A general perception that the term ‘supply chain management (SCM)’ creates is that practically every product that reaches an end-user goes through a well-calculated and estimated process. From the rice that we consume each day to the drinks we choose, everything is delivered to us through several processes, all aligned in the supply chain. The […]
A general perception that the term ‘supply chain management (SCM)’ creates is that practically every product that reaches an end-user goes through a well-calculated and estimated process. From the rice that we consume each day to the drinks we choose, everything is delivered to us through several processes, all aligned in the supply chain.
The supply chain system binds components like production, distribution, storage, import, and export together. It is, thus, observable that the SCM has a cascading impact on almost all aspects of the trade. This makes it obvious that if the SCM is faulty, a country’s progress is almost impossible. As Nepal strives for economic growth, growing competence in this area by improving the linkages of various components of the sector is vital. However, the problems facing SCM in Nepal is as straightforward as it is profound: supply chain bottlenecks.
Supply Chain Bottlenecks
Nepal, at present, is pushing for good infrastructure. However, hovering above the country’s infrastructural development are supply chain bottlenecks.
A supply chain majorly consists of eight components, namely, planning, information, source, inventory management, production, location, transportation, and return of goods. While the rest of the world is looking for extending the efficiency of the supply chain, Nepal is still struggling to keep up with the interdependency between each of these components resulting in the incapability of achieving the bottom line i.e. profit.
In Nepal’s context, the Gross Domestic Product (GDP) has been increasing and the share of the manufacturing sector to GDP has risen to NPR 56, 018 million (USD 4.9 million) in 2018 from NPR 36, 364 million (USD 3.2 million) in 2001.
While the manufacturing sector has been rising, one of the most significant hassles facing the sector is that the supply chain lacks the same pace of growth.
For instance, there are 100,890 nurseries (both government and private) all over Nepal for the production of apples, which is one of the high-value priority commodities. Nevertheless, producers lack appropriate information about the market, packaging materials, logistics, and storage and processing facilities. As a result, apples are not graded and all shapes and sizes of apples are packed in beer cartons and carried to markets. Moreover, the transportation costs are high due to lack of transportation facilities. Overall, the components of the supply chain lack interdependency and are not cost-effective as well.
As stated, transport and logistics are one of the many components of the supply chain. Due to the poor road condition affecting the transportation of goods and the ‘godown’ concept of storing goods without any systematic segregation based on the nature of the items, some significant issues have been arising in the supply chain.
A measure of understanding logistics management in the nation is comparing it with the global rankings. Nepal ranks 114th out of 160 countries in the World Bank’s latest Global Logistics Performance Index (LPI) Report.
Source: The World Bank, International LPI
The logistics component has escalated in rankings due to progress witnessed in customs procedures, trade logistics quality, timeliness delivery, and tracking and tracing system.[i] However, the lack of organized transportation routes, increasing traffic at ports, lack of full-fledged operation of check posts and excessive documentation process are still the main drivers behind the delay as these issues hinder the possibility of change and socio-economic growth of manufacturing industries.[ii]
Further, the local authorities intervene in the supply chain links and the lack of relevant stakeholders to monitor the supply chain stifles the supply chain and trade potential. These gaps in the supply chain act as hindrances for actualizing the capacity.
Crude awakening- A Post-Earthquake Perspective
Nepal Earthquake 2015 caused enormous destruction, killing approximately 9000 people and incurring losses in the range from USD 6 billion to USD 10 billion i.e. approximately 25% of GDP.[iii] Catastrophes like this pose quantifiable risks and given the economic and financial status of Nepal, the opinions that flooded during the post-earthquake reconstruction days brought forth a crude awakening among the Nepalis regarding the SCM issues.
After the earthquake, reconstruction became a big concern because a gap started to emerge between the demand and supply of construction materials. Massive amounts of construction materials were required but a robust SCM strategy to manage the supply of materials was missing. There was an insufficiency in the level of supply capacity of non-local and local construction materials. The quality of local materials was concerning and the price for non-local materials was very high due to high dependency on imported raw materials, power outage and shortage of labours.[iv] The gap further widened by the change in people’s preferences for types of buildings post the earthquake. Besides the supply of construction materials, the earthquake revealed three other weaknesses in the SCM strategy of Nepal.
Firstly, the SCM ecosystem requires deporting and mobilizing the skilled workforce to ensure that reconstruction programs followed the building code. A major problem encountered in this aspect was an initial lack of trained workforce and government engineer-inspectors, as well as knowledge regarding earthquake-resistant technology because it had never been considered as an integral part of the general engineering/ supply chain education in Nepal.[v]
The second factor is the poor distribution system leading to an increase in prices. A major percentage of the supply of goods in Nepal by manufacturing companies (like cement, TMT bars, etc.) is generally done to regional construction companies, followed by district and local suppliers such as the small hardware shops. However, due to the poor distribution system within the country, the supply chain components like transportation and margin of regional suppliers raised fares haphazardly. During the post-earthquake reconstruction phase, the price for TMT bars, for instance, varied greatly from manufacturer’s level (NPR 68 per kg) to regional level (NPR 90 per kg). Moreover, the inability of transport unions to accommodate all transporters also pushed transportation costs to NPR 125/km even.[vi]
The practice of not insuring goods while travelling through the supply chain was the third challenge acknowledged.[vii] For instance, around 46.2% transporters are not members of transport unions and the union has accommodated not all transporters. This is why, when there were pieces of evidence of breakdowns of vehicles post-earthquake due to bad road condition the transportation losses accounted for around 2%.[viii] Hence, it was evident that the supply chain strategy of Nepal is not coordinated with the components involved in the supply chain process. The need for a flexible supply chain capable of adjusting as per the environmental, technological and other significant changes was, thus, realized at a time of haphazard movement and changing priorities of people.
The Way Forward
The SCM system of our country is poor, majorly due to the supply chain bottlenecks, lack of coordination between the components of supply chain and also due to some of the faulty principles it is based on since the existing SCM does not provide sustainable and long term solutions.
A realistic starting point is to acknowledge the low standard of materials supplied in the country as well as lack of competitiveness among the components of SCM and address the importance of excellent products with international standard and cost-effective service delivery. More precisely, importance should be given to enhancing national capacity and leadership in each of the components of the supply chain and developing a global coordination mechanism to put the components in place. Moving towards increasing visibility and availability of the stock of goods rather than outdated notions of the ‘godown’ concept is also needed.[ix] Such a change in the management and approach of SCM is likely to help Nepal’s production and supply smoother in the future.
References:
[i] The Kathmandu Post. (2018, July 30). Issues in logistics management stifle Nepal’s trade potential. The Kathmandu Post. Retrieved July 30, 2019, from https://kathmandupost.com/money/2018/07/30/issues-in-logistics-management-stifle-nepals-trade-potential
[iii] OECD. (2015). Disaster Risk Financing: A Global Survey of Practices and Challenges. Paris: OECD Publishing. Retrieved from http://dx.doi.org/10.1787/9789264234246-en
[iv] Practical Action. (2016). Supply Chain of Construction Materials in Earthquake Affected Districts: An assessment in Nuwakot and Rasuwa.
[v] Sharma, K., KC, A., Subedi, M., & Pokharel, B. (2018, August 25). Challenges for reconstruction after Mw7.8 Gorkha earthquake: A study on a devastated area of Nepal. Geomatics, Natural Hazards, and Risk, 9(1), 760-790. Retrieved from https://doi.org/10.1080/19475705.2018.1480535
[vi] Ibid [iv]
[vii] Ibid [iv]
[viii] Ibid [v]
[ix] Gehlot, A. K. (2019, January 22). Globalization, Supply Chain, Logistics, and Nepal. New Business Age. Retrieved July 31, 2019, from http://www.newbusinessage.com/MagazineArticles/view/2365
Nasala Maharjan is a Bachelor's in Business Administration (BBA Honors) graduate from Kathmandu University with a major in Finance. She is mostly interested in researching and writing about economic development and contemporary issues in Nepal. She joined Nepal Economic Forum (NEF) as a Research Fellow in 2019 and is currently a beed at beed management.