu, with significant and activeMuslim, Sikh, and Christian minorities.Companies need to be aware of such intraregionaldifferences and their sensitivities. During the monthsof Ramadan, for instance, products that appeal to thereligious sensitivities of Muslims see a big jump insales, while capital-goods and auto manufacturers inIndia wait for the holiday of Diwali to launch majorsales promotions. The Chinese New Year, celebratedevery February, practically cripples long-distancegoods movement, forcing companies to build upinventories to serve demand during the festive period.Finally, because there is no one common languagethat binds Asia, and English is spoken and understoodin few regions, companies are forced to customizetheir product labeling and promotions to meet locallanguage requirements.Five strategies for successAsia’s continued high growth rates make it a veryattractive market for global manufacturers and consumer goods companies. But the ability to takeadvantage of those opportunities is only available tocompanies that appreciate the diversity and complexity of the region. McKinsey’s research indicates thatthere are five key challenges or issues that companiesmust master to succeed in Asia:1. Succeeding with “last mile” delivery2. Handling extreme consumer diversity3. Unlocking the potential of e-commerce4. Managing risk through nearshoring5. Acquiring sufficient supply chain talentIn the remainder of this article, we will discuss eachof these, including strategies for addressing them.www.SupplyChainQuarterly.com1. “LAST MILE” DELIVERYfessional logistics service providers. At the same time,Plan for demographic and social trendssmaller, distributed retailers with an emphasis on lowThe McKinsey Global Institute (MGI) forecasts that prices for customers will remain cost-focused and willby 2020 over 4 billion people will be urban dwellers seek low-cost, entrepreneurial delivery models.worldwide, and 80 percent of them will live in develOne such innovative (and uniquely Indian) healthoping countries.1 This new urban consumer class care distribution model is that of the ERC Eye Carewill spend more on housing, recreation, health care, Center, which offers affordable and quality eye careand consumer products. This in turn will drive up through its vision centers, satellite clinics, and a hubdemand for increasingly sophisticated supply chain hospital in the northeastern state of Assam and nearcapabilities, including higher customer service levels, by areas. As part of its effort to address the currentfaster delivery, improved availability, and greater shortcomings of the eye-care system in the region,agility. The MGI study also indicates that although the company plans to expand via its hub-and-spokepopulations in urban centers aremodel across Assam to offer peogrowing six times faster than inple in underserved communitiesIf they are to capture the access to affordable consultations,rural ones, this expansion is notlimited to first- and second-tieyeglasses, and eye surgery. Underfull potential of Asia’ser cities. In China, Indonesia,this model, the company mainemerging markets,and India, for example, majortains high-volume inventory atgrowth is occurring in smaller citits hubs, and stocks low-volumecompanies will haveies located in remote areas. Thus,inventory at the “spokes” (serviceto understand andthe demographic and social trendslocations located at a distancein these countries indicate thatfrom the hubs).account for the uniqueexisting cities will become denser,Finally, the increase in consupply and demandwith alternate routes to marketsumption in rural areas will createlike modern retail, traditional disfresh demand centers that will bechallenges of the region.tributed retail, and e-commerce,profitably served by new, indiwhile today’s towns will grow intorect distribution models. Theseyoung cities.models require the manufacturerThis trend has several implications for supply to sell to a rural distributor, who then sells to retailchains. First, the increasing service expectations ers spread throughout 10 to 15 villages. The smallwill make last-mile (final delivery) distribution far scale and remote location of these retailers requiresmore important than it is today. For example, it is special modes of transport and may drive the aggrenot uncommon today for an Asian “mom and pop” gation of products across manufacturers. Consumerstore to work with a 60–80 percent level of on-shelf goods companies like Unilever, ITC, and Evereadyavailability, compared to 99 percent in the developed developed the first such rural distribution models inworld. Achieving higher levels of service will call for India, and these organizations continue to innovatesophisticated management of the last mile, including to serve growing rural demand. Unilever, for examreal-time tracking of orders and deliveries, and opti- ple, employs the Shakti Amma (the literal meaningmization of routes and vehicle loading.is “empowered woman”) model to reach smallerSecond, increased consumption in the bigger cities villages that it cannot otherwise serve directly. Thewill finally create the scale for third-party logistics company’s rural salesperson at a district level appoints(3PL) companies that specialize in last-mile logistics. women entrepreneurs called Shakti Ammas in vilThese companies will start with a few key accounts lages. These women pick small quantities of productsbut will soon become aggregators serving multiple from the salesperson and then sell them to smallmanufacturers and retailers in a locality. In India retailers in their villages.today there are very few large 3PLs; most logisticsactivities are being managed by local, unorganized Focus on efficient logisticstransporters. This will change as cities grow and cus- The complexity of last-mile logistics in many Asiantomers demand superior service that requires sophisti- markets inevitably leads to higher costs, and thesecated capabilities.costs have been exacerbated in recent years by risingThird, multiple routes to market within the same service expectations and by other factors, like increascities will promote different last-mile logistics models. ing costs for fuel, real estate, and labor. For mostThe modern, multibrand retailers and the larger, sin- industries, logistics spend as a percentage of revenuegle-brand retailers that promise shoppers better cus- is significantly higher in Asia than in Europe or thetomer service will prefer to work with the more pro- United States.www.SupplyChainQuarterly.com[QUARTER 3/2014]CSCMP’s Supply Chain Quarterly43

[WINNING STRATEGIES FOR EMERGING MARKETS IN ASIA]To stop their logistics costs from eroding too muchof their margins, supply chain managers need toemploy optimization tools like network planning,vehicle scheduling, and route planning to squeeze outthe last bit of inefficiency in logistics.This approach can lead to significant cost improvements. One Chinese logisticsservice provider, for example,saved 5 percent of its transportcosts by rearranging its network.With over 130 hubs and 600 linehauls across China, the companydecided to apply demand forecasts by line haul rather thanby the national volume and touse advanced network modelingto balance cost with service. Byreviewing and adjusting its linehaul volume plans monthly, thecompany has managed to transform its logistics network intoa major source of competitiveadvantage.A multinational commodity-goods company dealing in bulklogistics managed to reduce its logistics spend by 6to 8 percent in just two years—without any drop inservice levels—by adopting lean tools and techniquestypically applied in manufacturing operations to itsentire outbound logistics value chain. Among thecompany’s initiatives were efforts to minimize railcarloading time and total turnaround time for road transportation, especially minimizing waiting time at theplant and warehouse; optimizing the mix of rail androad transportation; increasing road transportationcapacity through the use of larger trucks; and settingup win-win contracts with transporters that includeda mix of cost and safety factors. Successful implementation of these initiatives required an intensiveeffort to develop capabilities among more than 50executives and managers in the company’s logisticsfunction.Unlock working capital in the value chainAnother key focus for Asian supply chains is the management of working capital. Working capital management—for example, through inventory optimizationand the management of payables and receivables—isan integral part of every business. In Asian markets,however, it takes on added importance due to thehigh amount of capital trapped in the extended valuechain as well as the higher cost of capital. For example, it is not unusual for the cost of capital in India toexceed 12 percent.Supply chains in Asia are inherently complex due44CSCMP’s Supply Chain Quarterly[QUARTER 3/2014]to their proliferation of SKUs, routes to market, andconsumer segments. This greater complexity anduncertainty translates to higher inventory levels, notjust in the company, but also in the extended valuechain, including suppliers and channel partners.While most multinationals and larger local companiesmaintain good control over theirworking capital, their smaller suppliers and partners do not possess similar capabilities. The highrate of borrowing in most marketsmeans that these companies oftenstruggle to raise cash, and thatbecomes the rate-determiningstep in the growth plans of largerorganizations.Increasingly, companies arerealizing this and are responding in two ways. First, they areextending their superior supplychain capabilities to their partners. This includes investing intechnology and planning systemsthat track and optimize end-toend inventory in the extendedchain. Second, they are helping their partners securecheaper capital from banks. Banks in Asia are taking steps to help small and medium-size enterprises(SMEs) improve their working-capital managementprocesses and systems, so that they rely less on borrowed funds to fuel growth. For example, the banksmay help companies adopt vendor-managed inventory (VMI) techniques, in which a supplier holds andmanages materials and parts for its customers. Onceconsumed, those parts and materials are regarded ashaving been directly purchased.gy. As the company came to encompass almost everyvalue need and price point in the mass, premium, andluxury segments of India’s watch market, it created alarge array of brands with a price range of less than US 20 to more than 500.These alternate business models, often employedwithin the same company, are underpinned by verydifferent supply chains. Lean supply chains supporthigh-volume, mass-market products with a greateremphasis on value, while agile and fully flexiblesupply chains deliver premium products, for whichservice overrides cost considerations. Companies thatdo business in Asia need to master this supply chainsegmentation to successfully compete across the entireprice portfolio.Adapt planning methods to the marketOne multinational operating across Asia uses variantsof a “control tower” approach as part of its sales andoperations planning (S&OP) to achieve an agile supply chain. Under this model, a cross-functional groupof senior personnel from various supply chain func-[FIGURE 1] TOP PRIORITIES FOR INDIAN AUTOMOTIVE COMPANIESOrganizational priorities in the coming five yearsN 22Average rating1Responding quickly to supply chaindisruptions5%Challenging cost escalations14%Increasing consumer requirements9%Driving product development tobalance cost and value14%2. CONSUMER DIVERSITYMatch the supply chain to the product portfolioA significant implication of the diverse nature of theAsian consumer is the need for products and servicesoffering similar functional benefits but at widelydifferent price points. This, coupled with local entrepreneurship, has meant that different business modelshave evolved to deliver the products and servicesconsumers want at the prices they want to pay. Manysuccessful companies have used this business strategyeffectively in Asian markets. For example, one consumer goods company that sells detergent powdersoffers one brand at US 0.50/kg and another at 2.50/kg. A car manufacturer whose most popular brand waspriced at US 15,000 has launched an equally popularmodel at just 5,000. One more example involves theIndian watchmaker Titan, which developed its brandstrategy in tune with a customer-segmentation stratewww.SupplyChainQuarterly.comtions, such as demand, production, inventory, andlogistics, work together to identify and address supplychain issues. In mature markets like South Korea andSingapore, products are segmented based on marginand working capital, and a weekly joint planningmeeting with retailers is set up to ensure transparencyof supply and demand. However, in growing marketslike Thailand and Indonesia, where SKU proliferationis common and there is a chronic shortage of skilledplanners, the company simplified planning efforts byidentifying the critical SKUs that require high-accuracy planning, and then using automated planningand replenishment to handle the remaining products.Furthermore, in Southeast Asia, where each country market is relatively small, this company achieveseconomies of scale through regional production that issupported by both regional- and national-level planning and in-country control towers. This allows thecompany to achieve 96 percent product availabilityfor modern retailers in North Asia while at the sametime reducing inventory by 40 percent in SoutheastAsia—without impacting lead times or serviceability.Managing sales losses and wronginventory accumulationOptimizing a global manufacturingfootprint2Normal/very cal importance27%19%50%3.650%3.548%3.2Top functional or organizational priority1 Rating scale: 1 – Normal importance 2 – Very important 3 – Critically important 4 – Top priority for the functional leader5 – Most important priority for the organization2 Excludes respondents who did not respond to the question[SOURCE: MCKINSEY & COMPANY]www.SupplyChainQuarterly.com[QUARTER 3/2014]CSCMP’s Supply Chain Quarterly45

[WINNING STRATEGIES FOR EMERGING MARKETS IN ASIA]A similar segmentation of SKUs by an auto-component provider in India, using the control towerapproach to track shifting product demand in the faceof a volatile market and material shortages, saw its“on-time in-full” levels increase from 68 percent to 82percent without any increase in its inventory levels.3. E-COMMERCEUnderstand trends in emerging marketsSince the 2000s, delivery models that have had atremendous impact on supply chains in Asia haveemerged. The explosive rise of electronic commerce(e-commerce), for example, has transformed theInternet from a source of information about products and services to a way to buy them. While suchchannels are already considered an important aspectof doing business in developed economies, digitalbusiness-to-consumer (B2C) markets are also startingto boom across Asia’s still maturing economies asInternet penetration grows.But what really distinguishes Asian e-commercesales is the customer’s willingness to pay for convenience in light of Asia’s infrastructure challenges. AMcKinsey survey showed that more than 65 percentof respondents in India and 40 percent in China werewilling to pay extra for convenience, compared to just17 percent in the United States.2Around 26 percent of Internet users in Asia in the25–30-year age cohort use the Internet to buy products, and this is expected to grow to 60 percent by2025. Consumers in Asia increasingly are accessingthe Internet using new tools like mobile phones andtablet computers, and a growing number are relyingon social media to make informed buying decisions.Not just dedicated e-retailers, but also traditionalbricks-and-mortar retailers are embracing electroniccommerce as a critical component of their emerging-market business operations. Such multichannelapproaches for the delivery of products, along withthe proliferation of SKUs discussed above, is forcingsupply chain managers to adopt new and innovativestrategies for product delivery in Asia.The biggest challenge in establishing an e-commerce channel remains the management of the“back end” supply chain. For many e-businesses thisis unusually complex due to the higher number ofSKUs and suppliers the retailer needs to manage. Thereliability and flexibility of these suppliers has notgrown at the same rate as the demand, so e-commerceretailers often need to adopt more robust supply management practices than do traditional retailers.Adopt innovative service strategiesHomeplus, a Tesco joint-venture company in SouthKorea, launched virtual stores in Seoul subway sta46CSCMP’s Supply Chain Quarterly[QUARTER 3/2014]tions, using e-commerce to overcome a rival’s greaterphysical presence. The walls of the Seonreung subwaystation in downtown Seoul came to life with virtualdisplays of more than 500 of the most popular products. The images incorporated bar codes, which customers could scan using an app on their smartphonesto request delivery to their doorsteps. The new business was successful, as the virtual stores created freshdemand that was fulfilled by the company’s alreadywell-established supply chain. This success storyprompted a Chinese online retailer to launch its firstvirtual stores in Shanghai.Other companies are using their e-commerce channels not just to deliver products, but also to enhancethe service offered by their conventional sales channels. For example, an Asian motorcycle manufacturerallows customers to select customization features likeseating options and accessories online. This information is sent to dealers, who fit the appropriate parts sothat the customers can collect ready-to-ride customized motorcycles after a very short delivery lead time.4. MITIGATING RISKEmbrace nearshoringNearshoring refers to increasing the proximity oftangible (for example, manufacturing) and intangible(such as innovation) aspects of businesses relative toend-consumer demand. Nowhere has this been morerelevant in the last decade than in Asian markets.Most multinational companies began their Asianbusinesses by viewing these markets as geographicalextensions for brands they were selling in the developed world. Their first business models thereforeinvolved establishing routes to markets in Asia andselling products manufactured in North America orEurope. These models very soon changed to nearshoring of manufacturing and procurement, which hashelped companies tap into market potential, reducecosts, and enhance agility.The emergence of state-developed special industrial zones, such as those in China, Indonesia, JohorBahru in Malaysia, and Gujarat and Uttarakhand inIndia, coupled with locally available raw materialsand skilled manpower, made a ready case for thenearshoring of manufacturing. For example, in thefirst six months of 2012, the motorcycle manufacturerHarley-Davidson’s retail sales were up 16.5 percent inthe Asia-Pacific region. The company recently decided to open a manufacturing plant in India, its firstoutside the United States. Increasingly, manufacturers are encouraging their engineering and equipmentvendors to establish factories and technical-supportfacilities near their manufacturing plants in Asia.The more advanced companies are now taking thenext step in the nearshoring process, with a focuswww.SupplyChainQuarterly.comon the intangible assets of knowledge and talent. Inorder to better understand Asian consumers and beable to offer products and services that are specifically developed for them, many companies are settingup consumer research centers, product research anddevelopment (R&D) centers, and leadership traininginstitutes in Asia. One British company has recentlyestablished a management development center inSingapore—only its second such center, and notablefor the fact that it is located outside Europe. Thisstate-of-the-art center, which has a higher capacityutilization than its European counterpart, will beused for training and development of the company’sAsian staff. And a German company has establishedits latest global R&D center in India with the brief todevelop mass-market products for the world.Adopt global risk management practicesIt is generally recognized by supply chain managersthat risk in their supply chains has greatly increasedover the past few years due to shrinking economiccycles, increased geopolitical turmoil in developingcountries, and unpredictable natural disasters. Forexample, floods in Thailand in 2012 caused havocwith the supply chain of Japanese high-tech andelectronics companies with a manufacturing footprintin Southeast Asia. Automotive original equipmentmanufacturers (OEMs) in India witnessed up to a50 percent drop in sales volumes in 2013, with somesegments recording up to eight consecutive quartersof declining volumes due to the prevailing economicuncertainty.A survey of supply chain professionals conducted byMcKinsey & Company at an automotive conferencein India in 2013 found that responding quickly tosupply chain disruptions was the topmost priority fororganizations in the next five years. (See Figure 1.)Achieving that objective would require a cross-organization approach that includes pre-empting “shocks”by reducing variability and building structural agility,detecting such shocks early through appropriate trigger points, responding in real time through predefinedplaybooks with clearly defined responsibilities, andcapturing advantage. (See Figure 2 for a more detailedlook at successful approaches to building agility acrossfunctions.)Several companies in Asia have already adoptedthese models. For example, Honda has standardizedits processes across all auto models and speeded itsreactions to changes in the mix of models orderedby dealers, while P&G has implemented systems anddeveloped the necessary infrastructure to ensure quick[FIGURE 2] KEY TO BUILDING AGILITY ACROSS FUNCTIONSExamples of leversAgile agilityq Laborflexibilityr Assetfootprintw Rampup/downcapabilitiest Assetflexibilitye ProcessdesignflexibilityDCPurchasingagilityy Supplierselection anddevelopmentu Make or buy;contractingstrategiesi RisktransferProductdevelopmentagilityo 1) Diversifiedresearch anddevelopmentfunnelEPlanningagility1! Demandshaping1@ Inventorystrategy1# End-to-endplanning1 Forecasting1% “War room”/control tower[SOURCE: MCKINSEY & COMPANY]www.SupplyChainQuarterly.com[QUARTER 3/2014]CSCMP’s Supply Chain Quarterly47

[WINNING STRATEGIES FOR EMERGING MARKETS IN ASIA]responses to changes in

emerging markets, companies will have to under-Winning strategies for emerging markets in Asia This article marks the second installment of a three-part series by McKinsey & Company on managing supply chains in emerging markets. Part 1 discussed Latin America, Part 2 (the current article) looks at Asia, and the final installment, Part