Social Enterprises Improving Supply Chains for the Poor

Posted in Operations & IT Articles, Total Reads: 2064 , Published on 17 January 2013
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There are billions of under-privileged class of people due to social or economical reasons; many social entrepreneurs have made heroic efforts in helping the poor by creating innovative business models to create social value. Many social enterprises use the poor as producers to improve their living standards. A social enterprise helps its associated micro-entrepreneurs by improving the latter’s supply chain operations via: (a) easier access to financial credits; (b) easier access to market information; (c) easier market access; and (d) better access to supplies and raw materials and higher productivity through better health and equipment.

 

1. Financial flows  -micro-lending to initiate/sustain operations;

2. Information flows - market information to improve operational efficiency;

3. Demand flows - market and sales operations to stimulate demand; and

4. Supply flows - basic materials, equipment, etc. to improve productivity, operations excellence to reduce operating cost and/or improve selling price.

Enabling financial flows for micro-entrepreneurs:

Many financial institutions do not think micro-entrepreneurs are qualified to borrow money because of the following reasons:

  • No demonstrated capability of running and growing a business;
  • Lack of any collateral.

Therefore, it is difficult for them to grow or even sustain whatever little enterprise they are running.

Consequently, it is difficult for the poor to break the vicious cycle.

Muhammad Yunus founded Grameen Bank in Bangladesh because he believed that the poor are eager to learn and willing to work hard. Grameen  Bank is intended to enable the poor who need a little bit of money to start or sustain a business as a micro-entrepreneur. Recognizing the potential challenges for the poor to pay back the loan, Yunus developed an innovative lending model that has shown great success. To qualify for a loan, a poor person with assets worth less than 0.5 acre of land can join a five member group who are not relatives or family members. Specifically, each member shares responsibility for the loan granted to any other member in the group; i.e., all members are responsible to provide the repayment when one of the members is behind.

Inspired by Grameen Bank’s success, Vikram Akula founded SKS Microfinance in India. Unlike Grameen Bank, SKS is based on a for-profit business model, the idea being that to provide an estimated $300 billion of credit to the poor, social enterprises need to tap the commercial capital markets by providing attractive financial returns. Within 10 years, SKS has provided $725 million in unsecured microloans and insurance products to over 2 million people in 30,000 villages.

Enabling information flows for micro-entrepreneurs:

Besides social enterprises, commercial companies can also support micro-entrepreneurs in their supply chains by providing vital information. Consider the case of the one of India’s largest commercial companies, ITC (www.itcportal.com) and its e-Choupal initiative.

Rural farmers in India face major disadvantages when selling their crops because they lack information to obtain fair market prices; they may also pay a higher price when buying products due to high distribution cost and inadequate retail channels in the rural areas. To help these farmers, ITC embarked on an initiative called ITC e-Choupal that uses information and communication technology to change the selling operations for the farmers in India. Under this initiative, ITC representatives train villagers to help them access ITC’s web portal to learn of the commodity prices traded at each mandi in the previous day. On the same portal, ITC announces the minimum price it will offer the following day. With this market price information, farmers have two choices: the farmers can either sell to ITC according to the announced price. Alternatively, the farmers can bring their produce to the mandi the following day, knowing the minimum bid offered by ITC when considering the bids offered by other potential bidders. Therefore, the e-Choupal initiative enables the farmers to obtain fair market price and ITC can reduce the procurement cost by eliminating the commissions it would otherwise pay to middlemen.

Enabling demand flows for micro-entrepreneurs:

With a commitment to help poor Afghan women weavers and their families break the cycle of poverty, Connie Duckworth founded an online portal Arzu (www.arzurugs.com) that sells traditional and custom designed rugs produced by Afgan women. By sourcing these rugs from various Afgan women weavers and by offering them fair price, Arzu creates jobs in the rural area of Afghanistan and provides women weavers steady income and access to education and healthcare.

Recognizing that there are 1.2 million of Nepalese diaspora around the world Bal and Rakesh Joshi co-founded Thamel (www.thamel.com) in Oregon. Thamel has online Thamel Gift Shoppe that enables Nepalese emigrants to send gifts made in Nepal to their family and friends living in the home country. Started with only two local vendors, Thamel sold over 8000 products from over 100 local vendors in 2010. Hence, Thamel creates business and jobs for micro-entrepreneurs who are local vendors and local manufacturers. Initially, the delivery process was a challenge because Kathmandu, Nepal’s capital, does not have street addresses. To make it work, Thamel worked with the Municipality of Kathmandu so that they can use the government’s Geographic Information System to find the delivery location by identifying well-known landmarks in the city. Besides its online shop, Thamel partnered with Kumari Bank to develop money transfer services in 2002.

Enabling supply flows for micro-entrepreneurs:

Supply flows refer to basic raw materials like water and energy, both in short supply for the poor in emerging economies. Supplies also refer to equipment that makes these raw materials accessible, or otherwise making the micro-entrepreneurs more productive.

Improving productivity through access to health related products and services

Because micro-entrepreneurs lack access to health related products and services due to affordability, their productivity fall and their meager earnings drop as their vision deteriorate or as they fall sick. To help these micro-entrepreneurs break the cycle of poverty, some social enterprises develop affordable health related products and services.

In 2001, Dr. Kassalow founded Vision Spring (www. visionspring.org) a non-profit organization with a commitment to provide global access to reading glasses in low-income communities. He teamed up with Scott Berrie to form Scojo New York, a for profit company that makes and sells high-end reading glasses for the US market. By using 5% of the pre-tax profits from Scojo New York to support the operations of Vision Spring. Vision Spring trains dozens of local entrepreneurs, called Vision Entrepreneurs, and provides them with loans of $75 so that they can buy a kit of eye charts, brochures, and a stock of glasses. Vision Spring managed to sell its reading glasses in El Salvador, India, Haiti and Guatemala for as low as $2 a pair.

Improving productivity through equipment

Martin Fisher and Nick Moon co-founded KickStart (www. kickstart.org) in 1991 by developing, designing and manufacturing practical equipment that help poor farmers in rural Africa to improve their productivity in farming. KickStart develops and sells a manually operated micro-irrigation pumps so that the poor villagers can gain access to water so as to raise more crops.

However, there is a caveat: the social enterprise’s mission is only attainable if the social enterprise itself has a sustainable operation. This brings us to the other important question of how social enterprises themselves can become more economically sustainable.

There are cases in which the social enterprises themselves are facing many challenges: (a) uncertain public funding from government, foundations, and donors, and uncertain access to capital markets, thus creating constriction in access to credit for the micro-entrepreneurs; (b) uncertain market demand for the products produced given a lack of marketing and sales expertise; and (c) high operating cost due to inadequate infrastructure to support the distribution of goods to the poor, and low productivity due to inherent difficulty in recruiting and retaining highly talented labour.

It is not only the starting a new social enterprise challenging, but also sustaining it economically is also quite difficult not the least because of competition from mainstream business. The market is unlikely to be profitable because, if it were, it would have been captured by mainstream businesses already. In other words, mainstream businesses are not interested in competing with these social enterprises in certain “niche markets” that are too small to be profitable. Of course, if the social enterprise is highly profitable, then other big business may enter the market and compete. These challenges may explain why there are few successful social enterprises.

This article has been authored by Parag Mahajan from NITIE.


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