Alcohol levy: Time for procurers to shine

* THUSO MPHELA | Tuesday October 5, 2010 00:00

Is this going to be easy? Definitely not! Whether this levy is justified or not is not the purpose of my discussion; neither is the determination of whether this will achieve the noble intentions or not.

The sole purpose of this paper is to share with KBL and the community at large on how supply chains can be employed to turn the fortunes of this company around. It is unfortunate that this situation is imposed by the external environment. There are only two options; negotiate with the government or look to your people to play the trick.

The only comforting thing about the levy is that it is a phenomenon which is clearly on the surface and not so complicated in understanding. The technique applied is straight forward! 30%. The stage at which the levy is applied in the supply chain is of paramount importance in understanding its impact on competitiveness of the business. If the levy on imports is charged at the border (CIF) and the local product is charged at retail; the latter is immediately thrown out of competition. One is levied at cost while the other is levied on retail price resulting in higher costs for the one charged at retail price. This is the picture the reader should get.

If negotiations with the government have failed is that the end of it? Technically yes...but the situation can be turned around. This is where supply chains come in. It is important for the reader to understand that price is a function of cost. In every day operations businesses charge a mark-up (a given percentage) on the cost of the product to make profit. If you are a monopoly this is easy, but if you have competitors, your price may spell your demise. This is what is haunting KBL. Products from other producers especially in the region are a serious competition to the local brews. The local brews have become less popular to consumers who opt for foreign brews just because of the price factor. What do you do after you have been slapped with a 30% levy with a potential of further increase in the levy looming? The larger the cost base the larger the absolute levy which basically makes your products more expensive than your competitors giving the latter a price advantage in the market.

Supply chains can help you trim down your cost base in a number of ways, including but not limited to; forcing your suppliers to achieve a certain target of cost reductions; help suppliers achieve the cost reductions; improve supplier relationships; reduce your transportation costs; manage your inventories efficiently; and above all ensure your procurers or supply chain staff have the pre-requisite expertise to ensure this is possible. Toyota recently learnt its lesson after driving the cost minimization strategy too hard by forcing its suppliers to charge certain prices for their supplies.

This resulted in suppliers failing to cover their own bills resulting in sub-standards and outright failure to deliver.KBL would be advised to form closer relationships with their suppliers. However, this is not as easy as it sounds. Getting a supplier to be committed to you or have you as a preferred customer takes a lot of trust especially on your business concept. It also takes time which KBL may not have.

It is difficult to drive the supplier to reduce their cost base if you have no relationship. This is worsened by the fact that your competitors may be sourcing from the same supplier. If this is the case the influence of KBL in comparison with competitors would come into play.  If this does not give KBL enough ammunition they may want to look locally and partner with local suppliers and build capacity.

The other option that KBL has is to review their production processes and distribution for efficiencies. Cost savings made can subsidise other costs that may be necessary evils. In most cases companies have control over these cost centres. The company should also engage on a serious company-wide mission of cost-cutting.

It would be self-defeating to make this the duty of a few people in the organisation. An objective spend analysis would definitely lead the company to cost centres to target. I believe your supply chain professionals are in a position to do this.

I have to admit that for companies that have achieved a turnaround in the past all the glory cannot be attributed solely to supply chains. But of course supply chains have played a pivotal role in changing the fortunes of many companies including DaimlerChrysler and Xerox.

In the end government may also want to review the implementation of the levy so that equity in the supply chain is achieved. If imports are levied at production costs the same should apply for KBL by charging at manufacturing stage (cost) or else all at retail price. This would create a level playing field for all the players. Otherwise the local business would be sacrificed for the foreign ones defeating even the original intention of the policy.

* Thuso Mphela is a lecturer in Logistics and Supply Chain Management at the Management Dept., Faculty of Business, University of Botswana