On the Viability of Fixing Leaky Supply Chains for the Poor Through Benefit Transfers: A Call for Joint Distribution

• DOI: http://doi.org/10.1111/jbl.12189
• Date: 01 June 2019
• Author: Shashank Rao,Rahul Nilakantan,Kang Bok Lee,Deepak Iyengar
• Published date: 01 June 2019

On the Viability of Fixing Leaky Supply Chains for the Poor

Through Benefit Transfers: A Call for Joint Distribution

Shashank Rao

1

, Rahul Nilakantan

2

, Deepak Iyengar

3

, and Kang Bok Lee

1

1

Harbert College of Business, Auburn University

2

Indian Institute of Management Indore

3

Barney Barnett School of Business and Free Enterprise, Florida Southern College

Supply chain managers have yet to solve the conundrum of profitably distributing and selling to the poorest consumers. Most prevailing

methods of addressing this problem take one of two contrasting approaches—that is, (1) price subsidization or (2) benefits/cash transfers.

The former has been heavily studied in the literature with the consensus being that it is highly inefficient and prone to leaks. We investigate the

viability of the latter by focusing on how branching out to reach the poorest customers impacts the performance of banks. Results indicate that

the impacts of this approach are deleterious, thereby questioning its commercial scalability. Therefore, we argue that this approach may also

have only limited potential in terms of being an effective, large-scale solution to the problem of access for the poor. Instead, a third approach

to achieve scalable Bottom of the Pyramid growth and development needs to be considered—cultivating partnerships through joint distribution.

Keywords: transfer programs; branch network; sustainable growth; leaky supply chains; partnerships

INTRODUCTION

According to the World Bank, nearly half of the world’s popula-

tion lives in rural, underserved areas, and out of these, nearly

80% are poor. These populations constitute the so-called Bottom

of the Pyramid (BOP)—a phrase describing that segment of the

population who lack access to basic goods and services. It has

been suggested that this group of people earn the equivalent of

just a few dollars a day (Banerjee and Duflo 2007). In fact, the

rates of rural inequity in some countries are so dire that a com-

mon approach in the literature is to assume that entire rural pop-

ulations in some countries fall under this category (Whitney and

Kelkar 2004; Schwittay 2009; Zala and Patel 2009).

In several places, attempts have been made to improve the

quality of life of these populations. Often these initiatives

involve some form of joint public–private participation. The

guiding principle behind such programs for the private sector has

been that as value is created for these sections of the society,

organizations serving them will also find value and thereby bene-

fit from increased market penetration (London et al. 2010). This

in turn can lead to the twin goals of commercial profitability and

social development while serving the BOP (Kuriyan et al. 2008).

While in a few cases, private enterprises have been able to do

this mostly on their own (Hart 2005), in a majority of instances,

some public-sector involvement has been critical (Varman et al.

2012).

One of the most common and time-tested approaches by

which the public sector gets involved in such initiatives is

through price subsidization (PS)—trying to keep market prices of

certain goods and services in BOP markets low, in order to

increase their affordability to low-income buyers (Sodhi and

Tang 2016). In such cases, governmental involvement (and often,

government-controlled distribution systems) partially meets the

price of supplying the product to such markets, and the buyer is

left to pay a reduced share of the cost, thereby increasing afford-

ability, and by extension, demand. Therefore, this approach can

be considered a push-based distribution approach that focuses on

pushing cost-sheltered products through the distribution channel.

In addition, however, an alternative approach has now also

emerged. Often called direct benefits/direct cash transfer (DBT),

it involves the subsidizing agency/government directly transfer-

ring cash to a recipient, who can then use it for designated pur-

poses (Rawlings and Rubio 2005; Bourguignon et al. 2008). In

contrast to the supply-side programs such as price subsidizing,

such programs try to grow the low-income market through de-

mand creation by providing purchasing power to poor consumers

(de Janvry and Sadoulet 2006). The immediate impact of such

programs is to capitalize on the income effect—that is, increased

finances available to the poorest consumers should increase con-

sumption spending, which in turn should prompt the private sec-

tor to find this market attractive. Essentially, as private

companies realize that the previously poor now have purchasing

power, the belief is that they will deem it profitable to sell to

them. Therefore, such programs represent a substantive change

in the approach to BOP development by moving from a pure

supply channel of subsidized products to a demand-based chan-

nel built around market mediation through a modification of the

consumers’ability to pay (e.g., Selen and Soliman 2002; De Tre-

ville et al. 2004).

While the DBT approach is intriguing and offers the promise

of a workable solution to an old problem, it is not completely

free of challenges either. One major concern has been that it cre-

ates increased dependence on a formal banking channel, given

the need for beneficiaries to have bank accounts in order to

receive the transferred benefits (Mundle 2016). This has

prompted regulatory or commercial environments wherein banks

are sometimes mandated to branch into underserved markets

(Besley 1995). While such mandates may have value from a

social standpoint, their commercial viability is subject to

Corresponding author:

Shashank Rao, Supply Chain Management and Information Systems,

Harbert College of Business, Lowder Hall, Auburn University,

Auburn, AL 36849, USA; E-mail: Shashank.rao@auburn.edu

Journal of Business Logistics, 2019, 40(2): 145–160 doi: 10.1111/jbl.12189

© 2018 Council of Supply Chain Management Professionals

speculation. Unfortunately, extant research does not provide

much clarity at this point either. While some scholarship has

looked into the impact of a bank’s branching/geographic reach

on profitability (e.g., Hirtle 2007; Hirtle and Stiroh 2007), this

work has largely been concentrated in developed markets and the

extent to which the same would translate into BOP markets is

unknown.

Our study seeks to address an issue fundamental to DBT’s

large-scale rollout as a viable alternative to PS. We contend that if

DBT is to serve as a viable large-scale alternative to the supply

challenges presented by PS, banks need to be able to provide the

background infrastructure to make it happen. And yet they are

unlikely to want to do it unless they can do it profitably. Therefore,

if bank branching at the BOP can be shown to be profitable for

banks, then DBT can indeed serve as a viable solution to the sup-

ply chain and distribution challenges of PS. However, if this is not

the case, then other alternative approaches to this issue of BOP

access will need to be investigated, including opportunities for cost

reduction through joint distribution (Sodhi and Tang 2016) and

partnerships (Lambert 2014). Therefore, this article addresses the

commercial viability of a financial-flow-based solution to a very

pressing supply challenge by answering the research question—

How does increased geographic reach of banks through branching

in low-income markets impact their performance?

This article addresses the Special Topic Forum’s call by exam-

ining the viability of a unique theoretical framework in logistics

and supply chain management (LSCM) related to providing

products to the BOP. Indeed, it has been suggested that SCM

involves the overall management of three bidirectional flows—

products/services, information, and financial resources (Mentzer

et al. 2001). Yet a preponderance of scholarship in SCM

focusses on directly addressing the first of these flows—that is,

products. This is especially true with respect to solutions for the

BOP, since most traditional approaches focus on distributing

goods to BOP consumers in a highly cost-sheltered/subsidized

manner and evaluating the commercial viability of the same

(e.g., Rangan et al. 2011; Mehta and Jha 2014). In contrast to

prior approaches, our focus is on the commercial viability of an

alternative solution for BOP development (i.e., financial flow

management). Therefore, this article is positioned at the intersec-

tion of the disciplines of SCM and Finance—an emerging area

of interest for SCM scholars (e.g., Pfohl and Gomm 2009; Hof-

mann and Kotzab 2010; Sanders and Wagner 2011; Wuttke et al.

2013; Gelsomino et al. 2016).

LITERATURE REVIEW AND RESEARCH CONTEXT

Any initiative to turn the BOP into a viable marketplace has to

capitalize on the income effect—an economic principle which

proposes that consumption patterns are enhanced by an increase

in a consumer’s real income and depressed by a reduction in it.

This real income change can come either by way of changing

the price that a customer pays for the goods (e.g., price subsi-

dization), or by changing the amount of money they have avail-

able. Traditional approaches (e.g., price control and

subsidization) have usually concentrated on the former, with lim-

ited long-term success. Because of this, the latter approach seems

to be gaining the interest of scholars and practitioners of late.

Price subsidization at the BOP—supply chain challenges

Even the initial writings that brought BOP into the mainstream

discourse acknowledged that the leading barrier to doing busi-

ness at the BOP was the complex physical distribution and

logistics required to get products to these places (Prahalad and

Hart 2002). Several factors contribute to this problem—small

pack sizes, low margins, and lack of physical infrastructure to

house and distribute goods (Prahalad 2009; Karamchandani

et al. 2011; Sodhi and Tang 2016). In addition, because this

population is often geographically dispersed, the cost of serving

them is even higher than it would otherwise be (Karnani 2007;

London et al. 2011). Finally, given lack of purchasing power,

transactions in this segment represent too low an amount to

generate the scale economy needed for companies to build effi-

cient distribution systems (Karamchandani et al. 2011). All of

this means that direct entry into such low-income markets often

involves high setup/fixed costs of establishing a brand new

supply chain, and it is therefore rather hard for companies to

do it profitably. As a result, only a few major companies

attempt to navigate these headwinds and sell to this segment

(Schwittay et al. 2011; Simanis 2012; Kolk et al. 2014).

Instead, most companies that engage with the BOP in the

absence of external support tend to do so either as part of their

corporate social responsibility or charity programs (Simanis and

Milstein 2012; Fawcett and Waller 2015; Sodhi and Tang

2016).

One of the most common avenues by which such markets do

get access to goods and services typically involves some form of

governmental/public-sector involvement (Perez-Aleman and

Sandilands 2008). For example, Rangan et al. (2011) argue that

“in the extreme-poverty segment, where delivering basic services

such as water, sanitation, health care, and education requires

heavy investments, companies have little choice but to enter into

public–private partnerships that provide guarantees on cost

recovery, subsidies, and market exclusivity”(p. 117). Indeed, it

has been pointed out that a substantial portion of current BOP

initiatives exists because of such governmental or nonprofit

involvement (Johnson 2007; Kolk et al. 2014).

Such initiatives are, however, often problematic because by

their very nature, a price differential is embedded into the phys-

ical delivery of the product. Given that goods are sold to the

BOP at a price that is below the open-market price, there is an

artificial market distortion, which in turn provides opportunities

for arbitrage, supply-diversion, and profiteering (Mundle 2016).

As a result, such large-scale programs are plagued with corrup-

tion and pilferage—also sometimes called leakages (Mehta and

Jha 2014; Chakrabarti et al. 2016). For example, in the Public

Distribution System of India—the world’s largest such subsi-

dized product distribution program for the poor—it has been

estimated that nearly 42% of the products in the supply chain

are leaked and sold elsewhere at full price (Dreze and Khera

2015). Similarly, it has been argued that only about 60% of

subsidized fuel intended for BOP consumers in India reaches

the end-consumer, and the rest is leaked (Shenoy 2010), and in

the Philippines Rice Subsidy Program, it has been estimated

that nearly 48% of subsidized rice is leaked out of the distribu-

tion channel and sent to unintended recipients (Mehta and Jha

2014).

146 S. Rao et al.