The expression ‘no man is an island’ could be re-phrased ‘no business is an island’ with just as much validity, as it is self-evident that individual businesses, wherever they are located, are just one small part of a complex ecosystem, which normally extends far beyond the immediate locality of their geographical base. But as in an ecosystem, not all organisms are created equal, and it is rare when SMEs hold most power. In the majority of cases, ‘apex companies’ – dominant companies at the top or bottom of their value chains – are the ones whose moves determine the health, or otherwise, of the whole.
Long-term partnerships over transactional deals
At the same time, the larger the web the more value chain participants find themselves at the mercy of stronger and more threatening competitive pressures. SMEs that choose to engage in more expansive value chains and ecosystems are therefore advised to choose their partners carefully, both by aligning themselves with apex companies that have the capability to prosper, but also in choosing buyers and suppliers that want to establish relationships based on longer-term partnerships, rather on transactional deals without any element of underlying loyalty on either side.
Apex companies, in turn, will also prosper by nurturing their own supply chains, tackling the constant need for quality and cost improvement by sharing their objectives in a collaborative manner. The companies with the greatest awareness of the need to share their objectives to improve quality and cost are most likely to thrive in the longer-term, bringing their supply chains with them on this journey.
Win-win solution for major conglomerate and small suppliers in Nigeria
Donor funded programmes that seek to unlock constraints to local business growth in Nigeria’s northern states illustrate this point. Whilst the target beneficiaries of these programmes are almost always micro, small and medium-sized enterprises and their respective stakeholders, their fate is inextricably connected with that of larger apex companies, often not based in the north at all.
Experience shows that it is sub-optimal to focus primarily on increasing the quality and quantity of production by SMEs in the north unless this is matched by increased demand from the real movers and shakers of their value chains, often in the south. The real key to sustained prosperity is for these two parts of the value chain to work seamlessly together, jointly agreeing on strategies and helping each other implement them.
The experience of the industrial conglomerate Dangote is a good example of this in practice. Dangote plans to invest several hundred million dollars in six state-of-the-art rice mills in Nigeria. To be competitive, these mills will need to operate at high utilisation levels (requiring far more throughput than current production levels can sustain) and high milling efficiencies (requiring high quality inputs).
Palladium and the Sustainable Trade Initiative IDH worked with Dangote and the Bill & Melinda Gates Foundation to recommend to Dangote the optimal supply chain model to grow and maintain production quality and volumes. Eventually, we proposed the following model:
- ‘Supply Chain Managers,’ – businesses that would provide seed and other inputs on credit to farmers, as well as training, mechanisation, and aggregation services – would be identified or established.
- The Supply Chain Managers would conclude long-term contracts with Dangote. The relationship with Supply Chain Managers would guarantee Dangote the necessary rice production levels without the company having to run its own farms directly.
- Farmers, in turn, would receive services from the Supply Chain Managers, would retain their independence and would not need to go through unreliable middlemen to sell their produce, increasing their returns.
- The direct and long-term relationship between Dangote and the Supply Chain Managers would provide security to enable: 1. Dangote to invest in the mills, 2. the Supply Chain Managers to develop and access financing for their growth, and 3. farmers to invest in upgrading and scaling their operations.
This is certainly not a model which is new to the world. But it is ground breaking in the manner in which it is being designed into Dangote’s business model – collaboration with suppliers and their stakeholders is built into the structural design of the supply chain which supports Dangote’s investment in the suppliers’ business infrastructure.
Growing understanding of the benefits of collaboration
Throughout the world there is greater awareness amongst larger companies that they need to collaborate closely with their SME supply chains to compete in global markets. This is not the same as vertical integration, where apex companies extend the ownership of the supply chain in order to exercise greater control, which always carries the danger of producers becoming locked into dependency relationships. It is a recognition that the development of collaborative relationships down the supply chain is not only compatible with success, it can also be a driver of it.