UNC Kenan-Flagler Insights

3 Things to Consider Before Expanding Supply Chain To Emerging Markets

April 18, 2013 By Heather Harreld

indianstreetvendorThanks to globalization, multi-national supply chains that span across emerging economies are fast becoming the norm. While it’s easy to focus on the impressive growth and profit statistics that have accompanied this development, managing a supply chain in an emerging economy also comes with a unique set of challenges.

Jayashankar Swaminathan, UNC Kenan-Flagler faculty director of the UNC Center for International Business Education and Research, has outlined three factors companies should consider before expanding their supply chains to India, Turkey or any other emerging economy.

1. Infrastructure Challenges

When operating a supply chain in an emerging market, many of the things taken for granted in developed countries are often unavailable. Infrastructure challenges can manifest themselves in many different ways, from un-air-conditioned warehouses to roads without drainage systems that shut down for days after each rainstorm. Even where paved roads exist, cities in emerging markets are developing at a much faster rate than infrastructure can keep up, and traffic congestion can render highways impassable. These challenges mean that companies need to build flexibility into their business plans. Production and distribution rarely follow precise timelines. Where a late delivery might mean a 40-minute delay in a developed country, it could mean weeks in an emerging market.

Energy shortages and power supplies that suffer frequent interruptions are another major infrastructure problem in developing countries. Companies may need to invest in back-up power supplies that keep offices running even when they’re off the grid. In addition, they can address poor infrastructure by finding innovative ways to use technology. For example, rapid SMS technology can be used to track shipments when internet access is unavailable.

 2. Challenges Adapting to New Consumer Preferences

The middle class in emerging markets is simply not the same as in developed markets. Perhaps the biggest difference is consumers’ emphasis on value and bargain hunting in emerging markets. Companies cannot expect to just enter a new market with the same product they sell in developed countries at a similar price point. Instead, they must innovate to meet the needs of these value-driven consumers, all while keeping unique regional tastes and preferences in mind.

For example, when Unilever entered the Indian market with containers of shampoo that were the standard size in Western countries, the company found that its products were only appealing to the top 25% of India’s middle class. Unilever discovered that consumer products like shampoo are frequently sold in small sachets in India and began offering new units that only hold enough shampoo for one or two uses. However, these units also had to be priced at a much lower price level of around four cents. In order to make a profit, Unilever had to revamp its supply chain with strategies such as developing smaller factories and outsourcing more units.

 3. Distribution Challenges

Particularly for consumer products, distribution is dominated by small mom-and-pop stores. In India these stores make up 95% of the retail market, and this percentage is similar throughout the developing world. With total areas of about 150 square feet, both their display and storage space is extremely limited. Unlike the developed world, which is characterized by large, organized retailers like Wal-Mart, these stores lack the ability to provide consumers with a large stock or variety of products. For example, a retailer may only be able to have three or four tubes of toothpaste in the store at one time. This means companies will often need to provide incentives for stocking their products and have sales staff on the ground in local provinces to help build relationships with store-owners.