Executive Briefings

Mega-Cities in Emerging Markets Pose Special Logistics Challenges

A conversation with Edgar Blanco, research and executive director, SCALE Latin America, MIT Center for Transportation & Logistics.

Part of the Engineering Systems Division of the MIT School of Engineering, the Center for Transportation & Logistics coordinates more than 100 supply chain research efforts across the MIT campus and around the world. Its goal is to educates not just students but corporate leaders in the essential principles of supply chain management, and to help organizations boost productivity and decrease their economic and environmental impact. SupplyChainBrain caught up with Dr. Blanco at the 2011 Annual Conference of the Council of Supply Chain Management Professionals, in Philadelphia.

Q:  Before we speak about the particular logistics challenges that companies face in mega-cities in the world's emerging markets, let's define just what a mega-city is.

A: Blanco: It is an urban area that usually has 10 million or more people in it. Currently, around the world there are roughly 44 cities that meet that criterion. People in these markets represent close to 15 percent of the global GDP, and people within these cities usually earn about 80 percent more per capita than people do in the rural areas.

Q: So obviously you're studying them because they aren't just big, but different in some kind of way, I suppose.

A: Blanco: Why is it important to study this type of logistics? These mega-cities, at least the majority of them, actually are in emerging markets, not in the developed economies. So they are the kind of environments that most companies, especially in the U.S. and Europe, are not used to dealing with. They already represent a big share of the GDP, but they will continue to grow and probably double in the next 15 years. Any company trying to keep on growing, especially as they go into emerging markets, needs to understand them and be very conscious about the unique aspects of those cities.

Q: So, what are these aspects?

A: Blanco: The first one is density. When we think about density, we usually think of New York, of Manhattan. When we think about density in emerging markets, a city like Mumbai comes to mind. When you do the numbers, you see that Mumbai, for example, has 29,000 inhabitants per square kilometer while the New York City area will have under 8,000. We're talking about orders of magnitude in difference. This creates lots of different problems for companies. They need to think, "How do I get to those customers and those consumers in those environments?" Size matters, density matters - because this density translates into congestion.

Second, with the amount of vehicles, mobility infrastructure grows slower than the growth of the population in these cities. So if I want to get to those customers, not only do I have to get into these huge urban environments, I also need to think, given the congestion, how I will go about planning my logistics operations.

On the other hand, if there's congestion, how does these consumers buy their goods?  Usually they don't go to big retail outlets or the big shopping malls that we use in the developed world. In emerging markets, most of the goods are actually purchased through very small stores. So here are my logistics and distribution problems: not only are we in an environment I'm not used to operating in but my customers go to channels that I have traditionally outsourced, put into other people's hands. But now, I may need to think twice and say, "How do I get to those small stores?"

Q:  What is unique about these mega-cities, other than the size?

A: Blanco:  The fragmentation of the channel is one of them. But one of the elements that makes this even more complex is the kind of partners you have to deal with. A small store by itself is not unique. But the kind of technology that is available right now in those stores is. The answer is none. These stores are usually managed by individuals. The growth of the economic development of the region is built on these small businesses, and they are serving a set of customers. So the symmetry of capabilities between the supplier of goods and the retail outlets is much much higher, probably than you're used to.

Second, given that these economies are emerging, we are in a situation where credit, for example, is not widely available, and a lot of these transactions happen in cash.

Finally, your partners that need to help you move those goods from your warehouses or DCs into those stores will not be the big UPSes or FedExes of the world. They will be small providers that have been developing at the same time as these stores. So how do you partner with fragmented channels, that fragmented transportation partner and the potential lack of technology across the board - but still be able to sustain growth and be profitable in that battle?

Q: It sounds almost overwhelming. So where does one start?

A: Blanco: You need to first start getting familiar with these big places like, say, Sao Paulo or Rio de Janeiro, where you will have areas that are very affluent with very good infrastructure, but at the same time, you have areas that are only favelas. You have to understand that environment. You literally have to know very well the topography of the city, the geography of the city.

Second, your partners may not be there. You may have to start taking ownership in setting up your distribution centers in those cities. But because these cities are very packed and very dense, you have to start ahead of time, thinking, "Where am I going to start locating my distribution centers within the city?" It's not enough to have one DC for these environments on, say, the outskirts of Mexico City to serve the whole city. "Do I have to have a satellite location or have to have small trucks to serve those small streets?"

The planning of investment in infrastructure is very, very challenging.

Q: Speaking of investment, what are the financial implications of these logistics challenges?

A: Blanco: We need to brush off our understanding of the impact of cash on the supply chain. I need to understand the financial implications in logistics and on the flow of goods. In emerging economies, the sales and marketing functions are much more affected by the capability of logistics and supply chain management. That's not to say that we don't have those same challenges here, but in those markets, that connection is stronger and potentially the more critical.

From my perspective, we need to not only go back to our basics -  think about how we plan locations, how we plan distribution systems, how we plan for vehicles - but also we need to go back and rethink how am I going to justify this investment.

Q: At what stage is technology in in terms of helping distribution in this type of environment?

A: Blanco: The lack of technology seems like it's a lost cause, but [that's not so] given the adoption of mobile phones in the emerging markets. These cities and groups of people have not had the luxury to invest in the same path of technology as we have. We have computers and personal PC, laptops, barcodes, etc. There, they probably skip all that. We have found in our research that most of these individuals have mobile phones. In fact, in a few years, all of them will have smart phones.

In emerging markets, especially in  mega-cities, to be able to orchestrate and coordinate those activities, I need to start thinking outside the box. "How can I bring these mobile technologies into the logistics arena, how can I make them a part of my planning of operations, and most importantly, how can I also leverage them to connect with these high levels of fragmentation?"

It's what I call a mobile-enabled supply chain.

Resource Link:
MIT Center for Transportation & Logistics
To view video in its entirety, click here

http://www.supplychainbrain.com/content/videos/2011-videos/cscmp-2011/logistics-in-mega-cities-in-emerging-markets/

Part of the Engineering Systems Division of the MIT School of Engineering, the Center for Transportation & Logistics coordinates more than 100 supply chain research efforts across the MIT campus and around the world. Its goal is to educates not just students but corporate leaders in the essential principles of supply chain management, and to help organizations boost productivity and decrease their economic and environmental impact. SupplyChainBrain caught up with Dr. Blanco at the 2011 Annual Conference of the Council of Supply Chain Management Professionals, in Philadelphia.

Q:  Before we speak about the particular logistics challenges that companies face in mega-cities in the world's emerging markets, let's define just what a mega-city is.

A: Blanco: It is an urban area that usually has 10 million or more people in it. Currently, around the world there are roughly 44 cities that meet that criterion. People in these markets represent close to 15 percent of the global GDP, and people within these cities usually earn about 80 percent more per capita than people do in the rural areas.

Q: So obviously you're studying them because they aren't just big, but different in some kind of way, I suppose.

A: Blanco: Why is it important to study this type of logistics? These mega-cities, at least the majority of them, actually are in emerging markets, not in the developed economies. So they are the kind of environments that most companies, especially in the U.S. and Europe, are not used to dealing with. They already represent a big share of the GDP, but they will continue to grow and probably double in the next 15 years. Any company trying to keep on growing, especially as they go into emerging markets, needs to understand them and be very conscious about the unique aspects of those cities.

Q: So, what are these aspects?

A: Blanco: The first one is density. When we think about density, we usually think of New York, of Manhattan. When we think about density in emerging markets, a city like Mumbai comes to mind. When you do the numbers, you see that Mumbai, for example, has 29,000 inhabitants per square kilometer while the New York City area will have under 8,000. We're talking about orders of magnitude in difference. This creates lots of different problems for companies. They need to think, "How do I get to those customers and those consumers in those environments?" Size matters, density matters - because this density translates into congestion.

Second, with the amount of vehicles, mobility infrastructure grows slower than the growth of the population in these cities. So if I want to get to those customers, not only do I have to get into these huge urban environments, I also need to think, given the congestion, how I will go about planning my logistics operations.

On the other hand, if there's congestion, how does these consumers buy their goods?  Usually they don't go to big retail outlets or the big shopping malls that we use in the developed world. In emerging markets, most of the goods are actually purchased through very small stores. So here are my logistics and distribution problems: not only are we in an environment I'm not used to operating in but my customers go to channels that I have traditionally outsourced, put into other people's hands. But now, I may need to think twice and say, "How do I get to those small stores?"

Q:  What is unique about these mega-cities, other than the size?

A: Blanco:  The fragmentation of the channel is one of them. But one of the elements that makes this even more complex is the kind of partners you have to deal with. A small store by itself is not unique. But the kind of technology that is available right now in those stores is. The answer is none. These stores are usually managed by individuals. The growth of the economic development of the region is built on these small businesses, and they are serving a set of customers. So the symmetry of capabilities between the supplier of goods and the retail outlets is much much higher, probably than you're used to.

Second, given that these economies are emerging, we are in a situation where credit, for example, is not widely available, and a lot of these transactions happen in cash.

Finally, your partners that need to help you move those goods from your warehouses or DCs into those stores will not be the big UPSes or FedExes of the world. They will be small providers that have been developing at the same time as these stores. So how do you partner with fragmented channels, that fragmented transportation partner and the potential lack of technology across the board - but still be able to sustain growth and be profitable in that battle?

Q: It sounds almost overwhelming. So where does one start?

A: Blanco: You need to first start getting familiar with these big places like, say, Sao Paulo or Rio de Janeiro, where you will have areas that are very affluent with very good infrastructure, but at the same time, you have areas that are only favelas. You have to understand that environment. You literally have to know very well the topography of the city, the geography of the city.

Second, your partners may not be there. You may have to start taking ownership in setting up your distribution centers in those cities. But because these cities are very packed and very dense, you have to start ahead of time, thinking, "Where am I going to start locating my distribution centers within the city?" It's not enough to have one DC for these environments on, say, the outskirts of Mexico City to serve the whole city. "Do I have to have a satellite location or have to have small trucks to serve those small streets?"

The planning of investment in infrastructure is very, very challenging.

Q: Speaking of investment, what are the financial implications of these logistics challenges?

A: Blanco: We need to brush off our understanding of the impact of cash on the supply chain. I need to understand the financial implications in logistics and on the flow of goods. In emerging economies, the sales and marketing functions are much more affected by the capability of logistics and supply chain management. That's not to say that we don't have those same challenges here, but in those markets, that connection is stronger and potentially the more critical.

From my perspective, we need to not only go back to our basics -  think about how we plan locations, how we plan distribution systems, how we plan for vehicles - but also we need to go back and rethink how am I going to justify this investment.

Q: At what stage is technology in in terms of helping distribution in this type of environment?

A: Blanco: The lack of technology seems like it's a lost cause, but [that's not so] given the adoption of mobile phones in the emerging markets. These cities and groups of people have not had the luxury to invest in the same path of technology as we have. We have computers and personal PC, laptops, barcodes, etc. There, they probably skip all that. We have found in our research that most of these individuals have mobile phones. In fact, in a few years, all of them will have smart phones.

In emerging markets, especially in  mega-cities, to be able to orchestrate and coordinate those activities, I need to start thinking outside the box. "How can I bring these mobile technologies into the logistics arena, how can I make them a part of my planning of operations, and most importantly, how can I also leverage them to connect with these high levels of fragmentation?"

It's what I call a mobile-enabled supply chain.

Resource Link:
MIT Center for Transportation & Logistics
To view video in its entirety, click here

http://www.supplychainbrain.com/content/videos/2011-videos/cscmp-2011/logistics-in-mega-cities-in-emerging-markets/