Building local supply chains

In Africa as in many emerging markets, supply chains are still a huge challenge.  The biggest factor is that local suppliers are often non-existent or under-developed and highly informal.  This contributes to unreliability, which is further compounded by both governance and infrastructure weaknesses.  These factors can only be resolved through political will and significant investments over the next five to ten years.

So the question remains:  how do we build these linkages now?

We are currently tackling this problem by finding serious entrepreneurs with high-potential and a clear vision. Many of our clients include the neighborhood grocers, the small “mom and pop shops” and the local retailers- precisely the local partners and distributors that national and international players need to reach the mass market.  Especially for the fast moving commercial goods (FMCG) segment, local retailers and distributors (at least within GroFin’s portfolio) are unique in almost exclusively catering to middle and low-income consumers.  In catering to such a large population, they almost always ensure consistent and high demand and because international manufacturers need reliable providers, they can potentially access long-term supply contracts.  However, this symbiosis is endangered when the local company lacks the capacity or infrastructure to fulfill their contract.

We try to help address both the capacity and infrastructure gap by providing business training and financing the transport or facilities needed.  Subsequently, FMCG retailers and distributors are among some of our huge success stories. However, the local supply chain benefits don’t end with the FMCG sector, they continue to ripple out from all the companies in our portfolio.

As our portfolio companies expand, their purchasing power affects other local enterprises in their industry.  At intake, the average GroFin portfolio company uses an average of 8 local suppliers.  However, within the average 5-year loan period, their demand increases, creating contracts for an average of 17 local suppliers.  Today, GroFin’s 500+ investees contract nearly 7000 other local enterprises across Africa and the Middle East.

Given our 10-year track record, we’ve also amassed a sizable network and are able to refer potential suppliers and clients to our investees.  As investees grow, they are able to provide consistent cash flow to these suppliers.  In economic terms, these cash flows were estimated to be approximately US$100M annually.

An add-on benefit of GroFin’s business support is the push for better environmental, social and governance (ESG) standards.  At intake, GroFin investees are measured on a variety of benchmarks, such as their accounting systems, worker health and safety policies, and environmental sustainability.  We then help them upgrade and reach global standards for their sector or industry.  As they become more organized and streamlined in their own accounting, distribution and systems, their supplier requirements also become more uniform and consistent.

Besides our own work, there’s much to learn from global leaders with proven and new approaches to local supply development.  Coca-Cola’s micro-distribution center model may have emerged to market soft drinks, but now is shaping methodologies for inclusive businesses across the developing world.   Our partner Shell Foundation has developed two new types of social enterprise “intermediaries” or supply chain connectors that work across retail supply chains in Southern and East Africa.

Finally, the SupplyChainLab is chock full of information about improving local supply chains in emerging markets.