Making ‘IT’ Move

As competition increases between IT distributors in the Middle East, efficient supply chain management could make the difference between a profit and a loss, reports Stuart Wilson.

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By  Stuart Wilson Published  October 31, 2006

There are no simple and straightforward answers when it comes to defining the most efficient logistics setup for an IT distributor in the Middle East. Much depends on a distributor’s product portfolio, its target geographic market and the dynamics of its customer base. Throw in the impact of customs and duty regulations, the role of sub-distributors, grey market product flow and the occasional irregularity in vendor pricing policies and you start to get some idea of exactly why excellence in logistics can make the difference between a profit and a loss for a Middle East distributor.

Despite these challenges, many of the region’s most powerful distributors believe they have what it takes to give them an edge over their rivals on the logistics front. For regional distribution giant Almasa, expanding their network of stocking points remains high on the company agenda.

“We are constructing a massive new facility in Jebel Ali,” explains Frank Sheu, CEO at Almasa IT Distribution. “The main objective is to make Jebel Ali into a regional hub that supports the network of five satellite warehouses we will have up and running across the region by March 2007.”

Almasa’s plan to expand its stocking points includes new facilities in both Riyadh and Cairo. Supplying these warehouses with stock on a weekly basis forms just one part of Sheu’s master plan for Almasa’s impressive new facility in Jebel Ali.

“Almasa will only use half of the warehouse’s capacity for its own stocking needs,” says Sheu. “The other half we will offer to vendors to use as their own stocking hub to support the requirements of their multiple distributors in the region. This represents a much more economical option for vendors. Their investment on price protection is reduced and we believe that our cost structure and experience will allow us to beat any 3PL in terms of offering this type of service to vendors.”

While Almasa looks committed to opening more stocking points around the region, other distributors continue to take a more cautious approach, citing some of the unique regional factors that deter them from more in-country investment. eSys, for instance, is currently serving customers across the Middle East and Africa from its stocking points in Jebel Ali and Amsterdam. The company is mulling over the possibility of launching another hub in either Tangiers or Johannesburg.

“It is actually a difficult decision to make and defies all the logic that you have learnt. But in the Middle East you have to adapt to the local ways of importing and exporting in order to survive. You know what the pricing is on Computer Street and the impact that 5% import duty has on the consistency of pricing,” says Pavan Gupta, EMEA director at eSys.

“We will not compromise on our business principles or ethics. The only way we can go local is to offer a huge amount of value-add to resellers and hypothetically we could become a broadliner with 60 product lines. In that position you can trade against the financial handicap that is imposed by not participating in some of the hanky-panky logistics that occurs,” he adds.

Gupta’s view is echoed by most of the major distributors operating in the Middle East and Africa. Whatever way you look at it, there is still an element of underhand activity occurring that can give some of the less scrupulous logistics operators an unfair advantage over those major players who stick to the rules. As one distributor jokes: “If a customs officer is corrupt it’s not the worst thing in the world — at least there is a solution to the problem!”

While the major distributors applaud Jebel Ali as a beacon of logistics efficiency in the wider Middle East market, issues do still remain. Transfer of ownership deals within the free zone itself remain the dominant form of transaction and underinvoicing of consignments moved out of Jebel Ali remains a cause for concern. As Mike Vosper, operations director at Tech Data, admits: “There are still a few forwarders serving Jebel Ali whose popularity has less to do with quality, security or time definite transits and more to do with duty evasion.”

Furthermore, according to Nicholas Argyrides, general manager at Logicom Dubai, whilst the transfer of ownership deals can facilitate an easier transaction of goods, they can also be dangerous as people take advantage of this for illegal practices such as under-invoicing. “Continuous monitoring by the local authorities is the only way to ensure that everything that occurs stays legitimate,” he stresses.

Major authorised distributors frequently portray the role of traders and re-exporters in the Middle East technology supply chain as a double-edged sword. “If they follow all the customs and tax regulations traders and re-exporters play complementary roles in regional channel logistics — especially when it comes to covering certain markets in Africa and some smaller markets in the GCC,” says Mario Veljovic, sales and marketing manager at Aptec.

Back to Sheu at Almasa, he explains that although there are more sub-distributors in Dubai than any other city in the region, they are only one part of the channel customer base. Many of the in-country resellers still prefer to buy from the satellite warehouse of an authorised distributor.

“Sub-distributors typically only carry a few fast-moving SKUs; they cannot offer the breadth of product or match the consistent supply, levels of service and warranty terms offered by authorised distributors. They may have a 2% to 3% price advantage but there is a great deal of inefficiency in their model and they face business constraints,” he adds.

While Jebel Ali is well established as a landing point for finished goods, other vendors believe that the free zone also has the potential to emerge as a major manufacturing hub for IT products. The recent link-up between Fujitsu Siemens and PWC Logistics to set up a desktop assembly operation at Jebel Ali is testament to this.

“We looked at what could be done to shorten the end-to-end delivery time for desktops in this region and found that by taking the extra step and integrating PWC Logistics into the assembly and the shipping we could reduce the time to market even further,” says Stephane Rejasse, Middle East general manager at Fujitsu Siemens.

Some of the assembled product is supplied to Fujitsu Siemens distributors within Jebel Ali while approximately 65% is moved through in-country partners to end-users. Rejasse believes that not only have customers realised that the product quality is on a par with product manufactured in Germany, but many view the fact that the desktops were assembled in the UAE positively.

For PWC Logistics, the tie-up with Fujitsu Siemens represents the first time they have struck this type of deal. “To be honest, we are a logistics company so our mission is to provide as much of the supply chain function as we possibly can,” says Greg Sandoval, country general manager at PWC Logistics Dubai. “This is one element of the supply chain — if we can provide the assembly service for Fujitsu Siemens and take the product from the point of manufacturing to the end-user, then that really enhances our core competencies as a company.”

The success of this link up has clearly whetted their appetite to look at other opportunities to engage more closely with the Middle East IT supply chain.

“When you are bringing in components to Jebel Ali and manufacturing, as opposed to bringing in finished goods and transferring them through, there is slightly more paperwork,” he adds. “The authorities in Jebel Ali are astute business people and we have brought down some of the barriers to let manufacturing develop even more in the free zone. This is something that more companies will want to take advantage of long-term and I believe that the authorities want to see more local manufacturing — it shows the long-term commitment of companies such as Fujitsu Siemens to this region.”

Massive advances in the quality and reliability of road shipments in the Middle East market have helped to transform the dynamics of GCC IT logistics. This factor, coupled with the rapid increase in size of the IT market in specific geographies, has influenced distributor thinking with regards to the location of stocking points. With more and more Middle East distributors now turning their attention to Africa as well, a new wave of regional expansion plans is well underway. Aptec is one distributor leading the charge.

“We are currently covering our core markets very well due to our in-country strategy,” informs Veljovic. “However, we are considering more stocking points to serve the African continent. Stocking points in Morocco for the North, Nigeria for the East and Kenya for the West are all under consideration. Some smaller markets in the GCC do not have the critical mass to allow proper in-country stocking but the logistics networks in place already to serve those markets are now extremely efficient.”

Tech Data, which currently has its primary stock in Jebel Ali and satellite hubs in Bahrain and Jordan, runs a weekly transfer to Bahrain and three transfers each month to Jordan. The Bahrain hub is run by Aramex, making it an efficient and economical operation. “The cost of clearing an order from the free zone is nominal. This is not the case in Jordan where the clearing charges are very high at more than US$80. This means that for orders less than $2000, it works out less expensive to buy the product from Jebel Ali and have Aramex deliver using their consolidated road service,” says Vosper.

“However, it takes a week to move a shipment from Jebel Ali to Amman, and you can wait several days before getting the conformity inspection and certificate. So there are both cost and time savings for our customers who take advantage of pre-positioned stock in the Jordan hub,” he continues.

With experience in Bahrain and Jordan, Tech Data claims to have evolved its processes, systems, planning and logistics expertise to enable the company to successfully operate a stocking point anywhere in the region. Where it choose to set up a hub really depends on what its customers actually need and perhaps what its vendors need too. As Vosper points out, “If it makes business sense, and it’s legal, we’ll do it.”

While distributors try their utmost to understand the product flows within the Middle East market and develop the most efficient logistics structure accordingly, their efforts are still hampered by grey product flows both into and out of the region. “Grey trade still has a tremendous impact on logistics models,” concurs Argyrides at Logicom. “Cheap freight tariffs to and from locations such as the UAE and Far East facilitate the supply of grey product into unauthorised channels.”

While some distributors claim that grey trade remains a significant problem, others contend that the influence of this trade is reducing. “Grey market product usually turns up here when the grey trader can make money on it,” elaborates Vosper. “When grey product arrives, we usually have to sit and wait for it to sell through, which means our inventory holding cost goes up and our overall margin is eroded. I don’t want to tempt fate here, but it does seem to me that issues over grey products are fewer than in the past.”

A slick approach to logistics remains the top priority for Middle East distributors. There is no substitute for experience and local knowledge when it comes to developing the perfect model for the Middle East. Getting logistics wrong can prove a costly mistake for distributors and many are now investing significant time and resources developing their internal IT systems to give them real-time information on inventory and orders. This business visibility is an essential tool, allowing them to make instant management decisions.

“In our business, price deterioration is synonymous with IT products,” concludes Argyrides. “This is mainly on the hardware side but you need careful planning, product road mapping, follow up on vendor price protection policies and smart ordering systems to minimise any potential impact.”

Logistics in the Middle East IT channel will continue to evolve, but there will be no quick fix to some of the outstanding issues that have dogged the market for years.

Never forget that this is an emerging market covering some hard to reach territories with no real channel structure as yet, such as Iraq. Flexibility, local understanding and the ability to evaluate and respond to reseller needs will separate the logistics kings from the channel cowboys.

“We will not compromise on our business principles or participate in some of the hanky panky logistics that occurs” Pavan Gupta

“There are still a few forwarders serving Jebel Ali whose popularity has less to do with quality and more to do with duty evasion” Mike Vosper

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