“System D” and Global Supply Chain Risk

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Back in January 2011 Wired Magazine ran an outstanding piece by Robert Capps, in which he interviews the journalist Robert Neuwirth about his book, Stealth of Nations: The Global Rise of the Informal Economy. 

Neuwirth explains how we came to call such supply chains “System D:”

There’s a French word for someone who’s self-reliant or ingenious: “débrouillard.” This got sort of mutated in the postcolonial areas of Africa and the Caribbean to refer to the street economy, which is called “l’économie de la débrouillardise”—the self-reliance economy, or the DIY economy, if you will. I decided to use this term myself—shortening it to “System D” —because it’s a less pejorative way of referring to what has traditionally been called the informal economy or black market or even underground economy. I’m basically using the term to refer to all the economic activity that flies under the radar of government. So, unregistered, unregulated, untaxed, but not outright criminal—I don’t include gun-running, drugs, human trafficking, or things like that.

In re-reading the piece again today I was struck by not just the great analysis of how “grey/black” supply chains develop and operate but also how they often seamlessly interlink with what I guess in Neuwith’s terminology would be “white supply chains” which are legal and operate within the frameworks of local and international laws.

In the piece, Neuwith notes this example:

“Procter & Gamble, Unilever, Colgate-Palmolive: They sell lots of products through the little unregistered and unlicensed stores in the developing world. And they want their products in those stores, because that’s where the customers are.

Wired: How does that work?

Neuwirth: Basically, they hire a middleman. Procter & Gamble, for instance, realized that although Walmart is its single largest customer, System D outposts, when you total them up, actually account for more business. So Procter & Gamble decided to get its products into those stores. In each country, P&G hires a local distributor—sometimes several layers of local distributors—to get the product from a legal, formal, tax-paying company to a company willing to deal with unlicensed vendors who don’t pay taxes. That’s how Procter & Gamble gets Downy fabric softener, Tide laundry detergent, and all manner of other goods into the squatter communities of the developing world. Today, in aggregate, these markets make up the largest percentage of the company’s sales worldwide.

Anyone who has spent time working in the developing world will instantly recognize System D. In most of South America, for example, “named” manufacturers seamless distribute products and services through local entities that are often not a part of the formal economy. And even when they are in structure, in operating model they move fluidly between legal/formal and non-legal/informal channels. Indeed, given the oppressive regulatory regimes that affect these countries, commerce would almost be impossible in many cases without System D agents. Thus, in one sense these operators and networks, as Neuwirth illustrates, are a vital part of the last/first mile of many global supply chains.

However, with that point of view one wonders just what level of exposure risk a given company takes on when it connects it’s “white” supply chain with a “grey/black” one in Uruguay, Nigeria or India? Most companies have a hard enough time valuing and managing the risk in the networks they control or contract, never mind the kind of dynamic and semi-legal structures that define System D. Moreover, as these structures are not, as some might think, limited to one particular industry or another, supply chain strategist and risk manager should pause for a moment and ask themselves how much of their global network relies on System D and what kind of risk exposure, seen or unseen, such arrangements introduce into their global operations.

Note: The entire interview is at http://www.wired.com/magazine/2011/12/mf_neuwirth_qa/?utm_source=twitter&utm_medium=socialmedia&utm_campaign=twitterclickthru

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