Networked micro-enterprises: the added value of collaborative procurement in rural South Africa 1
Carsten FRIEDLAND1, Christian MERZ1, Johan (Rensie) VAN RENSBURG2 SAP Research, CEC Karlsruhe, Vincenz-Priessnitz-Strasse 1, Karlsruhe, 76131, Germany Tel: +49 721 69020, Fax: +49 721 696816, Email:
[email protected]/
[email protected] 2 CSIR Meraka Institute, Meiring Naude Rd, Brummeria, Pretoria, 0184, South Africa. Tel: +27 82 4476239, Fax: + 27 12 8413341, Email:
[email protected]. Abstract: This is a further contribution from the implementers of a Collaborative Working Environment (CWE) in a developing economy to highlight both the planning and implementation mechanisms as well as the outcomes of such Rural Living Lab (RLL) interventions. The current paper utilises the learning in the area of User Requirement collection in the Sekhukhune RLL and provides a framework for the initial solution modelling and testing. This is done by focussing on the Collaborative Procurement scenario identified during user requirement collection. The paper provides insight into the activities of the subject experts (from the ‘system of innovation’) and ‘real world’ participants from the RLL to provide an initial set of business processes, business models and supporting technology to be deployed and iteratively refined in the Sekhukhune RLL. Keywords: RLL; Rural Living Lab, collaborative procurement; iterative refinement in RLLs; SMME; end user engagement, franchise, spaza.
Introduction C@R (Collaboration@Rural) [1] is an EU funded Integrated Project as part of FP6 and aims to boost the introduction of Collaborative Working Environments (CWE) as key enablers catalyzing rural development. Within C@R seven Rural Living Labs are set up. The Sekhukhune Rural Living Lab (RLL) is the only Living Lab in an emerging economy and is firmly rooted in a representative rural African context [2]. It concentrates on incubation mechanisms to support Small Medium and Micro Enterprises (SMMEs) which could provide a backbone for socio-economic development in South Africa. Socioeconomic development in an area like Sekhukhune turns out to be much more than a singular discipline and it is clear that it requires coordinated efforts. Amongst these efforts is the development of a sustainable business model that paves the way for technological innovation to be applied to real world use cases addressing end user pain points.
Objectives In this paper we report on achievements since last year’s IST Africa 2007 in the Sekhukhune RLL [2, 3]. In particular we focus on our approach to engage end-users, on the shaping of sustainable business cases and models as well as on the technical implementation work.
The following sections will be concentrating on the collaborative procurement use case as a prime example of Infopreneur intermediated service delivery. This kind of service delivery aims to overcome what we call the small trader’s dilemma. The paper will therefore: 1. Provide an overview of the background and learning that lead to the current ability to formulate an initial business and technology solution proposal; 2. Detail the ‘real world’ user involvement processes as well as the outcomes of such processes; 3. Introduce the business model to be explored during the RLL implementation; and 4. Describe the technological platform to be refined during implementation in the Sekhukhune RLL. The conclusions reached from this paper will form the basis of the implementation, refinement and validation activities of the next phase of work in the RLL.
Background Figure 1 below provides a summary of the “normal” rural barriers to enterprise development and competitiveness, as well as the additional, South African-specific barriers. It also provides an outline of the specific type of collaboration-based SMME intervention that could be developed in this type of context as well as the intended outcomes of the Sekhukhune RLL. The challenges of rural area enterprises and economic development are mainly related to critical sizes of enterprises and their supply chain volumes [2, 3].
Figure 1: The framework of C@R interventions stating challenges and potential outcomes
The Sekhukhune RLL interventions are characterized by the marriage approach between the so called ‘System of Innovation’ (SOI) and the ‘Community of Practicioners’ [3]. The ‘community of practitioners’ consist of a MicroFranchise [4] network of social entrepreneurs - called Infopreneurs™ [5]. These rural “social” entrepreneurs run start-up service enterprises at different levels of complexity and size (hubs, nodes and satellites)
within the local communities of Sekhukhune. The SOI consists of a number of institutional actors that fulfil different, mainly Research & Technological Development (RTD) functions at different ‘distances’ from the “community of practitioners”. Within the context of the RLL of Sekhukhune, the SOI get extensively involved and embedded in the ‘observed’ (“natural daily life”) environment, i.e. “marry” a specific selection of SMMEs (Small, Medium and Micro enterprises) within that “natural daily life /work environment” – the Infopreneurs™.
Methodology – Mapping the LL concept onto Sekhukhune The methodology being followed to detect problem areas, to shape responding business models and to design according technical solutions very much reflects the Living Lab approach. The Sekhukhune RLL is introduced as a concept for user-centric, experimental and contextualised research for sensing, prototyping, testing, piloting, validating and refining complex solutions in multiple and evolving real life contexts. RLLs help to involve people, SMMEs, other firms, public players into co-creation, co-production, co-delivery of new knowledge society services and businesses that relate to collaborative and knowledgeintensive work. RLLs are dynamic structures with feedback flows of experience that serve to nurture the whole model of infrastructures, individual components, validating applications and users.
Figure 2 – the different stages of Living Lab evolution [6 ,7]
This does not happen instantaneously but evolves through different stages of Living Lab set up and operation. Figure 2 illustrates these different stages of evolution [6, 7]. The current phase in Sekhukhune can best be described as “limited scale experimentation based on user experience”. In order to move forward through the different phases a spiral development approach is applied that includes the following steps of action research (see also figure 3 [7, 8]): • Establish various agreements among participants through an extended negotiation process. The Sekhukhune RLL strongly builds upon long term established relationships amongst the different stakeholders. This also included the local communities as important drivers for open innovation and as customers of knowledge based information services. • Diagnosing the issues and challenges, doing interpretation and data collection leads to theoretical assumptions. In case of Sekhukhune this step has been clearly driven by the end users. Identified pain points are based on data collection from different perspectives of supply chain participants. In case of the spaza shops these participants include the producers, wholesalers, spaza shop owners and their customers.
•
•
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Action planning: specifying improvements and interventions, action plans, experimentations. Four rural specific business scenarios and subordinated use cases have been designed [3]. Based on a first draft of business model the technology has been selected. In parallel synergies are detected within a network of European Living Labs [9, 10] Action taking: implementing changes, carrying out experiments, continuous monitoring, feedback to participants. Starting with mock ups, rapid prototypes have been developed, services have been identified and are being mapped onto the architectural layers of the Open Service Oriented Architecture [11]. Evaluating: collaborative evaluation of outcomes, problem redefinition. This step is currently on it’s way and will frame the work of the next few months. Specifying learning
Figure 3 - the spiral development approach[7, 8]
Understanding the local specifics of informal trade in Sekhukhune The following sections describe the research activities related to the collaborative procurement use case envisaged for the Sekhukhune RLL. This specific use case originated from the initial observation that so-called spaza shops1 in Sekhukhune make up a substantial portion of the overall economic activity in that rural area. However, beyond their role as important microeconomic actors in the region they also fulfil a vital role in supplying the local rural community with basic needs commodities (With a long tradition some of the spaza shops that were interviewed have been in operation for more than 30 years). Enabling these micro businesses to become more effective and efficient (especially in the domains of procurement and logistics) in supplying their customer base with required products could therefore not only provide a boost to local economic activity but it could in a very direct way also improve the socioeconomic situation for a vast number of underserviced rural inhabitants. Methodology It should be noted, that research on the informal trading sector in South Africa is still very much in its infancy. For well documented historical and political reasons, this sector has 1
A spaza shop is defined as an informal shop/business operating within a formal or informal residential area. Typically, spazas either operate from a section of a privately used home or from a simple stand-alone building. The term "spaza" means "hidden" in the Zulu language and emerged during the apartheid era when the establishment of black-owned businesses in townships was declared illegal. Spazas form an important part of the informal trade sector in South Africa, which in turn makes up approximately one third of all informal sector activity (Ligthelm 2002).
been largely neglected until the mid-nineties. Since then a number of publications have attempted to shed some light on general characteristics of this market segment (most prominently Ligthelm 2002 [12]) but there are still many untouched issues. Thus it was of particular importance for this research to try and validate the specific local flavour of certain issues through direct interviews with representatives in the typical spaza value chain in Sekhukhune in order to understand the conditions, requirements and peculiarities of the small trade business in the region. The following stakeholders have been interviewed: Spaza shop customers Spaza shop owners Local wholesalers The interview sessions had two goals. Beyond getting the views from all stakeholders of the value chain it was also an effort to start establishing an end user group. The interview approach for each of the three stakeholders is summarized in the table below (figure 4).
Objective
As is analysis: The spaza shop value chain in rural South Africa
Target Group
Spaza Shops
Method
Primary research (semi-structured interview)
Spaza Customers
Wholesalers
Primary research (semi-structured interview)
Primary research (open expert interview)
Figure 4 - Interview approach for stakeholders in the spaza shop value chain
The interview design specifically took into account end user background and know-how. Formulations were chosen to best fit into the cultural and social setting of the respondents. In addition, each interview team included a local interpreter who assisted during the interview and who also made sure that respondents felt comfortable while being interviewed by “strangers” coming from a completely different social background. Altogether, 21 spaza shop customers, 26 spaza shop owners and 3 large wholesalers have been interviewed in the Sekhukhune area between May and July 2007. Interview Outcomes The most important outcomes of the interview sessions are presented below in a condensed form: Spaza shop customers typically buy products at spaza shops related to very basic needs. For them, spazas are convenient to reach and they therefore play an important socioeconomic role in the community. However, compared to the shops in the remote cities, non-availability of products is a common problem with too few goods being offered at too high a price by the Spazas. Spaza shop owners on the other hand typically have an extremely low financial liquidity. Thus they very frequently buy small quantities of trading stock and therefore pay excessively high procurement prices. In addition, procurement transaction costs are prohibitively high (transport, effort) which causes high sales prices and commonly yields a
non-availability of goods. Spaza shop owners usually have no possibility of buying on credit due to a perceived lack of creditworthiness by the traditional financial service providers. Beyond that, they typically suffer from a combination of inadequate knowledge and insufficient bargaining power to effectively negotiate discounts. Although very few spaza shop owners buy stock together, they nonetheless seem to be open towards the concept of cooperative buying schemes. Wholesalers in Burgersfort, Bushbuckridge and Nelspruit (some of the larger towns serving the procurement demand of Sekhukhune) typically don’t offer any spaza specific services although they consider the spaza market to grow in size and importance in the future. Spazas now already form an important part of their customer base. Gathered Learning The interview sessions clearly indicated a very typical situation for South African rural areas that we chose to call the small trader’s dilemma: Typically, rural spaza shops need to: buy stock in small quantities (due to an extremely limited financial liquidity) thus buy stock in exceptionally quick cycles (to try and nonetheless meet the high demand of their under-serviced customers) Yet market conditions require them to: buy stock in large quantities to be able to take advantage of bulk discounts offered by suppliers and to generally increase their bargaining power keep the number of procurement cycles to a minimum due to disproportionately high transaction costs In the current situation, there are few possibilities to reconcile these starkly contrasting requirements, leaving rural small traders in an utmost disadvantageous market position. However, the results of the conducted surveys also suggest numerous ways to potentially boost both effectiveness and efficiency of the spaza business, specifically in the domains of procurement and logistics. Through the introduction of a combination of different measures including information intermediaries, technological innovations and a franchise-like organizational structure we believe to be able to achieve significant improvements in terms of trading stock costs as well as procurement transaction costs. Beyond that, we hope to achieve a significant decrease in the time span between the detection of a demand for a product and the replenishment of that specific product.
A business model for solving the small trader’s dilemma As a potential solution to the small trader’s dilemma, we propose an innovative business model (architecture of added value) which is illustrated in figure 5. In the following sections we describe the required business process innovations, the specific added value propositions for each stakeholder, and finally, the conceptual revenue model which is geared towards optimizing profitability as well as ensuring the sustainability of the proposed solution. Proposed business process innovations
A business model can typically be divided into its internal architecture (the organizational units and actors forming a direct part of the business itself) and an external architecture which refers to the microcosm within which the business intends to conduct its business activities [13]. Both in the initial setup and subsequent nurturing of its components, these two architectures obviously call for different approaches especially in the areas of control and dependency. We intend to introduce a MicroFranchise model [4] to form the core of the internal architecture of the proposed business model. This setting seems to be sensible for the Sekhukhune collaborative procurement use case. The main difference between traditional franchises and the suggested micro franchise model is that in the envisioned scenario the overall goal of the franchisor does not lie solely in the accumulation of a maximum of revenues. Instead, the franchisor pursues both the goals of being socially responsible and economically sustainable. This concept of a social enterprise is a core component of successful micro franchises such as the those of the Grameen conglomerate (e.g. the Grameen phone project and the Grameen micro credit concept [14]) or the Fairtrade labelling organization [15] to name some prominent examples.
Figure 5: The architecture of added value
The operational implementation of this business model will be strongly integrated with the Infopreneur concept developed by the Meraka Institute in South Africa [16], which envisages a cascaded model of franchisees as a delivery channel for a whole bundle of rural services. The Meraka approach aims at an increased sustainability for the Infopreneur concept by combining both the principles of economies of scale as well economies of scope. It also provides additional support structures specifically suitable for franchisees in rural underdeveloped areas. Most of the concepts of the collaborative procurement business model can be conveniently mapped on to the Infopreneur business model. In terms of the proposed business model, the micro franchise will be operating as a supplier of consumables related the satisfaction of basic needs of the rural community. For this purpose the franchise will operate a number of warehouses. Goods for these warehouses will be ordered proactively according to business modalities which are typical for
transactions between wholesalers and their suppliers in the established “first economy”. Ordering goods proactively yields a number of distinct advantages within the envisioned business scenario: The product demand of spaza shops is highly predictable. They generally have a very limited product range with most of the spazas having a very similar assortment of products Proactive ordering allows for a significantly higher degree of order aggregation compared to the aggregation possibilities of a specific day’s orders in a certain geographically limited region. This will lead to a much better bargaining position. The order process will offer suppliers to access the informal “second” economy according to conditions and modalities of the established “first” economy. Through a careful placement and distribution of the warehouses daily ad-hoc demands (e.g. smaller order aggregations) can be served quicker and could be delivered by optimally making use of regionally specific logistic possibilities (e.g. piggy-backing on existing logistic networks of city-based bakeries which are already serving Sekhukhune on a daily basis) The above setting allows for optimally reaping one of the two major monetary benefits of cooperative procurement in the Sekhukhune context, namely the increased bargaining power of large order quantities which in turn lead to reduced product prices. The second source of significant savings potential through cooperative procurement lies in reducing the costs of current transactional inefficiencies, specifically in the area of logistics. In the envisaged scenario, this will be achieved through the bundling of regional demands accruing in a specific time span (e.g. in one day). In terms of this arrangement, spaza shop owners can place orders via plain text SMS from a predefined offline (e.g. paper-based) catalogue. These orders undergo a verification and reconciliation process by a regional coordinator (Infopreneur), before being sent to the closest warehouse of the Micro Franchise. The ordered products are then delivered via a delivering mechanism best suited for the specific region. The ordered products are paid by the spazas upon delivery. This paper’s section on the technical implementation provides more details about this scenario. Added values for the stakeholders involved Overall value proposition pursued by the Micro Franchise: Increasing the availability of basic goods for rural communities in South Africa: • Through innovative mechanisms which reduce product prices and facilitate the order and delivery processes • Through a sustainable franchise-like business model which is demand focused, self learning and which rewards each stakeholder for increasing the overall flow of products into rural areas • Through a business model which concentrates on a lean product catalogue of nonperishables. This will include some 50-100 products for which there exists an above average demand by the rural population, getting rid of typical higher transaction costs through products with a slow turnover or high warehouse costs. • In close cooperation with the public sector since the business model directly supports local Integrated Development Plan (IDP) and Local Economic Development (LED) activities and public sector support could be lobbied for (tax redemption, subsidies, etc.)
The proposed added value for the stakeholders involved are summarized as followed: Spazas: Spaza shops are brought in the position to offer their products cheaper as if they were buying in bulk. At the same time they are enabled to do as many small procurement transactions as desired (perhaps even daily) at no significant extra cost. Thus the small trader‘s dilemma is solved! Additionally, spazas have the opportunity that a whole basket of average low cost household (basic needs) goods are delivered, which are currently not available via delivery. This will happen at an exceptionally small time span between order placement and goods delivery (between 1 and 2 days). Other improvement include the significant reduction of the liquidity problem (Upfront financing of trading stock is reduced from an average of 14 days to an estimated 2 days – That‘s a factor 7!). Various feedback channels regarding product requirements are offered. Technology wise a low-tech, easy to use ordering system via a widely available communications channel (SMS) is available. In case of the need for further support locally based assistance through Infopreneurs™ (thus, strictly speaking, not even a cell phone is required to participate) can be accessed. Infopreneurs™: The collaborative procurement use case generates an additional source of income by increasing the Infopreneur’s service portfolio. They’re offered a commission on the sale and distribution of products without them having to take up financial responsibility for those products (ownership remains with the micro franchise up to the moment it is paid by the spaza shop). Various incentives to increase their commission are available (increasing the number of participating spazas, determining new products, finding alternative logistic partners, solving local issues like unreliable orders, etc). These incentives form an important part of the revenue model. Suppliers: On the supplier side a long term relationship with spazas is proposed. This relationship in a sense offers access to the 2nd economy at 1st economy conditions (Regular orders, EDI, single point of contact, delivery to a network of centrally located warehouses). Spazas comprise a strongly growing market segment. They represent a market which is profitable, yet also related to corporate social responsibility (CSR). Logistical Partners: Logistical partners are offered a long term logistics relationship that also allows for piggybacking on existing logistics network (e.g. local bakeries have a network of daily delivery in place already!). Again spazas are a strongly growing market segment that becomes accessible for the logistical partners. They represent a market which is profitable, yet also related to corporate social responsibility (CSR). Public Sector: The public sector gets a chance to directly contribute to IDP and LED activities. The proposed sustainable business model could be significantly boosted by a relatively small public sector support (a small change in the profit margin could make a big difference, since the retail sector (at least in the 1st economy) typically works with tiny profit margins). Financial Services Provider: Financial Services Providers are offered an investment possibility in a promising business idea (in terms of start-up capital) which could easily integrate mobile banking (providing
access to a young, yet potentially huge market). They are enabled to access a market which is profitable, yet also related to corporate social responsibility (CSR). Technology Provider: Technology providers (like SAP) get insights in the technology demands of a market segment which is substantially different from the established ones. These insights are essential to access to a strongly growing market segment which is profitable, yet also related to corporate social responsibility (CSR). Rural Community: The rural community is supplied with basic goods at affordable prices. At the same time product shortages are decreased by removing some of the biggest bottlenecks in the current procurement practice. Furthermore the product diversity is increased by implementing feedback channels with regard to product demand. Revenue model The revenue model forms a vital part of the overall architecture of added value since, conceptually speaking, it provides the nuts and bolts to adjust, fine tune and thus optimize the business model. Through its rules, agreements and overall setup it intends to influence the behaviour of actors of both the internal and external architecture by offering them the personal prospect of realizing revenue streams under specific conditions. The proposed business model introduces a number of additional actors compared to the current rural procurement practice (e.g. employees of the micro franchise) logistical partners, Infopreneurs™, technology partners, financial service providers, etc.). This setting will only be viable if all actors can be offered a realistic prospect of personal monetary gain. The proposed business model intends to finance these additional costs from various sources, most notably from a combination of a decrease in procurement costs, an increase in overall turnover of products as well as the speeding up of single procurement cycles. Taken as a whole, the ambition of the revenue model is to most optimally support the overall goal of the micro franchise: increasing the mid- and long-term availability of basic goods for rural communities in South Africa. The revenue model is also a clear commitment towards our firm belief that the sustainability of development related projects dramatically increases when combined with a solid and self sustaining business concept. South Africa currently experiences a real GDP growth of around five percent [17]. One of the big growth potentials lies within the informal sector which is dominated by previously disadvantaged segments of society. Here, the prospect of economic upliftment provides an extremely strong incentive and the proposed business model intends to make use of this potential bundle of economic ambitions, economic activities and combined economic power for supporting its envisioned business activities. In principle, the revenue model aims to provide actors with a combination of incentives and sanctions to encourage certain behaviours and discourage others. The nature of these incentives and sanctions need to be carefully designed for each stakeholder within the further course of the project.
Implementation – the technical response The development approach is very much end user driven. New technologies being introduced need a sound business base and a clear justification from an end users point of view. Without an immediate added value new products and tools are failing, in particular in an environment that is characterized by low margins for technology providers, limited customer liquidity and low penetration of ICT. Following the outcomes of our end user interaction and the design of the business model a service bundle have been identified to be delivered by the Infopreneurs™ acting as intermediate agents between the actual SMMEs and 1 st economy players (like established mining companies, wholesalers etc.). This service bundle has been extracted into individual use cases, e.g. to place an order per spaza shop via mobile phone SMS/form request submission. For specification of the use cases UML has been used. The use cases are continuously validated leading to incremental improvements and adaptations that are triggered from different stakeholder perspectives. In the next step the use cases have been fragmented into software services to be developed using open standards (e.g. web services). This translation of use cases into service specifications is tricky and requires a detailed understanding of the business processes. Identified services have been mapped onto the architectural layers of the overarching Open Service Oriented Architecture (OSOA) [11, 18]. To optimize system performance and to reduce implementation effort it is essential to assign the different services to the different architectural layers correctly. This offers the opportunity to identify functional overlaps with other RLLs and to define common services that can be shared by different RLL applications and tools. Ultimately this leads to a common service library that paves the way for technical synergies in a network of Living Labs [9, 10]. Again this common service library needs to be compliant with open standards.
Figure 6 – geospatial interface (spaza ordering aggregation panel)
We’ve developed rapid prototypes based on above mentioned specifications for different use cases. A screenshot of the one dealing with collaborative procurement for spaza shops is illustrated in figure 6. Multiple modalities (mobile versus desktop), navigation patterns (geospatial human computer interface, SMS based/browser based interaction, portal applications, Web2.0 tools) and connectivity modes (offline versus online) are
experimented with according to the end user target group (spaza shop owners, Infopreneurs™) and the context of the end user (remoteness, location, role). The user interfaces have been designed to enable intuitive, simplified interaction taking the computer literacy level of end users into account. As remoteness and expensive logistics (lack of transportation) are ubiquitous in the Sekhukhune RLL area a geospatial interface with supplemented ERP transactions have been chosen to e.g. cluster spaza ordering or to coordinate delivery and transportation. A geospatial interface reflects the core demand of an end user to oversee distances, transportation infrastructure or spatial density of available services. Very important is the localized language and content that reflects indigenous knowledge and context. At the same time standardized controls are used that follow the globally standardized interaction patterns (e.g. tabstrips, mouse over menus etc.). The developed prototypes are now at the stage to be validated by the end users in a ‘design in use’ approach. Ensuring quick and cyclic development and in parallel the delivery of add-on modules to existing platforms enables immediate added values and new revenue streams – retaining common interfaces.
Conclusions Applied LL methodologies in the African emerging economy context of the Sekhukhune RLL lead to distinct results in terms of identified pain points, use case design, a supporting business model and prototypical application development. The proposed solutions have the potential to sustainably stimulate local development in the community by organizational (entrepreneurial) and technological interventions. The design of these interventions have been strongly driven by engaged end user communities, i.e. marrying the ‘System of Innovation’ with the ‘community of practicioners’. A sustainable business model adding value to all stakeholders is crucial for success. As demonstrated for the Collaborative Procurement use case revenue can be generated from a combination of a decrease in procurement costs, an increase in overall turnover of products as well as the speeding up of single procurement cycles. The implementation of the Rural Living Lab interventions are supported through a tight R&D cooperation between CSIR/Meraka and SAP Research. This partnership leverages the know how about African business processes with best practices in software engineering also reflecting the expertise of a consortium of further European technology providers. Further work is driven by more extensive application development and field experimentation. This also includes the co-development of common tools and services with other European Living Labs, e.g. Homokhátság, Hungary. Other activities concentrate on the establishment of local focus groups that allow for even quicker end user feedback cycles. The activities of the Sekhukhune RLL as well as the learning here obtained also has the potential of paving the way for an African Network of Living Labs (ANoLL) – a topic that will be explored at the IST Africa 2008 conference and to which we would like to invite all interested parties (African as well as EU) to make a contribution. In case of the Sekhukhune RLL we’re currently exploring the additional value and potential synergies in cooperating with the Limpopo LL [19] that focuses on the planning and policy aspect of SME incubation.
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