Vietnam Supply Chain

ThE STaTE oF ERP in ViETnaM

ViETnaM:a changing retail environment

Cold Chain in EMERGinG MaRKETS

ViETnaM’S TExTilE induSTRy

FRONTIER

Trung Th u Luong, National Sales Manager for La Vie mineral water, notes that even though modern trade is growing for package goods com-panies, traditional trades will remain a dominant force. Beth Owen sup-ports 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. “Th e 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 over-come, just like any other markets in Asia”, she continues.“Th e retail sec-tor will continue to grow just like any other market as the Vietnamese consumer searches for a more specialized shopping experience”, he con-tinues. Beth Owen, General Manager of Indochina Research, mentions a recent retail interview her company conducted in Vietnam.

a changing retail environment

Th e Vietnamese retail market has seen sig-nifi cant 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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ViETnaM:articles

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“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 com-ing to the market. She notes that a number of Asian fran-chises have entered the market. How-ever she mentions for some big interna-tional brands it will take time to enter the market as they struggle with regula-tory issues. Dutz also notes that there is a trend towards modern trade and con-venience shopping. He however ques-tions where retailers have yet found the right model for Vietnamese convenience shopping.  “It is important that conveni-ence 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 tradi-tional model.”

In a number of growing emerging mar-kets a lot has been made of the growth potential of tier two and three cities. However, compared to China and In-dia, the focus for Vietnamese retailers remain tier one cities. Phi Van Nguyen notes that living stand-ards 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, Dis-tribution Division of Highlands Coffee mentions that the focus for most retail-ers remains the two biggest cities. High-lands Coffee has an expanding retail base in the country and a growing pack-age goods distribution arm to retailers. “Ho Chi Minh City and Hanoi continues

to grow and the two cities hold signifi-cant 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.

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 Viet-nam have information available at the retail level.  Phi mentions that local companies are still far behind when it comes to infor-mation 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 la-bour, 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 compa-nies 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 com-panies lose control of their sales people”, said France. “Many companies only cov-er 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 chal-lenge 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.

Vietnam Supply Chain Frontier

To sustain growth we have to go outside of the big cities.

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“Focus on Tier One

Information is Key

Cold Chain in EMERGinG MaRKETS:the heat is on!

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For many Chinese and Vietnamese consumers, frozen food is still a foreign concept. Large retailers in China and Vi-etnam continue to focus on fresh food options such as live chickens and in-store fish tanks. However, consumer shop-ping 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 de-mand. 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 dysfunc-tional supply chain that is highly fragmented in the retail sec-tion. 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 opportu-nities for both local and foreign investors. Unfortunately, a lack of cold chain facilities is hampering ex-pansion 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.

Agricultural produce typically travels from farmer to trader to agent to wholesaler to retailer. In some countries local ad-ministrators add extra distribution layers. In some cases, state-owned companies will distribute products to provincial dis-tributors 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 suf-fers as products travel down the chain with limited cold storage and frequent processing delays. China currently accounts for 13 percent of global fruit produc-tion and 40 percent of the world’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.

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 tempera-ture range throughout the supply chain. This can be particu-larly challenging in emerging markets.

It is estimated that around 30% of the total production of fruit and vegetables in China are wasted

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How does the Traditional System Work?

What is Required?

The Challenges

Vietnam Supply Chain Frontier

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 un-derstand 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 nor-mally takes longer than expected in emerging markets. The key to any cold chain is driving end to end processes and ef-ficiency. 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. Distri-bution 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.

Cold chains are expensive to operate and in many cases a coor-dinated 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 stand-ards 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 consorti-ums will include logistics providers, cold chain equipment sup-pliers, multinational and local companies within their membership. Stakeholders can collaborate dur-ing 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 im-prove efficiency in the overall system.

Technology investment is a key element of establishing a cold chain. Companies need to have a long term perspective in rela-tion 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 vi-able 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 sup-ply chain of a disruption in the cold chain.

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. Kear-ney 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 confer-ences and workshop are great venues to inform companies and authorities about the health and safety risks, an increasingly im-portant topic.The cold chain is critical to global trade in almost all commodi-ties. With a growing demand among emerging market consum-ers for chilled products, the cold chain is becoming an increas-ingly important part of the supply chain strategy. One of the key requirements will be to reduce waste and improve quality. Re-cent 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.

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The key to any cold chain is driving end to end processes and efficiency

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Collaboration is Important

Rethink Technology

Focus on Education

Vietnamese companies are increasingly looking for ways to make their operations more efficient and effec-tive. Research has found that a suc-cessful Enterprise Resource Plan-ning (ERP) system has the ability to reduce inventory by as much as 45 percent. Until recently, ERP was out of reach for many Vietnamese compa-nies 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 op-tions 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 Vi-etnam, Nguyen added, recent entry into the World Trade Organization (WTO) has put increased pressure on local or-ganizations 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

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 con-tinue to work on rough estimates to de-termine the size of the market and indi-vidual market segments.

The Vietnamese economy has progressed a lot over the last five years. However sup-ply chain management is still a relatively new discipline. “There is a misunderstanding of what supply chain is,” explained Long Chan-dara, 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 Viet-namese company might be interested in a payroll package and expect ERP to pro-vide 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 organi-zation. 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 manage-ment buy-in, time needs to be invested in developing a clear understanding of ERP and its potential benefits for SMEs.

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ThE STaTE oF ERP in ViETnaM

ERP Misconceptions

Many Vietnamese organizations are increasingly looking at ERP implemen-tation to drive organizational change. However, in Vietnam, ERP readiness is a critical point to consider for any project team prior to implementation. “Com-panies in Vietnam don’t always have an ERP culture”, said Chandara. For example, simplifying and standard-izing business processes is an impor-tant 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. Viet-namese 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 chal-lenging undertaking. Vietnamese compa-nies need to institutionalize performance metrics and be clear how performance will be measured. Something that doesn’t always take place. “Companies in Viet-nam don’t always have an ERP culture”, said Chandara. For example, simplifying and standard-izing 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

existing business processes will result in optimized business processes,” said Abesolom Abby Fidel, an independ-ent 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 chal-lenging undertaking. Vietnamese compa-nies 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 num-ber of challenges when implementing ERP systems. One of the big errors com-panies make is to rush implementation schedules. “ERP implementation in Vi-etnam 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, Vietnam-ese companies sometimes lack patience and flexibility in dealing with the re-quired business engineering. people on a project can be challenging undertaking. “Companies don’t always have the hu-man 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 consult-ants don’t always under For ERP imple-mentation 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 organiza-tion is an ongoing process. “Companies need to cultivate and motivate employ-ees,” advised Fidel. Nguyen added that, to some extent, human resource depart-ments are benefiting from the slowdown in the economy as employees are less likely to jump ship.

Despite lower costs now, Vietnamese companies need to have a clear under-standing of the investment cost and re-turn on investment. “Companies some-times 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 re-search. For any company, ERP is a big investment and implementation and building local capability should not be taken lightly. Especially in these uncer-tain economic times.

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Vietnam’s ERP market is still relatively small, but it is a growing market that has changed dramatically the last five years

“ “Implementation Challenges

Value and Return of Investment

ERP Readiness

Vietnam Supply Chain Frontier

Vietnam’s textile industry has increased significantly since normalizing relationships with the United States in the 1990’s. Vietnam was granted most favoured na-tion 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 sec-ond 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.

In the textile industry, companies are increasingly looking for lower cost countries that can provide outsourcing opportuni-ties. 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 chas-ing 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

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.

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 outsourc-ing 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 Di-rector 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.

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 manu-facturers need embroidery skills and Vietnam has kept in touch

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ViETnaM’S TExTilE induSTRy: opportunities and Challenges

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Labour Cost Advantage

Low Cost Location

The Vietnam Advantage

with its traditional roots,” she adds. However, for local design-ers, 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 air-conditioned shopping areas and the shopping experience is less hectic.” This can have a negative impact on a designer’s creativ-ity 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 Re-becca Lebold, director of apparel product and technical devel-opment 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.

For many companies outsourcing to Vietnam, intellectual prop-erty (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. De-signers 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 prop-erty 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.

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 undertak-ing 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 In-telligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Viet-nam. 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 ma-jor 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 competi-tive 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 gov-ernment is aware of this dynamic and has invested billions of dollars in the country’s infrastructure. The government is actively encouraging foreign direct invest-ment in the country’s infrastructure. This is visible with pro-jects 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 sin-gular focus on labour costs, it is easier to identify where Viet-nam’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.

The textile industry is now the second biggest exporter in Vietnam

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Intellectual Property Threat

Infrastructure Development

Vietnam Supply Chain Frontier

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Vietnam Supply Chain Frontier