It's the value chain stupid!

Photo: ColaLife. Mother and daughter holding Kit Yamoyo, Zambia.

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Interview: Simon Berry, ColaLife

Private sector people with supply chain experience will chuckle when they read this. It will be so obvious to them. But it's not obvious to the rest of us. This is just one example of how public private partnerships are so helpful. What's obvious to someone from the private sector may not be obvious to someone from another sector and vice versa.

In the planning stage of the ColaLife trial the guys from Coca-Cola would say "Yes, but what's the value chain?". And frankly we only had the vaguest idea what they were talking about. We certainly did not understand the significance of what they were asking. But we think we do now.

As someone from the NGO sector - and I would suggest that most people from the public sector think like this too - I'd focus on the supply chain, not the value chain. I would think: we have to get this product from here to there, how do we physically do it? Thinking in this way makes you blind to the fact that the physical means for getting something from one place to another is often already there. This is certainly the case with fast moving consumer goods like Coca-Cola, washing powder, talk-time and cooking oil.

So you don't have to build your own supply chain you just have to make the existing ones work for you. So how do you that? This is where value chains come in. What we have done in ColaLife is build an end-to-end value chain right from the design of the Kit Yamoyo (attractive, functional, affordable), through the manufacture, assembly, storage and distribution, to the purchase by the mother. Every step adds value and generates a profit for the organisation or individual adding that value.

If you can successfully create a value chain you don't need your own supply chain - along with all the 4 wheel drive vehicles, warehouses and so on. Magic. Are there any private sector people still reading? Have we got this right?

The ColaLife value chain

Money is made at each point

1 ORS manufacture | 2 Kit Yamoyo assembly

3 Storage and dispatch | 4 Delivery to the district wholesaler by Medical Stores Ltd

5 Purchase of kits by the retailer | 6 Sale of the kit to a care-giver

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Tags: #africa-wp, #featnutrition, #health-wp, #inclusivebusiness-wp, Diarrhoea, Distribution Chain, Distribution channels, Health, Kit Yamoyo, Low income consumers, More…

Comment by Steve Morris on March 13, 2013 at 7:06: Yes Simon, clearly obvious to some and not to others. Yet there is still a vital point missing in your message. You have in the post above "The ColaLife value chain
Money is made at each point" but one of the most critical questions that should be discussed is who owns that value made at each point. As an NGO bod my interest is in creating shared value, ensuring that a fair share of it gets to the bottom of the pyramid and that there is equitable distribtion at all points along the chain. There are also different types of value - it is not always hard cash - and where there is good two way flow of information and good support structures there is also value. Your essential point though, that we do not need to create a new supply chain is key. lets make markets and their supply chains work for the poor and not create or maintain poverty..

Comment by Simon Berry on March 13, 2013 at 8:20: Really good points Steve.

Do you have any tips on how to ensure an equitable distribution of the value created along the chain?

Our key concern is to keep the retail price at a level which the majority of mothers and care-givers can afford but as we scale-up I think that even this may be difficult to 'control'. The way we are doing it at the moment is through the retailer recruitment process and by printing the retail price on the kit.Not particularly strong control methods. For example, in very remote areas, K20.00 of talk time costs K25.00 or K30.00! Even though the scratch card is clearly marked!

Markets don't tend to respond well to measures to control them!

Comment by Simon Berry on March 13, 2013 at 8:22: I should add that in our trial the wholesalers' mark-up is 20% and the retailers is 35% although we may tweak these (and other things) when it comes to scale-up.

Comment by Steve Morris on March 13, 2013 at 10:00: Equitable distribution in not necessarily equal distribution so there is no problem with different % mark ups at different value points. Access to informaiton about real costs is important but very difficult to achieve and perceptions as to what makes a fair or equitable share of value added will of course depend on what infomation is available about the costs.

Your example of talk time pricing in rural areas is an interesting one. Often we would be looking for opportunities for increasing the share of benefit to the producer - assuming the power lies with the distributer or retailer as in many global food supply chains - but in this case who is the producer? the airtime service provider or the scratch card printing company? do we want to increase the service provider's % share? Not in this case - they would recognize that volume sold is key not cost per unit. In this instance is it the distributer adding more to cover their transport costs - in which case some work may need to be done on economies of scale in the distribution chain - or is it the village level retailer adding a mark up because she had to travel to town to buy the cards or just because the market will bear it? As you say the card is clearly marked so access to information is not the issue.

Comment by Simon Berry on March 21, 2013 at 21:15: It's all very interesting stuff. In the case of the talk time mark up I think it's the end-of-line retailers who are doing the additional mark-up. The 'proper' margins on talk-time are very low.

Comment by Innocent Mugwagwa on March 26, 2013 at 9:26: Interesting topic. As Steve says, it is about the distribution of rents along the value chain. As a development practitioner, I am interested in equitable distribution, because every relationship is about POWER, and power is always assymetrically distributed. How would do I ensure equitable distribution of rents along the chain, and what criteria would I use? First, by mapping all the players in the chain and calculating their share of margins, we get to know who is involved, the vertical and horizontal relationships, information assymetries, access to finance etc. Often, this will take me to a value chain leader, also called a lead firm (LF). The LF controls key technologies in the value chain, usually owning brand names, important recipes, trade marks etc and its area of expertise has high entry barriers. Usually that is where the bulk of the margins reside: as much as 55% in some agro-industrial chains in Africa.

It is important to focus on the LF because this all-powerful player determines who can join the value chain, what information they can get, upgrading opportunities, access to finance etc. In other words, making value chain improvements such as equitable share of margins would be difficult without involving the LF.

An important contribution development practitioners can make is value chain analysis as a starting point, obviously, but also organizing producers or other low margin, vulnerable groups, for example, can improve their bargaining power. Also, improving access to info through simple SMS messaging, for example, helps low-margin nodes of the value chain get better market access. Better organized producer/farmer associations can get finance on behalf of their members, instead of relying on the LF. They can reduce transport costs by pooling their deliveries, for example.