On navigating the choppy waters of logistics, supply chain and customer relations

BEWARE: the less sexy something sounds, the more important it probably is. And so it is with the practical realities of what could easily pass as another of my Street Markets columns had I gotten to a certain Gerardo Mendoza first. In any event, Frontier Strategy Group reminds us of a reality that is sometimes easy to forget, and though the context here is the pharmaceutical industry, this could be anything really:

“Many pharmaceutical companies in Brazil have relied too heavily on distributors. The distributors have grown up to become indispensable partners. And as the market has grown, distributors have undergone a flurry of M&A activity amongst themselves. Now some pharmaceutical companies have to reach their end customers through distributors that have larger annual revenues than their clients, and they gain that revenue from a more diversified set of partnerships. This has led, and is continuing to lead, to a significant imbalance of power in the producer-distributor relationship.

At the end of the day, this means that it is hard for pharmaceutical manufacturers to be able to offer enough sales volume to really matter to some of the major distributors. Now the only way they can gain preferential time and attention from their own third party agents is to pay them more – at the risk of beginning a margin-conceding arms race with other companies that employ the same distributor. The alternative is to exit the distributor relationship and, if there are no good alternatives, to shift to operating their own direct sales force. Now that the market is both complex and well developed, the easiest way to “go direct” would be to acquire some existing distributors. Unfortunately, many of the good targets have already been gobbled up.

Gerardo believes pharmaceutical companies in Brazil waited far too long to make their move. If they had diversified earlier into more of a hybrid model, employing distributors while simultaneously developing their own formidable sales force, they would be better off and less drastically dependent. They also should have had their eyes on acquisition targets earlier, before the distribution market became more consolidated on someone else’s terms.

If you are operating in a fast-growing emerging market country, this story could happen to you. In your team meeting this month, ask your team members whether they are concerned about overdependence and the potential for consolidation in the distribution space. You’ve heard the warning that your value chain is only as strong as its weakest link. But what happens when one of the links in your value chain becomes stronger than you are? That, too, is a problem.”

This is very worthy advice to remember, though I would add that this dynamic isn’t unique to emerging markets. But what makes the emerging markets version of it unique is precisely what the author, Dan Kornfield, does not spell out. That is that the potential friction created from the divergent growth trajectories of supplier versus distributor can have quite different outcomes in Latin America, Asia or Africa than what might happen in North America or Western Europe. To be blunt, sometimes these outcomes involve bribery. Sometimes they involve violence. Sometimes they involve both, or some alternate version thereof.

How much a developed country manager is privy to the ins and outs of this sort of thing depends on a variety of factors, some culture-specific, but to the extent that this can be generalized, I can point to two biggies:

1. Let’s face it, the scruples of the developed country manager handling this relationship. We all know that it’s impolitic to endorse bribery (or worse), but that doesn’t mean corporate managers don’t do it when they’re convinced nobody else is looking and they’ve constructed some sort of arrangement allowing them plausible deniability. And if reading that sentence makes you uncomfortable, then you might reconsider your expansion plan.

2. On the emerging market side, the more business developing countries conduct on the ground, the more savvy local business liaisons have become in understanding what Westerners like or need to hear or see. So while your locally-sourced manager may be great and outgoing and knowledgeable and trustworthy, bear in mind that what you consider a deal-breaker this person may just consider part of the course of doing business.

The bottom line: if you’re in the business of making sure things get from point A to point B in-country and you’re reading all this and thinking this applies somebody else, think again.

Oh and by the way, the original link to the FSG note is here.