Very poor countries are on the wrong side of a growing logistical divide

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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 hosts countrys 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 environments 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 communicationsall 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.