Centralized purchasing: a game changer for last mile distribution?
Last mile distributors (LMDs) are primarily dedicated to getting beneficial products, including solar lights, water filters, nutrition products and improved cooking solutions to underserved areas. However, they face difficulties in reaching last mile consumers. The“Last Mile Distribution: State of the sector report” presents data and insights and provides tangible recommendations for stakeholders on how to engage with and support the sector.
In this article, the GDC shares key insights on the procurement challenges that Last mile distributors (LMDs) face, as well as emerging solutions leveraging centralized purchasing models.
- Last mile distributors of beneficial products face numerous difficulties in procuring the right products, at the right price, in the right place, and at the right time:
- In new markets, for beneficial products that cannot be manufactured locally, there is typically no in-country stock available. LMDs must therefore import products - often from China - and thus face significant costs and hassle
- In more mature markets, wholesalers often emerge and create in-country stock. However, this stock might not necessarily be the best match for last mile consumers’, or LMDs’, needs
- A first wave of pioneering pilots of centralized purchasing models has emerged to tackle these challenges; these show both the appetite for centralized purchasing, as well as the hurdles that need to be overcome for these models to scale
- These experiences should inform the design of future procurement initiatives, with public and private actors playing a key role in supporting their path to scale and sustainability, so as to help unlock sales of beneficial products at the last mile.
Last mile distributors (LMDs) are primarily dedicated to getting beneficial products to underserved areas and are key to unlocking their potential impact. However, they face difficulties in reaching last mile consumers, as the recently published “Last Mile Distribution: State of the sector report” highlights. One such difficulty is procuring the right products, at the right price, in the right place, and at the right time.
Typical challenges in end-to-end product procurement
In new markets, for beneficial products that cannot be manufactured locally, there is typically no in-country stock available. LMDs must therefore import products - often from China - and thus face significant costs and hassle, including:
- A 3-4-month lead time between placing an order and receiving it in Africa
- Prohibitively high minimum order quantities (typically one container, representing e.g., 1,500-2,000 solar home systems)
- High working capital requirements, as manufacturers often request 50% upfront payment and 50% to be paid at port, while LMDs will only recover their money once they have sold their products, sometimes several months after arrival at port
- Significant time and hassle in overseeing the end-to-end procurement process
In more mature markets, wholesalers often emerge and create in-country stock. However, this stock might not necessarily be the best match for last mile consumers’, or LMDs’, needs. For instance, in the off-grid solar market in East Africa, LMDs are stuck between:
- Suppliers of quality-certified goods, who are typically large manufacturers with dominant bargaining positions. Their products are often more expensive, making them difficult to sell at the last mile. In addition, some have their own, proprietary distribution networks and might not be interested in distributing through LMDs
- Suppliers of non-quality-certified yet often highly price-competitive brands. These suppliers are of variable reliability, rarely offer warranties, and supply products whose quality is not guaranteed
The potential (and challenges) of centralized purchasing
A first wave of pioneering pilots has emerged to tackle such challenges, including via centralized purchasing models. These initiatives aggregate demand either by securing orders from LMDs ahead of time (aggregation model) or creating in-country stock based on rough demand estimates (wholesaling model). They show the appetite for centralized purchasing, as well as the hurdles that still need to be overcome for these models to scale. Examples include:
- In Liberia, a local government agency imported a large order of off-grid solar goods to help unlock the market by creating in-country stock. However, the market was too small to absorb such volumes, and the stock became a stranded asset as the products’ batteries discharged and newer, more competitive, products emerged.
- In a number of African markets, Total Access to Energy Solutions (TATES) has started offering an end-to-end importation service to LMDs, including possible provision of credit, freight and customs clearance. This has worked quite well for larger LMDs, who are willing to outsource such wholesale services to avoid the hassle of importing their own goods. However, opening up this service to smaller, aggregated LMDs poses a number of operational risks and difficulties. Having multiple different buyers can easily become difficult to coordinate and administer, due to logistical challenges in aggregating demand from multiple players, which further increases the cost of the service. Smaller LMDs may be seen as more likely to default between the time of placing an order and paying for it. It could therefore be difficult for a commercial player to justify aggregated purchasing by small players without de-risking funding, e.g. from a public or private donor.
- In Uganda, SENDEA, an innovative cooperative of 5 local LMDs has developed a collaborative cost-sharing initiative with support from Stiftung Solarenergie. Together, the LMDs ordered an aggregated container of high-quality products from a manufacturer in China. This gave all 5 LMDs access to competitive stock that would otherwise have been inaccessible to them, given their low individual volumes. However, the initiative has not yet found a sustainable model, primarily due to challenges in sharing the financial risk of the import across all aggregated LMDs, without charging a premium so high that it would render the initiative unaffordable for the smaller LMDs.
Recommendations for the sector on supporting centralized purchasing
These experiences should inform the design of future procurement initiatives, with public and private actors playing a key role in supporting their path to scale and sustainability, so as to help unlock sales of beneficial products at the last mile.
New markets: increasing volumes and reducing risk
In new markets for beneficial goods, stakeholders in the sector could help to improve the potential sales volumes and reduce the risks and coordination costs of centralized purchasing. For example:
- Initiatives dedicated to supporting LMDs, such as Venture Builder and the Global Distributors Collective (GDC), as well as national associations such as USEA, could link up centralized purchasing platforms with their networks and help coordinate LMDs with similar demand patterns
- Policymakers can help by creating homogenous tax codes across geographic regions to enable a single centralized purchasing initiative to serve multiple nearby nations at the same time, thereby widening the potential demand pool
- Public or blended financing funds could provide de-risking funding for centralized purchasing entities, and/or develop a dedicated fund in partnership with a centralized purchasing initiative to lend directly to LMDs procuring through it.
Mature markets: a critical role for wholesalers
In mature markets, wholesalers could offer centralized purchasing by identifying competitive products not readily available in-country and making these available to LMDs with a high quality and reliable service offering. This could help LMDs develop differentiated offers in highly competitive markets. Such a model could lead to a whole new market for general wholesalers, large enough to cover the costs and risks of setting up a new model. Key success factors for interested wholesalers include:
- (1) identifying the right products: what are the products that will give LMDs a differentiating edge, while retaining affordability and quality levels required in last mile markets?
- (2) providing high quality service: what additional services could wholesalers deliver to support LMDs, e.g. on payment terms and aftersales, that would allow LMDs to better serve their customers - and wholesalers to earn attractive margins, making centralized purchasing for the last mile a financially sustainable model?
There also exists an exciting opportunity for players with existing importation infrastructure to enter the beneficial goods market and provide a highly attractive value proposition to an ever-growing market of LMDs. To this end, we encourage funders and wholesalers alike to test and pilot such centralized purchasing initiatives in mature markets.
The GDC is currently piloting a model for a centralized purchasing platform in East Africa. If you would like to find out more, please get in touch with us.