Vietnam Supply Chain
FRONTIER Cold Chain in EMERGinG MaRKETS
ViETnaM: ViETnaM’S TExTilE induSTRy
a changing retail environment
ThE STaTE oF ERP in ViETnaM
a changing retail environment
The Vietnamese retail market has seen significant changes the last couple of years. Neighbourhoods in Ho Chi Minh City and Hanoi have been transformed as Vietnamese shoppers demand more from their retailers and retail experience. However, even when compared to other major Asia economies, the retail market remains in its infancy with a great potential for growth. Despite the current economic downturn, the retail market remains attractive. “Double digit growth is attractive in any market”, notes Eckart Dutz, Managing Director of Cartridge World. “I don’t see the current global economic downturn as a major barrier for sustained growth”, he says.
There is still a lot of optimism and many retailers expect an upturn within the next six months
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Trung Thu Luong, National Sales Manager for La Vie mineral water, notes that even though modern trade is growing for package goods companies, traditional trades will remain a dominant force. Beth Owen supports this view. “We are still seeing growth in traditional trade and the retail market remains highly fragmented”, she says. Owen mentions that there is still a perception in Vietnam that modern trade is the shopping place for the upper classes, with higher prices than traditional trade. She notes that some aspects of traditional trade have changed little and that consumers continue to shop at wet markets. “The structure of the city is not friendly to modern trade and research shows that people are not willing to travel far for products and services”, said Owen. “However, with time and planning, all of this can be overcome, just like any other markets in Asia”, she continues.“The retail sector will continue to grow just like any other market as the Vietnamese consumer searches for a more specialized shopping experience”, he continues. Beth Owen, General Manager of Indochina Research, mentions a recent retail interview her company conducted in Vietnam.
Vietnam Supply Chain Frontier
Focus on Tier One
In a number of growing emerging markets a lot has been made of the growth potential of tier two and three cities. However, compared to China and India, the focus for Vietnamese retailers remain tier one cities. Phi Van Nguyen notes that living standards outside of Ho Chi Minh City and Hanoi are still low. “Even in tier two cities the market is just not big enough for more than one big retail complex”, she explains. However, she mentions that her company has developed a clear growth plan for the six major cities in the country. David France, Managing Director, Distribution Division of Highlands Coffee mentions that the focus for most retailers remains the two biggest cities. Highlands Coffee has an expanding retail base in the country and a growing package goods distribution arm to retailers. “Ho Chi Minh City and Hanoi continues
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to grow and the two cities hold significant growth potential for companies”, France notes. He mentions that the same level of development is just not visible outside of the two major cities and that some cities are stagnant because of the ongoing global crisis. Trung Thu Luong brings another perspective, noting that package goods companies with the right product category and price points are increasingly looking outside of the two major cities. “To sustain growth we have to go outside of the big cities.” However, most interviewed agreed that for most companies, the major urban areas will remain the playground.
Information is Key
A growing retail sector will increasingly rely on information technology to make decisions. Companies also need a more sophisticated way of doing business. Few suppliers and distributors in Vietnam have information available at the retail level. Phi mentions that local companies are still far behind when it comes to information technology. “Many companies don’t see the benefits of information technology and some companies are still standing in the dark.” Dutz alludes to the fact that with relatively cheap labour, many companies are reluctant to invest in information technology. “For some businesses it is difficult to make the case for technology.” However he notes that information management is criticcal for success. “Without the information required, some companies just push things in the shop and then see what happens”, said Dutz. Owen notes that the retail market is starting to demand more and some high end retailers are putting pressure on companies to improve technology. France notes that if distribution companies want to succeed at the retail level, they require technology to assist them in this task. “Above 25 sales people it becomes very difficult to manage employees and companies lose control of their sales people”, said France. “Many companies only cover about 60% of their retail base.”Even
with the current economic climate, the Vietnam retail market will remain an exciting prospect for many investors. Retail space will continue to be challenge in the near future and it will take some time for consumers to change their behavior. Some might argue that the speed of change has been slower than projected. However, retail change does not happen over night. “It will take time for people to migrate from traditional trade, time to learn, like it and make it a habit”, said Phi.
“There is still a lot of optimism and many retailers expect an upturn within the next six months.”Phi Van Nguyen, Managing Director of the Future Sense Group who brought international brands such as Gloria Jeans Coffee and Yogen Fruz to Vietnam predicts that as the retail market continues to grow we will see more international brands coming to the market. She notes that a number of Asian franchises have entered the market. However she mentions for some big international brands it will take time to enter the market as they struggle with regulatory issues. Dutz also notes that there is a trend towards modern trade and convenience shopping. He however questions where retailers have yet found the right model for Vietnamese convenience shopping. “It is important that convenience marts get the assortment right and make people want to go there. Currently it is not that attractive for Vietnamese consumers”, Dutz explains. “For most Vietnamese consumers, convenience shopping already exists, it is just a traditional model.”
To sustain growth we have to go outside of the big cities.
Cold chain IN EMERGING MARKETS: the heat is on!
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Vietnam Supply Chain Frontier
For many Chinese and Vietnamese consumers, frozen food is still a foreign concept. Large retailers in China and Vietnam continue to focus on fresh food options such as live chickens and in-store fish tanks. However, consumer shopping and buying patterns are changing. Chilled products, including juice and frozen foods are increasingly becoming popular in emerging markets such as China, Vietnam, and India. Young people, in particular, are driving consumer demand. This is true especially in cities that are undergoing rapid urbanization. The growth is fueled also by new legislation in the retail environment that gives foreign investors and retail chains greater access to these markets. In all this retail frenzy, the cold chain is becoming a hot topic.
One of the key challenges in emerging markets is a dysfunctional supply chain that is highly fragmented in the retail section. In a fragmented retail segment, companies struggles to achieve economies of scale on both the retail and supply sides. With the projected growth in these key emerging markets, even given the current financial crisis, there are great opportunities for both local and foreign investors. Unfortunately, a lack of cold chain facilities is hampering expansion into these markets, especially in second and third tier cities. Even in first tier cities, such as Shanghai, Ho Chi Minh City, and Mumbai, multinationals struggle to find the right cold chain partners and facilities. Foreign investors currently view the lack of an established cold chain as one of the major barriers to market entry.
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It is estimated that around 30% of the total production of fruit and vegetables in China are wasted
How does the Traditional System Work?
Agricultural produce typically travels from farmer to trader to agent to wholesaler to retailer. In some countries local administrators add extra distribution layers. In some cases, stateowned companies will distribute products to provincial distributors before reaching local markets. Each step in the process adds additional handling and cost. Often products are transported without boxes and with limited or no refrigeration. Products are exposed to the elements and, consequentially, many products end up as waste. Quality suffers as products travel down the chain with limited cold storage and frequent processing delays. China currently accounts for 13 percent of global fruit production and 40 percent of the worldâ€™s vegetable output. However, it is estimated that around 30 percent of the total production of fruit and vegetables are wasted due to an inefficient cold chain. In India it is estimated that about 60 percent of the value of agricultural output is lost between the farm and market. An A.T. Kearney report on China estimates that only 15 percent of products that require chilled handling are currently handled that way. This compared to 85 percent in Europe.
What is Required?
For any company, it is critical to evaluate and understand the cold chain system. Temperature control is important as it is a key requirement to keep products within a specific temperature range throughout the supply chain. This can be particularly challenging in emerging markets.
The key to any cold chain is driving end to end processes and efficiency
One solution is investing in packaging that can protect products against temperature variations and improve product quality at the final destination. Companies also need to have a clear understand of the product flow and routing dynamics, including the transportation modes and refrigeration capability. Delays in delivery and processing can have severe effects on the quality. Companies should have a back-up plan as transportation normally takes longer than expected in emerging markets. The key to any cold chain is driving end to end processes and efficiency. It requires direct delivery with temperature cold trucks, warehousing and advance technology tracking and traceability for food safety. Companies need to account for geographical aspects as they truck products for one end of a country to the other. Distribution centers (DCs) can play a key role in a company’s cold chain strategy. DCs have the ability to service several layers of the distribution system. This can further improve distribution and supply efficiencies.
Collaboration is Important
Cold chains are expensive to operate and in many cases a coordinated effort is missing. Local companies that try to establish their own facilities often lack capital and expertise. For such companies, a key first step to developing a cold chain is to seek out or create a consortium. The consortium will be responsible for creating industry standards with government authorities. As standards are set, more companies will join the consortium. It is critical to include all key stakeholders in the process. Effective cold chain consortiums will include logistics providers, cold chain equipment suppliers, multinational and local companies within their membership. Stakeholders can collaborate during various projects and at the same time share risks. The entry of foreign retailers such as Mal-Mart, Carrefour and Tesco can add cold chain expertise and help to reduce margins and improve efficiency in the overall system.
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Technology investment is a key element of establishing a cold chain. Companies need to have a long term perspective in relation to technology investments. In many cases the technology and equipment are available, but companies find the investment too substantial and lack the economies of scale to make it a viable option. Finding companies to make the investment can be one of the key challenges during market entry. In emerging markets, companies seek simple and cost effective solutions to problems. For example, some companies now are using pressure-sensitive labels. Once the label is exposed to specific conditions, the label changes colour and alerts the supply chain of a disruption in the cold chain.
Focus on Education
Education is also key to creating a cold chain. Trainings and workshops can be used to educate and inform partners about challenges and how to overcome them. For example, A.T. Kearney has run a series of conferences in China the UK and the US to improve China’s cold chain distribution systems. The conferences bring parties together that are interested to enter or expand their cold chain distribution in China. Such conferences and workshop are great venues to inform companies and authorities about the health and safety risks, an increasingly important topic. The cold chain is critical to global trade in almost all commodities. With a growing demand among emerging market consumers for chilled products, the cold chain is becoming an increasingly important part of the supply chain strategy. One of the key requirements will be to reduce waste and improve quality. Recent food shares in China and the rest of Asia have highlighted the importance of food safety and health during the process. With all this attention on the cold chain in emerging markets, the cold chain will likely heat up even further.
The State of ERP in Vietnam Vietnamese companies are increas ingly looking for ways to make their operations more efficient and effective. Research has found that a successful Enterprise Resource Planning (ERP) system has the ability to reduce inventory by as much as 45 percent. Until recently, ERP was out
of reach for many Vietnamese companies as the investment was just too large for small and medium sized enterprises (SMEs) to justify. Many local companies did not consider ERP as a viable option. Today, however, SMEs are looking at ERP in a different light, as more affordable options become available. Vietnam’s ERP market is still relatively small, but it is a growing market that has changed dramatically the last five years. “In Vietnam the local market is growing fast as companies recognize the benefits of ERP,” said Nguyen Chi Duc, General Manager of Exact Software Vietnam, a specialized ERP software provider In Vietnam, Nguyen added, recent entry into the World Trade Organization (WTO) has put increased pressure on local organizations preparing to compete against a feared international onslaught. Nguyen said that companies in Vietnam are no different from their counterparts in the US and Europe. They are searching for
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vendors that can provide the required functionality and service quality that companies expect. Finding relevant data to determine the size of the market can be challenging. Most companies continue to work on rough estimates to determine the size of the market and individual market segments.
The Vietnamese economy has progressed a lot over the last five years. However supply chain management is still a relatively new discipline. “There is a misunderstanding of what supply chain is,” explained Long Chandara, Country Man ager of Tectura, an ERP service provider with a Country
Office in Vietnam. Chandara highlighted the need for vendors to manage their customers’ expectations of what ERP can and cannot deliver. For example, a Vietnamese company might be interested in a payroll package and expect ERP to provide the same functionally and benefits as best of breed software. This represents a misunderstanding of ERP. ERP is not a magic bullet to replace all best of breed software in the organization. Another challenge can be getting senior management on board. Nguyen succinctly summarized, “Some senior management don’t see the benefits of ERP”. For ERP to get senior management buy-in, time needs to be invested in developing a clear understanding of ERP and its potential benefits for SMEs.
Vietnam Supply Chain Frontier
Vietnam’s ERP market is still relatively small, but it is a growing market that has changed dramatically the last five years ERP Readiness
Many Vietnamese organizations are increasingly looking at ERP implementation to drive organizational change. However, in Vietnam, ERP readiness is a critical point to consider for any project team prior to implementation. “Companies in Vietnam don’t always have an ERP culture”, said Chandara. For example, simplifying and standardizing business processes is an important part of any ERP implementation. However, many companies in Vietnam lack the required business processes to do this. Similarly, evaluating business processes is critically important. “There is a [misplaced] belief that automating existing business processes will result in optimized business processes,” said Abesolom Abby Fidel, an independent SAP consultant based in Vietnam. Vietnamese companies need to invest more time in evaluating best practices than is currently done. That said, with limited data available, identifying best practices can be a challenging undertaking. Vietnamese companies need to institutionalize performance metrics and be clear how performance will be measured. Something that doesn’t always take place. “Companies in Vietnam don’t always have an ERP culture”, said Chandara. For example, simplifying and standardizing business processes is an important part of any ERP implementation. However, many companies in Vietnam lack the required business processes to do this. Similarly, evaluating business processes is critically important. “There is a [misplaced] belief that auto mating
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existing business processes will result in optimized business processes,” said Abesolom Abby Fidel, an independent SAP consultant based in Vietnam. Vietnamese companies need to invest more time in evaluating best practices than is currently done. That said, with limited data available, identifying best practices can be a challenging undertaking. Vietnamese companies need to institutionalize performance metrics and be clear how performance will be measured. Something that doesn’t always take place.
Companies in Vietnam are facing a number of challenges when implementing ERP systems. One of the big errors companies make is to rush implementation schedules. “ERP implementation in Vietnam takes much longer,” said Nguyen. Chandara added that many companies underestimate the implementation timelines and that project management can be problematic. Streamlining business processes can take a long time in any operation. According to Fidel, Vietnamese companies sometimes lack patience and flexibility in dealing with the required business engineering. people on a project can be challenging undertaking. “Companies don’t always have the human resources for ERP implementation,” Nguyen explained. Especially outside of the major commercial centers of Ho Chi Minh City and Hanoi, finding the right capability can be problematic.
Bringing in overseas consultants also presents challenges. “Overseas consultants don’t always under For ERP implementation to succeed companies need to change behaviour in the organization and remember there is no single person responsible for operations. Companies need to understand the capability in their organizations and what they need to do to develop capability. In Vietnam, finding and keeping good stand business practices in Vietnam”, said Nguyen. Language skills can also be an additional barrier. Developing local talent in the organization is an ongoing process. “Companies need to cultivate and motivate employees,” advised Fidel. Nguyen added that, to some extent, human resource departments are benefiting from the slowdown in the economy as employees are less likely to jump ship.
Value and Return of Investment Despite lower costs now, Vietnamese companies need to have a clear understanding of the investment cost and return on investment. “Companies sometimes underestimate the total cost of ERP implementation,” Chandara said. According to Nguyen, some companies view the implementation of a well known ERP brand as increasing the value of the company. The Vietnamese business landscape has changed dramatically the last couple of years and companies are increasingly recognising the benefits of ERP. However, the business environment in Vietnam is very different from more established ERP markets in the US and Europe. Vietnamese companies need to conduct a detailed risk assessment and not base their assessments only on industry research. For any company, ERP is a big investment and implementation and building local capability should not be taken lightly. Especially in these uncertain economic times.
Vietnam’s textile industry:
Opportunities and Challenges Vietnam’s textile industry has increased significantly since normalizing relationships with the United States in the 1990’s. Vietnam was granted most favoured nation status (MFN) in December 2001, which led to a dramatic reduction in import tariffs in the US market. Vietnam’s induction to the World Trade Organization (WTO) in 2007 and the Vietnamese government’s strong support of the textile and garment sector, have provided strong incentives to attract foreign investors. The textile industry is now the second biggest exporter in Vietnam and is expected to become the biggest in 2009. However the financial crisis has had a severe affect on Vietnam’s textile industry, which has suffered from a slump in demand from key export markets in the US, Europe and Japan.
Labour Cost Advantage
In the textile industry, companies are increasingly looking for lower cost countries that can provide outsourcing opportunities. The rising cost of land and labour are diminishing China’s labour cost advantage and Vietnam is increasingly seen as a low cost sourcing alternative to China. Estimates are that wage levels in Vietnam are about one third of those in China’s coastal region. Companies that are chasing lower labour costs are increasingly moving production to Vietnam. In a 2008 Booz Allen Hamilton survey 88 percent of companies originally chose China for its lower labour costs. Of the companies surveyed, 55 percent believe China is losing its competitive edge to countries such as Vietnam. The survey also indicated that 63 percent named Vietnam as their top low cost sourcing alternative to China. However, costs
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may be rising. The Navigos Group, a leading recruitment solutions provider in Vietnam, announced early in the year that there had been a 16.47 percent increase in Vietnamese workers’ average gross salaries between April 2008 and March 2009.
Low Cost Location
However, low cost labour is hardly a competitive advantage in the long term. Labour cost keeps changing and today’s low cost location is not necessarily tomorrow’s viable outsourcing location. If it is not China or Vietnam, it could be Bangladesh or Cambodia. Ig Hortsmann, a professor of business economics at the University of Toronto’s Rotman School of Management notes that Nike originally off shored manufacturing to Japan. As labour costs increased, manufacturing was later moved to South Korea and Taiwan. When labour cost increased in South Korea and Taiwan, it was moved to China and later also to Vietnam. Justin Wood, a Director of the Economist Intelligence Unit Corporate Network in Singapore makes the point that in the last 15 years Vietnam has moved from a low to a middle income country. The move towards a middle income will likely put additional pressure on Vietnam’s low cost labour status.
The Vietnam Advantage
Elisabeth Rolskov, founder of ER-Couture in Vietnam, notes that manufacturing advantages in Vietnam go beyond labour cost and the country has some competitive advantages compared to China. “Vietnam has very good embroidery skills and needle work”, says Rolskov. “A lot of designers and manufacturers need embroidery skills and Vietnam has kept in touch
with its traditional roots,” she adds. However, for local designers, Vietnam has limitations as a sourcing location. “Sourcing material, buttons and zippers from Guangzhou is much better,” says Rolskov. In Guangzhou you can find everything in airconditioned shopping areas and the shopping experience is less hectic.” This can have a negative impact on a designer’s creativity as the designer is restricted by what is on offer in the local market. Rolskov thinks Vietnam is currently a great location for smaller manufacturers as the market is more flexible. “China is more volume focused”, adds Rolskov, a view supported by Rebecca Lebold, director of apparel product and technical development at Lilly Pulitzer. “Vietnam has higher production minimums than many other countries. Lower minimums would allow smaller companies to source their product in Vietnam”, Lebold notes.
Intellectual Property Threat
For many companies outsourcing to Vietnam, intellectual property (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. Designers can “take inspiration” and it is seen as a major driver for setting trends in the industry. The World Intellectual Property Organization (WIPO) has called for stricter intellectual property enforcement within the fashion industry to better protect companies and promote competitiveness within the textile and clothing industries. “It is a hard thing to take care of and you just have to be faster than everybody else”, says Rolskov. For smaller designers and labels it is much easier to switch manufacturing. However to prevent the copying of designs is a challenging undertaking.
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The textile industry is now the second biggest exporter in Vietnam Infrastructure Development
Vietnam Supply Chain Frontier
For Vietnam to advance as an outsourcing location, the textile industry supply chain needs to be considered. Local logistics are influenced by direct and indirect cost. In Vietnam’s textile industry raw materials are often imported, which increases cost compared with those countries able to source locally. Managing reverse logistics can also be a challenging undertaking in Vietnam. Procedures, processes and infrastructure are sometimes not in place to man repairs, returns and warranties. According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Vietnam. According to TI analyst John Manners Bell, logistics costs are estimated at 25 percent of Vietnam’s GDP. Even with cheap labour cost, poor infrastructure remains a major barrier for entry. This is largely due to Vietnam being in the early stages of infrastructure development.Many experts believe that China’s advanced infrastructure gives it a major competitive advantage. Electricity and transportation costs will likely come down even further and and this will have a significant impact on the total cost, even if their labour is more costly. The Vietnamese government is aware of this dynamic and has invested billions of dollars in the country’s infrastructure. The government is actively encouraging foreign direct investment in the country’s infrastructure. This is visible with projects such as the Cai Mep Container Port in the Mekong River Delta and the new Long Thanh airport that’s projected to be completed by 2015. Through assessing the overall supply chain, rather than a singular focus on labour costs, it is easier to identify where Vietnam’s opportunities and challenges lie in the textile industry. While small scale designers and manufacturers take advantage of a flexible environment, infrastructure and logistics processes will need further investment to make Vietnam an outsourcing destination and source for tomorrow’s fashionista wardrobes.
Vietnam Supply Chain Frontier
Vietnam Supply Chain Frontier is published by The Supply Chain Lab. To learn more about how The Supply Chain Lab can help you with strategy and operations go to: www.thesupplychainlab.com or our blog www.thesupplychainlab.com/blog or contact: Tielman Nieuwoudt email@example.com 23 Wellington Road, Parktown Johannesburg, South Africa +27 11486-9439 James Yuen firstname.lastname@example.org 14 Robinson Road #13-00 Far East Finance Building Singapore 048545 +65 5304-8967
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