Developing an industry solution to service bottom-end markets in South Africa

Abstract

Logistics and distribution services have been around since the early 1950's. During this time it was only thought of as military services, but since then it has developed into a system that can give any company a competitive edge, if the network is designed e ciently. Due to the increasing competition in the logistics and distribution industry, it has become increasingly important for companies to gain a competitive advantage over their competitors. This entails exploring untapped markets, such as the BOP (bottom of the pyramid) market segment. The aim of this project is to determine whether there is a market opportunity in South Africa to service this segment. The market evaluation can be broadly classi ed into the market size, structure, and preferences of the consumers constituting this market segment. The problem investigation phase of this project evaluated the market opportunity, which concluded that the BOP market consists of four billion people, which constitutes 72% of the global population. In South Africa the BOP market consists of approximately 30 million people, which is 47% of the population. This validates that there is a great market opportunity for food producers and distributors to enter the market. Servicing and distributing to the BOP market comes with added complexity, thus traditional supply chain thinking will not su ce. The complexity in this market are due to a few contributing factors, such as the cash poor consumers constituting the BOP market, the lack of infrastructure, longer time frames and limited product awareness. Numerous companies have tried to improve their pro ts and overcome the challenges in distributing to the BOP market by bridging the infrastructure gap through selecting the appropriate technologies and controlling costs through di erential or layered distribution networks. The BOP market has a relatively high success rate in terms of market penetration (5% to 10%) but operation in this market proves to be di cult. A literature review based on companies who have success- fully entered the BOP market segment proved that it is possible to operate successfully in this market segment. The key success factors of these distribution companies were noted and the distribution models implemented were further researched. The literature case studies presented in this report validate that traditional distribution channels will not be su cient to service the BOP market in African countries. Al- ternative distribution channels need to be developed which are innovative and based on inclusive business models. An evaluation framework was developed based on key criteria in order to evaluate the several distribution models. The distribution models were further evaluated based on technical and nancial aspects. Based on the results of the evaluation framework, technical and nancial evaluation, the applicable distribution method was modelled in order to make an e ective recommendation. The dataset was reduced in order to create a proof of concept for the model, as the probability that this can be replicated on a larger set of data is very likely. The ideal location for the hub was determined by using the centre of gravity method with the respective inputs as discussed in the literature review. The dataset was further reduced to form clusters in order to conduct spoke location analysis. The ideal spoke locations were determined by using the centre of gravity method, as for the hub location, thus creating prede ned locations for the spokes to be situated at. The optimal number of spoke locations was determined by creating an optimization model, through the use of the Operations Research approach, to minimize the number of spoke locations, which was formulated using Lingo. Through the use of the optimization model, an entire distribution network was developed based on the test case data. The developed model was validated by conducting a sensitivity analysis, which proved that the model behaves as expected.