Supply Chain Performance, Geography, Governance Weaknesses, Civil Wars, and

                   Battles for Resources Are All Factors



    NEW YORK, Aug. 11 /EMWNews/ -- The gap between developed and

developing countries has been a global concern for decades, but

skyrocketing oil prices and the general growth of world markets threaten to

widen the gap between the developing and least developed countries,

particularly landlocked countries in regions with weak economic

performance, according to a new report from The Conference Board.



    "Exponential growth in countries such as India and China has tipped the

scale, making the poor even poorer," says Ronald E. Berenbeim, Principal

Researcher, The Conference Board, and author of the report. "Without

improvement in the system and infrastructure that support business growth,

these least developed countries will continue to decline, leading to

greater instability in their regions and the world. These poorest countries

are on the wrong side of a growing logistical divide."



    Though logistically disadvantaged countries are typically deficient

with respect to transit systems, trade with small and distant countries

depends significantly on other factors in which they are also often weak.

Supply chain performance within individual countries is also sensitive to

customs procedures, logistics costs, infrastructure quality, the ability to

track shipments, timeliness in reaching destinations, and the competence of

the host's country's domestic logistics industry. The World Bank assigns a

Logistics Performance Index (LPI) ranking to 150 countries based on these

indicators. Singapore ranks first on the list and Afghanistan falls last.



    In addition, poor logistics performers are often hampered by weak

institutions and tend to be in regional clusters where countries have

difficulty achieving steady sustainable growth. The World Bank has

identified several small and distant market clusters: Western Africa,

Central Africa, East Africa, Southern Africa, and Central Asian regional

clusters, and the Andean and Indochinese sub-regional clusters.



    Failed countries like the Democratic Republic of the Congo share four

clearly interrelated characteristics: bad governance coupled with poor

public policy; civil wars; landlocked geography and dependence to a

significant degree on neighboring gateway countries; and battle for control

of vital minerals in resource-rich countries.



    GLOBAL SUPPLY CHAIN MANAGERS ARE KEY TO GROWTH



    Reaching beyond public sector resources may be the key to achieving

small and distant market viability, says Berenbeim. Assuming that

logistical impairments can be addressed, small and distant countries still

face daunting challenges in providing a competitive environment for global

buyers and sellers. Product quality is no longer a stand-alone issue and

complex institutional measures have been developed globally to define

quality standards which determine the choice of suppliers who have the

competence and reliability to meet these standards.



    Global supply chain managers can be key sources of knowledge regarding

the competitiveness and sustainable growth potential of small and distant

markets. Over time, they have accumulated experience in dealing with local

parties in these countries as distributors, buyers, or producers. They have

first-hand experience in dealing with the associated trade costs and

bottlenecks, and they have also developed optimal strategies at the

national or regional level to deal with indigenous governance and market

failures. Their interactions with local partners are often at the most

basic level, and their innovation in such local-global partnerships can

help to mitigate trade obstacles and to develop sustainable supply chains

linking these countries to global markets.



    ASSESSING LOCAL PARTNER POTENTIAL



    At the ground level in small and distant markets, global operators

determine the potential of local partners by assessing the same attractive

and unattractive value-chain elements that affect production, buying, and

sale in any business environment:



    -- Hard infrastructure - relates mostly to costs of essential

infrastructure items such as plant location (rent or purchase), water,

sewage, utilities, land, and connectivity.



    -- Soft infrastructure - is the company and environment's information

technology, such as the availability of specialized designing or packaging

business services, the standards or usefulness of local labor, product or

environmental certifying institutions, production dissemination technology,

the sophistication of financial instruments to facilitate trade

transactions, supplier productivity, and trade logistics for imports.



    -- Factor conditions - are the three major variables of labor (such as

supply and training), capital (e.g., repatriation), and land (e.g., title

acquisition, conveyance costs).



    -- Incentive and competition framework -are local policies and laws

related to exchange rates (capital repatriation, taxes, and tariff/non

tariff barriers), product markets (labor skills), and industries and the

supply chain (infrastructure, backbone services).



    Beyond fundamental business conditions, success in these environments

will depend on the presence or absence and effectiveness or ineffectiveness

of local governance on matters including inter-firm coordination,

innovation and R&D, export and investment promotion,

standards/certification, legal/administrative reform, networks for skills

development.



    Small and distant market countries do not typically have strong

institutional capabilities in these areas, so local partner potential may

ultimately depend on whether the government is open to the creation of new

public-private partnerships. Another component of long-term success may be

the ability to join with other companies to develop these public-private

sector partnerships.



    For supply chain managers, reliability is the first priority. The first

job in determining reliability is to identify the risk factors in supplier

relations. Supplier risk management differs from the more familiar risk

management concepts that are associated with governance issues because

supplier selection can be more easily reversed, changed, or modified than

the choice of a governance partner. Companies need institutional

arrangements to keep lines of communication open and vigilance to address

differences with their suppliers.



    While these problems can arise in any business environment, countries

on the other side of the logistical divide face an even greater risk that

suppliers will do something that puts them out of business or fails to meet

quality standards and, in the process, disrupt company operations. To avoid

crises, such as financial solvency or non-adherence to governmental

regulations, companies need to regularly assess supplier performance. This

type of evaluation should emphasize the quality and flexibility of supplier

technology, adherence to performance commitments, and the effectiveness of

ongoing communications-all components in which logistically challenged

countries are at a competitive disadvantage.



    There are four not necessarily mutually exclusive models for companies

in logistically challenged environments to overcome the risks and costs of

poor infrastructure:



    -- Technology/skills transfer and local political muscle to drive down

transportation-to-market costs.



    -- Sourcing close to market to limit transportation costs.



    -- Enhancing product/value costs through brand equity to trump costs.



    -- Success in developing innovative public-private partnership to drive

productivity and competitiveness.



    The best strategies for these countries to bridge the logistical divide

include working toward better relations with neighbors to improve trade and

coastal access; a good policy environment for investment, transportation,

and remittances for the population that has sought work in other countries;

and the development of rural areas and improved appeal to aid donors.



    "It is important for global players to find ways to add value to

products through improving workforce skills and developing diverse networks

of small suppliers that are able to achieve higher quality standards than

their larger competitors," concludes Berenbeim. "Ultimately, adding value

may be the key strategy in achieving the integration of poor countries into

global supply chains."



    Source: Bridging the Logistical Divide: Integration of Poor Countries

in






             Global Supply Chains, Executive Action #282, The Conference Board