This description of a consulting client's problems will no doubt sound familiar.
Too much money is tied up in finished-goods inventory, causing tremendous compression on the client's financial viability. Although the business generates about US $100 million a year in revenue, the collapse in consumer demand that began in 2008 continues, not least because this business offers expensive, high-end home furnishing accessories. Market requirements are shifting at an ever-increasing rate, and the internal processes that are well established in this business are not designed for agility and responsiveness.
But that's where the familiar story ends. What this business is facing isn't really a typical set of challenges. The consulting client is halfway around the world, and landlocked. Rather than a stand-alone business, the client is an entire integrated industry vertical at the national level. Unlike turnaround opportunities inside of a single corporation, concerted action in this instance will require the alignment of first dozens and then hundreds of independent actors. This industry's competitors are not individual organizations but comparable industry verticals of other sovereign states, which in some cases don't like each other very much. It's a not-so-friendly environment: Sometimes bombs go off, armored vehicles are a common sight, and the muttering of conspiracy theories is incessant. There's been shooting going on for decades, and "rule of law" is questionable, more of an aspiration than a reality. Corruption is endemic.
What we are describing is the Afghan hand-knotted carpet industry. To revive that industry, working hand-in-hand with the Export Promotion Agency of Afghanistan, we signed up for an adventure. And, believe it or not, it has a happy ending.
An opportunity lost
Many people today know of Afghanistan only in the context of today's news, but the country has a rich history. Alexander the Great passed through more than 2,300 years ago. Fifteen hundred years later, the explorer Marco Polo transited via the Silk Road. Through the centuries, a rich and diverse cultural heritage, including the art of designing and producing hand-knotted rugs, passed down the generations.
Carpets are one of Afghanistan's best-known exports. They are prized for their rich history and quality by sophisticated buyers in North America, Europe, and China. The distinctive attributes of Afghan carpets—the quality of the domestic wool, natural dyes, weave technique, rich designs—create a substantial reservoir of consumer loyalty and brand credibility.
Today, the carpet industry is a major direct and indirect contributor to employment in Afghanistan. According to statistics published by the Afghan Ministry of Commerce, as well as estimates from various nongovernmental organizations (NGOs), approximately 10 percent, and perhaps more, of the Afghan work force is involved in the carpet trade. Hand-knotted carpets are vital engines of prosperity.
Yet, despite the rich history, and despite the favorable identity in the marketplace, the Afghan hand-knotted carpet industry is in trouble.
Over the past six years export sales of Afghan carpets have declined by an estimated 50 percent due to poor economic conditions in Western markets and emerging competition from better organized, more strongly supported exporters in neighboring countries. Given the turmoil Afghanistan has experienced over the past 30 years, it is a testament to the tenacity of the stewards of the carpet industry that the industry is alive at all.
While Afghanistan was consumed by internal strife, the international competitive landscape changed. Wage rates in Turkey rose, and as a result, the carpet industry there contracted. Sanctions on Iran closed off that country's access to Western markets, causing its market share for hand-knotted carpets to sharply decline. The civil strife in Afghanistan, not just over the past six years but also over the past four decades, prevented the producers there from taking advantage of Turkey's and Iran's misfortunes. Seeing an opportunity, Pakistan developed a national capacity, and India roared onto the global stage, with both countries filling the gap while the producers in Afghanistan worried about survival.
The demand side of the high-end, handmade-carpet market started acting differently, too. Traditionally, weavers produced carpets using heritage designs passed down through the generations. Wholesalers and brokers bought bundles of similar carpets in Afghanistan and brought them to global markets, selling them to retailers of "oriental rugs" around the world. However, with the rise of the Internet, international buyers began to send their own designs for custom hand-knotted carpets to producers.
Unfortunately for the Afghan producers, many Afghan-made carpets are exported in raw work-in-process form, finished elsewhere, and then remarketed, with much of the revenue never making its way to the carpet weavers themselves. A rug may be labeled as a Pakistani rug, or a Turkish rug, but it really is an Afghan rug. This is disintermediation on a global scale, as Afghan producers have lost direct connection with global markets.
Raw materials are also a problem. Decades of war have decimated sheep herds. Not only has the number of animals dropped, but due to security issues, producers also have suffered disruption of irrigation systems and loss of grazing lands. The genetic purity of the sheep has also been affected, and certain shades of wool have been lost. In response, imports of wool have risen. And access to chemicals needed for washing, which gives the carpets a particular look, has been disrupted.
Because Afghanistan is a landlocked country, transportation and exporting are problematic. Ground shipments can move to the sea via Iran or Pakistan, or move overland via central Asia. All of these routes are challenged. Iran, for obvious reasons, is unworkable as a route to the West. Pakistan is a national competitor in the carpet markets, so it is no surprise that cargo heading for the port of Karachi often is delayed and disrupted due to paperwork issues. Routes via Central Asia can work for exports to Europe, but they are very slow and costly for North American destinations.
Plan—source—make—deliver.Sift through the business challenges in Afghanistan, and the issues resolve neatly into these basic buckets of supply chain analysis. Fix the supply chain for the industry, and the problems will go away.
But what, exactly, needs to be fixed?
Issues across the supply chain
To find the answer to that question, we began by reviewing 18 published studies of the Afghan carpet industry dating back to 2004. Some had been published by the Afghan government, some had been produced by various projects sponsored by the United States government, and some were associated with projects sponsored by international development organizations. Subject-matter experts with experience in the global carpet industry and supply chain management, as well as recent, relevant experience in Afghanistan, conducted the analysis and evaluation of the studies. We traveled to Afghanistan, traveling about the country on multiple occasions to visit with key carpet industry stakeholders to refine the conclusions we had made based on prior reports.
What emerged was a set of common issues at the national level that need to be addressed across the supply chain—issues like access to credit for working capital, letters of credit, marketing plans, and logistics. We found that there is a need for a sector business strategy at the national level that would include marketing plans, banking and finance development, transportation, and export improvement. There is an opportunity for producers to join together in joint sourcing initiatives to seek economies of scale and leverage in the procurement of common inputs (wool, dyes, and transportation are the most obvious opportunities). And, of course, to address these issues there is a need for a comprehensive training program to fill knowledge gaps.
Many firms in the Afghan carpet industry are not capable, on their own, of marketing the Afghan carpet brand, getting to scale in logistics and financing, addressing issues related to the sourcing of wool, or developing the sophistication required to address these problems at a national scale, all so important in meeting international market expectations.
In international development-assistance projects, the ultimate objective is host nation "capacity development." It isn't enough to simply tackle the issues. The focus has to be on strengthening local abilities, networks, skills, organizational capability, and knowledge base, so that when the advisors depart, the local stakeholders can continue to move the project forward. While the catalyst for capacity development is often an international intervention, if a development initiative is to succeed it cannot be owned or driven from the outside.
The goal of the Afghan carpet project, then, is not to simply resolve problems. Rather, it is to build the capacity of the Afghan carpet industry to take the initiative and drive progress. To make that happen, all we needed to do was bring together all of the key stakeholders, get buy-in on the approach, organize and align their efforts, and then step back and let them take control ... in the middle of a war zone, with the Taliban on the loose, relying on a national government in danger of falling apart during the course of an election, and without the ability to safely visit some key regions and producers.
This was going to be a challenge, to put it mildly.
An idea is born
In March 2014, at the Serena Hotel in Kabul, we sat down for dinner. At the time, the Serena was one of the hotels favored by Westerners and Afghan government officials. Getting into the hotel requires passing through formidable security, but it is worth the inconvenience. Good food, tranquil atmosphere, and above all a feeling of security, not easy to come by in Kabul.
At the head of the table sat Ms. Najlla Habibyar, the director of the Export Promotion Agency of Afghanistan (EPAA). What emerged from that dinner conversation was the Afghan Carpet Organization For Excellence (ACOFE), a not-for-profit cooperative designed to bring the Afghan carpet community together to address the barriers to developing a profitable, healthy, inclusive industry that would increase employment, revenue, and exports. Ms. Habibyar would chair the organization, clearly demonstrating the Afghan government's support to international markets. She would be joined on the board by six leaders from the country's carpet export community.
The main objective of a collaborative effort organized around suppliers, like ACOFE, is to operate in the best long-term interests of the producers. By smoothing supply chain irregularities, addressing common needs across a pool of participants, and in some cases operating like a business cartel, a collaborative can deliver value that would otherwise be beyond the reach of individual participants.
ACOFE is also leveraging the power of a public-private partnership (PPP). A PPP is a government service or private business venture that is funded and operated through a partnership between government and one or more private sector companies. PPPs involve an agreement between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical, and operational risk in the project. The extent of a government's contributions and responsibilities vary and can involve something as simple as a public endorsement or as complex as substantial financial involvement and technical support (but with the government clearly in a supporting, not a leading, role). Government support for a PPP may also be in-kind, notably the transfer of existing assets.
It's a mutually beneficial arrangement. PPPs enable the public sector to harness the expertise and efficiencies that the private sector can bring to bear. Joining with the government, meanwhile, allows the private sector to leverage the power, reach, and authority of the government.
In the case of ACOFE, the idea born at the Serena was for the Afghan government—specifically the Export Promotion Agency of Afghanistan—to provide offices, furniture, and utilities at its compound for ACOFE. ACOFE would be chartered as a not-for-profit NGO, an independent entity acting on behalf of industry with both private industry and government support.
This plan makes sense on many levels. The co-location approach provides a visible and tangible expression of the government's endorsement of ACOFE. Teaming the ACOFE cooperative with EPAA also secures the direct involvement and sponsorship of an effective and respected directorate in the government. The PPP structure demonstrates private sector control to avoid the risk of government control in a country known for institutional corruption. And because the PPP operates outside of direct government control, it provides ACOFE the freedom to operate like a business, not a bureaucracy.
Optimism reigned. A purpose had been defined, a cooperative would be formed, and the members recruited to the cooperative would work collaboratively to define the specific initiatives that could accomplish that objective. From a capacity development perspective, a point of inflection had been crossed, and a new beginning for the carpet industry had come into focus with Nowruz, the New Year's celebration, just days away.
Two nights later Ms. Habibyar returned to the Serena, to take part in a celebration with friends marking Nowruz. Just after she left, the Taliban decided to mark Nowruz at the Serena, too. Four teenage gunmen entered the hotel restaurant, opening fire with handguns against patrons and sparking a three-hour standoff with Afghan security forces. At least nine people were reported killed in the assault, including five Afghans and four foreigners.
Such is life in Afghanistan. Nothing is ever easy. We never returned to the Serena.
The plan for economic sustainability
No matter how compelling the idea, it has to be paid for. Over the course of the past decade, the standard approach in Afghanistan has been to rely on donor-funded initiatives. But times are changing, and the West is going home. The British Army has left, the German Army has left, and U.S. troops are closing bases and have receded to an advisory role.
With donor involvement and the Western presence in Afghanistan diminishing, ACOFE must make itself sustainable in the long run. To do that, it must create a set of benefits that stimulates participation and involvement. It must deliver value to members by using member-driven initiatives to establish a viable revenue stream to sustain it over the coming years. Somehow, the revenue-generating activities must concurrently accomplish the primary purpose of ACOFE, which is to resolve the common issues across the hand-woven carpet industry.
Those common issues all map back to the supply chain. The activities needed to address the common issues—a potential portfolio of member services—can all be configured to deliver revenue to ACOFE:
Refining the idea launched at the Serena Hotel and transforming ACOFE into a sustainable enterprise requires the development of a portfolio of member services that will be exclusive to ACOFE, thus creating a compelling value proposition that will attract new members. These member services could be packaged and promoted in a way that allows participants to understand the advantages and to see immediate benefit. While it is far from clear which member benefits will ultimately be adopted by ACOFE, member services will provide a potentially rich source of revenue to support the cooperative's activities.
Membership dues are the most immediately available source of income, but logistics and sourcing activities are also anticipated to be near-term revenue generators for ACOFE. For international shipments, volume will be pooled, with the co-op taking a percentage of the value of all transactions. Proposals have already been received from two internationally recognized logistics companies. Finding common sources for wool, cotton, and chemical dyes will allow individual ACOFE members to achieve the benefit of volume pricing, applying classic strategic sourcing approaches. Even with the percentage paid to ACOFE, costs for the individual producers will be lower than if each participant were to strike its own deal.
ACOFE takes shape
Over the course of the Afghan spring and summer, the shape of ACOFE emerged. Working with the stakeholders, drinking countless cups of tea in a well-guarded coffee shop interspersed with low-profile meetings around Kabul, ACOFE began organizing as a cooperative. It would serve as an integrating body to address the common issues across the supply chain, and as a focal point for capacity building and economic growth in the carpet sector.
The challenge in all this was not in identifying solutions; everyone involved understood the nature of the supply chain problems and what needed to be done to address them. The challenge was in recruiting and training a group of Afghan leaders to join ACOFE in leadership roles, and then to lead the execution. After a careful search that was achieved, and the ACOFE office opened in Kabul, within the EPAA compound.
In July of 2014, at a news conference co-hosted by ACOFE and EPAA, the establishment of ACOFE was announced. Structured workshops served to transfer knowledge and establish core capabilities. Networking events engaged participants directly with banks, international logistics firms, and Western buyers. International study tours to China, India, and Dubai, sponsored by Western organizations, exposed Afghan carpet industry participants to global best practices and helped to knit together the participants into an effective team.
Over the course of the summer dozens of the industry's leading producers were actively involved in ACOFE, and training classes in marketing, accounting, and meetings management were delivered in Kabul, Herat, and Mazar-i-Sharif. By November of 2014, ACOFE had evolved from an idea to a functioning working group.
A big step forward
At the end of the last Western-sponsored study tour, in November of 2014 in Dubai, ACOFE demonstrated that it was ready to take control of its own destiny. The members of the board of directors scheduled an executive session, and they specifically excluded participation by the Western advisors. At the end of that discussion, the Westerners were invited to return and were informed of the board's decisions.
ACOFE's board recognized that despite the emergence of China as a market, the global center of demand remains in the United States and Western Europe. So the board decided to prioritize reconnecting the Afghan hand-woven carpet industry with the supply chain leading to Western markets, as well as developing appropriate marketing and promotion plans. This would allow ACOFE to launch a membership-recruiting plan with a specific value proposition for prospective members: access to Western markets. Once initial membership reached critical mass, the board would initiate a national logistics contract, which included establishing pooled drop points in Kabul, Herat, and Mazar-i-Sharif, to allow members to cost-effectively ship to Western markets. The board decided to defer additional training events as well as activity on joint sourcing and banking.
We believe that what the board members decided ACOFE would or would not do was not the most important outcome from the Dubai meeting. What is most important is that the cooperative's board of directors acted as leaders, taking the helm, making some key decisions, and charting the path forward. They were in control. The Westerners were no longer the impetus.
There is hope, and we are more optimistic than ever. The goal of any economic development project in a challenging environment is to develop host nation capacity, a capacity that can lead the country into the future. The first steps may be baby steps, but before you can run, you first need to be able to walk.
In Dubai, ACOFE started walking, a happy ending indeed.
Steve Geary is adjunct faculty at the University of Tennessee's Haaslam College of Business and is a lecturer at The Gordon Institute at Tufts University. He is the President of the Supply Chain Visions family of companies, consultancies that work across the government sector. Steve is a contributing editor at DC Velocity, and editor-at-large for CSCMP's Supply Chain Quarterly.