Last-Mile Distribution Models

Eric Carlson
Director, Global Social Benefit Incubator

Cynthia Dai
CEO, Dainamic Consulting, Inc.

What do solar lanterns in Africa, consumer goods in the Philippines, and village electrification systems in India have in common? They must meet the challenge of delivering products and services to (and from) remote locations cost-effectively.

In the past nine years, the last-mile distribution problem has been a concern for the vast majority of the 139 social entrepreneurs who have attended the Santa Clara University Global Social Benefit Incubator (GSBI™). The cost of transportation and middlemen often make it uneconomic to deliver essential products and services to underserved communities.

We have observed that the key issues seem to be:

build or partner with a channel,
product mix
retention and compensation.

With respect to the channel, there are three common alternatives (listed here in order of increasing capital and operating costs):

Leverage an existing channel and infrastructure. Microventures’ Hapinoy moves everything from noodles to medicine by aggregating the buying power of existing shops in poor communities in the Philippines. They also rent transportation from ubiquitous “Jeepney” buses to avoid the costs of trucks and drivers.
Establish a channel using existing social groups or organizations. Solar Sister works with women’s groups to select well-connected sales-agents to distribute solar products in rural Africa.
Complex products or services may require setting up a complete channel including systems integration. Husk Power Systems has used a “micro-franchising model” to supply equipment and training to local entrepreneurs to set up and operate village power-systems in India.

Selecting the right product mix (which affects training, logistics and margin) and deciding if service and support are required (which affects skill levels and training) are a second key decision for all three channels. To increase and supplement income from sale of solar lighting systems in rural India, ONergy also provides “energy audit,” user training, repair, and upgrade services.

Regardless of channel choice and product mix, a key distribution problem for all GSBI alumni has been channel “loyalty” (retention of the channel once it is established). As one might expect, retention seems to be based on agent selection, compensation (which may include non-monetary items such as “status in the community”), and support.

For example, Toughstuff has established a channel to distribute low-cost solar lighting systems, along with mechanisms (support, contracts, and personal relationships) to prevent an alternative supplier from taking over the channel.

In addition to your comments on our observations derived from GSBI™ alumni, we are interested in your insights on other important last-mile distribution issues, such as:

What structures, incentives or other factors can reduce the costs (e.g. promotion, training and “churn”) and help maintain a motivated sales force?
What are the key factors (price, training, quantities) that determine the right product mix?
How do the last-mile distribution issues differ based on the product/service attributes, business model, country, or geography?

Join Eric Carlson (Santa Clara University) and Cynthia Dai (Dainamic Consulting) in the conversation.

Paul Rigterink

One must make a living first

I believe social entrepreneurs should focus on products that allow rural people to make a living. If the product fills a hole in the goods and services that a rural person needs to make a living and is offered at a reasonable cost, rural people will buy it. Examples for pigs and poultry include wire mesh fencing, veterinary supplies, poultry houses, feeders, waterers, nests, brooders, incubators, etc. Other needs include nursery stock, pesticides, disease control, fertilizer, farm equipment, micro irrigation equipment, food storage equipment, transport equipment, packaging, etc. If a rural person is missing a key product or service, their whole farm will fail.
Eric Carlson

The question is how to get them the products they need

Our experience at the GSBI is that there are many social entrepreneurs trying to do exactly what Paul believes they should be doing. In doing so they have been very innovative in creating low-cost, quality products that meet local needs to create jobs in local markets. What we would like to hear about are innovations in last mile distribution (getting the products to local markets so they can be used), which is a significant impediment that many of social entrepreneurs encounter.

It also turns out that if the products are created locally (e.g. biochar), then "first mile distribution" in order to make the products available to a wider market is also a common problem.

Any thoughts on either of these distribution issues???
- Paul Rigterink
  
  The question is how to get them the products they need
  
  John
  
  You may want to review the last mile distribution system of Unilever India. My own experience is that social entrepreneurs distribute some but not all the products that people need to make a living. A small business or a a subsistence farm will fail if all the products and services are not available for conducting a business or running a farm. The use of micro financing allows people to buy all the products that they need to make a living provided the products are available. The problem is that certain key products are not available in many areas or are outrageously expensive due to high demand.
- Roland Catellier
  
  The question is how to get them the products they need
  
  Transforming Lives and the Way product reach neighborhood Retail Shops
  
  We believe in the youth of this country and with the co-operation of socially minded business people .
  
  We can change the way products reach every neighborhood retail shop in major cities – down to smallest villages in every part of this country. Why do we think this is important? Because millions of recent graduates can not find meaningful employment, because recent market research shows the buyers prefer to buy from local retailers they know, and the cost to hire a large of sales force is prohibitive for manufactures.
  
  Our solution Resolves these issues, we have created a system to connect manufactures with a large sales force who being independent distributors , will be highly motivated to put products in multiple retail shops because they are building a network of buyers who will continuously buy from them and give them a long lasting income stream. Manufacturers will be able to cope with a large sales force through our solution, receive consolidated order from multiple retailers to one distributor who will deliver their products directly to each retailer. With multiple distributors in every part of this country, the volume of products will be equal to large export orders to big box retail stores in the west on a weekly basis.
  
  What this means to youth in this country is they now have thousand of entrepreneurial opportunities they can seize, in their home towns, villages, and neighborhoods in all location of this country. What this means for socially minded manufactures is the gain a large sales force of educated distributors whom they have created opportunities to move into a better life, and a opportunity to bring their product deep into this national market.
  
  I came to China post 5/12/08 earthquake to donate 5 small homes to elderly caring for grand children, failed, this made me think a lot about how to reach extreme rural populations, with a pre engineered kit home for rural people to build themselves, to lower cost of construction. Having lived 3 months in a village during construction of a community center,and in Chengdu China since then I backward engineered a web based route sales distribution system, that solves the last mile issue plus social issue of high rate of unemployed university students. I’ve again failed twice by hiring unethical web designers
  
  who did not have the skill to produce the web site I conceived,thankfully last
  
  November 2011 I found a skilled web site designer who I expect to complete the web site in next 60 days. My vision is to launch in China India and Brazil by the end of 2012. I have set up corporations in Mainland China and India to operate a localizes version of the site. And have plans to go to Brazil in June
  
  2012 to set up there. The plan is to market consumer product made for export
  
  in those countries to develop a local market, and green products created by
  
  social entrepreneurs.I know I do not have the skills and knowledge to operate
  
  and manage a multinational corp., yet I’m pushing forward knowing eventually someone will recognize this a a viable project and join my team, invest in it,
  
  and impact millions in the process. Contact me on skype: rolin3850
Eric Carlson

Good examples of last mile distribution

Unilever (Hindustan Lever)in India is an great example of an MNC that has developed last mile distribution for BOP markets. There are two good case studies of HLL distributing products (soap and salt) in C.K. Prahalad’s "The Fortune at the Base of the Pyramid," although neither of these contains information on the "costs" of setting up the distribution. I think one of the reasons that CK favored the MNC for the BOP markets was that they had the experience and the money to set up distribution of their own. Of course, the "canonical" examples are Coca Cola, Nestle, and Mars, but again there is not much good information on example what was done. The social entrepreneurs whom we have encounterd at the GSBI have neither the experience of HLL, Coca Cola, Nestle, or Mars that would enable them to set up their own distribution. However, partnering with one of these, if possible, might be a good solution.

I also think that partnering with MFIs is an excellent idea. GSBI alumni are using MFI partners not just to distribute loans (Kiva) but also to distribute pumps in Cambodia (Ideas at Work) and solar lighting products (Energy in Common). Besides already having a local customer presence, the MFIs often can finance the purchase, which really helps cash flow for the social entrepreneur.
Cassandra Thomassin

Infrastructure Developement

Some firms have succeeded by creating their own solutions for last-mile distribution, others have established partnerships to compliment each other’s products and services. Perhaps industry clusters in the world’s most impoverished areas is a goal worth working towards. Of course, the urbanization of rural areas is not ideal, but social entrepreneurs can collectively and thoughtfully integrate their solutions into strategic areas to create hubs of resources perhaps. Perhaps Michael Porter’s cluster-based economic strategy for inner-cities can offer some insight into the developing world, http://ht.ly/80ucw
Cynthia Dai

The mix matters

The challenge for social entrepreneurs in the distribution business is that they must balance providing essential products with earning enough margin for their own sustainability. In figuring out the appropriate product mix, they must look at promotional costs, inventory turnover and volume-margin tradeoffs like any commercial business. In addition, economic empowerment and local job creation may be an integral part of a social enterprise’s mission. For example, <a href="http://www.livelyhoods.org/">Livelyhoods‘</a> mission is empowering urban slum youth in Kenya; the distribution business is the means to the end. Still, they work with their sales agents to figure out what they can move, which ranges from low-end products like reusable sanitary pads to high-margin products like cookstoves.
Richard Lowenberg

First Mile Networking

Strengthening ‘localism’ requires a healthier balance between supply-side and greater demand-side economic models. This is especially true for renewable energy and Internetworking initiatives. It is therefore important to change the concept of ‘last mile’ to ‘first mile’.

Here’s the opening text on the http://www.1st-mile.com site:

Most telecommunications service providers and government regulators currently refer to the home, office, neighborhoods and communities as the "Last Mile". They indicate that providing "Last Mile" enhanced connectivity, especially in rural areas, is not economically viable. They have their economic models backwards. The greatest source of value in most peoples’ lives is local, derived from self, family and community. In a globally networked and communicative society, local environments have the opportunity to aggregate and generate new economic resources, value and benefits. The local realm must be considered the "First Mile".

The commonly applied term, "Last Mile" represents a supply-side driven concept. It is a top-down, national and corporate, technical and engineering perspective on telecommunications infrastructure deployment and services delivery. It is based on legacy hierarchical thinking, intent and actions.

The "First Mile" is based on a demand-side based understanding. It describes a local geographic orientation for telecommunications infrastructure and services deployment, with a democratic social and economic perspective, that focuses on the difference these systems and services will make in the quality of peoples’ lives. The "First Mile" is rooted in realizations about the newly emerging ‘hyper-archical’ nature of networked economies, local-global relationships, actions and social change; with the provocative intent that the Information Revolution must ultimately be a "people’s revolution".
- David Taylor
  
  First Mile Networking
  
  I really appreciate the framing Richard presented on service delivery in the remote communities as First Mile and not Last Mile issues. In my work, the perception of distribution as a Last Mile issue has led to government and NGO projects trying to replace distribution networks, which has compounded the problem. While I do not yet have a positive example of how to resolve the difficulties in distribution in my context, I hope the negative example is worthwhile.
  
  My work focuses on increasing the use of improved seeds by rural farmers in Northern Ghana. I try to help Ghanaian seed companies produce, market and distribute their seeds so that they are affordable, accessible and attractive to rural farmers. Because these rural farmers are seen by many as the ‘Last Mile,’ government and NGO programs seek to do the distribution directly and at a subsidized rate. While these projects do not reach most farmers, they distribute about 70% of the seeds produced. Because of this external involvement in the market, many seed companies have realized that purchase volumes are no longer proportional to the selling price (as projects are often mandated to distribute a fixed amount of seed). Seed companies have therefore inflated their prices beyond the purchasing ability of rural farmers. The government and NGO projects temporarily reduce the distribution issues, but isolate seed companies from seeing the profitability of the BoP business model: the First Mile.
  
  David Taylor
  
  Engineers Without Borders Canada
Frankie Parrish

Last-mile distribution issues in Africa

Last mile distribution is always the most difficult part of any chain, even for professional logistics companies in the developed world. Many of the challenges are the same no matter where you are. Providing a consistent and cost-effective service to underserved, often poorly accessible areas and ensuring that an appropriate system is in place to maintain this service.

In rural Africa, where the terrain can range from sandy pot-holed tracks to rocky snow-covered mountains, and where there is poor infrastructure and limited existing logistics networks, the difficulties in last-mile distribution are magnified. The result of this is that remote communities are isolated from essential services and products.

For the past 20 years, Riders for Health has been working to solve the issue of last-mile distribution in one key area: health. What is required in this instance is establishing a transport infrastructure that can be supported even where there is no existing vehicle management and maintenance systems. Selecting reliable vehicles that are appropriate to the terrain and running them on a cost-effective basis, setting up workshops and a supply chain for spare parts, and training local men and women in safe driving and vehicle maintenance so that they form the core of a sustainable solution.

As with all last-mile distribution systems, the key is not just reaching one village once. It is reaching every village time and time again, regularly and predictably. That is the goal for all of us.

For more information about Riders for Health, visit http://www.riders.org

Frankie Parrish

Riders for Health
Eric Carlson

Riders gives another “last mile” model

Check out the Riders wessite http://www.riders.org. They clearly are making a difference. It is seems that their business model is based on contributed income (from individuals and corporate sponsors). For many products and services, contributed income may be necessary to "start up" a distribution system. However, I wonder how long and how far one can go based only on contributed income????
konrad app

Last Mile in Rural Kenya

After distributing 1000 portable chargers and lights as a relief service to the lowest income families in rural western Kenya after the post-election violence, we noted 2 variables that would drastically drive up costs and slow growth if done on a larger scale and for profit:

1. Upfront fees. Although the lowest income segments pay the highest prices per unit for lighting alternatives, they have only a few dollars cash-on-hand to spend at any one time. Models that require cash-up-front, particularly if that amount is over a few dollars, create a lengthy sales cycle and require frequent village demonstrations.

2. The channel absorbs upfront fees. Retailers or community groups also cannot be expected to pay upfront fees. Even village shop owners do not have much cash-on-hand either and are limited to buying low-cost items that move quickly and require no demonstration.

3. Set up. Products that require installation, electrical set up, or cabling require training, home visits, and coordination -all driving up sales costs.

Instead, when we eliminated upfront fees 100%, simplified the product, and made the solar lights available to community groups on a micro-lease basis, we found that entrepreneurs in the villages would come to suburban hubs to collect the products and distribute them within their villages – drastically cutting down distribution costs and sales cycles.

To ensure payment, we added a kill switch into the solar lighting electronics, and required interested users to recruit their own community groups. If one person did not pay, all lights shut off – forcing the community to ensure payments.

Likewise, to compensate the entrepreneur, who distributes and manages groups, we provided a percentage of the group proceeds to her. All payments were done via mobile phone to ensure proper tracking/handling. We formed Stima Systems to pursue this vision at larger scale.