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Integrated Value Chain Analysis


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  • 1. An Overview of the Integrated Value Chain Analysis™ Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC™
  • 2.
    • Sectors Presented
    • Cut Flowers (Roses)
    • Cotton-to-Garments (Polo Shirt)
    • Skins-to-Leather Shoe
    • Housing/Road Construction
  • 3. Value Chain Analysis for Cut Flowers (Roses)
  • 4. Market Opportunities and Characteristics
    • Fierce Competition with downward price trends
    • Stricter breeders’ rights as well as environmental and social codes of conduct increasingly important
    • In some countries, such as the UK, increased importance of supermarket (direct sales) distribution channels
    Cut Flowers Roses Ethiopian Exports (Roses): $10 million (2005) Global Demand (Cut flowers/buds) $12.3 billion (2005)
  • 5. Key Findings from the Value Chain Analysis
    • Farming with self propagated material or in hydroponics media both provides superior cost competitiveness via reduced plant material cost and higher yields
    Cut Flowers Roses US$255,683/ha US$0.155/stem 1.65 mil stems/ha US$294,190/ha US$0.150/stem 2.1 mil stems/ha
    • Insufficient coverage of cargo flights exacerbates the already high portion of transportation and marketing cost in the total farm to market value chain
    Farming 24.1% Post-Harvest Handling 1.5% Transport & Marketing 74.4% Farm-to-Market Value Chain for Hydroponics-Grown Roses Farm-to-Market Value Chain for Soil-Grown Roses Farming 24.8% Post-Harvest Handling 1.7% Transport & Marketing 73.5%
  • 6. Cut Flowers Roses
  • 7. Cut Flowers Roses Source: Global Development Solutions, LLC TM Flower Producer Imported Inputs Cut Flower Supply Chain for Ethiopia Local Inputs Imported Input Traders Export Market Dutch Auctions Cargo Export Market Other Passenger Cargo 2/3 1/3 Freight Forwarding Services Cold Storage On-site inspection and customs (MoA, Customs Inspectors) Refrigerated Truck Airport Airlines (EA, KLM, Lufthansa)
  • 8. Cut Flowers Roses Hydroponics vs. Soil Production
  • 9. Cut Flowers Roses Benchmarking Key Characteristics of Rose Production in Ethiopia
  • 10. Key Constraints and Challenges Cut Flowers Roses
    • Poor clearinghouse services
    • Undeveloped network of supporting service providers, especially in the area of insurance and freight forwarding/clearing
    • Nonexistent research and development, at business and public sector level
    • Increased diversification away from direct sales towards Dutch Auctions
  • 11. Actions/Way Forward
    • Increase usage of hydroponics growing medium
    • Increase self-propagation of plant material
    • Increase usage of support services rather than do all marketing by themselves
    • Do not entirely diversify away from direct sales
    Firm Level Industry Level
    • Establish Codes of Conduct
    • Create captive cost-minimizing supply chain structures for fertilizer and other inputs
    • Create industry level linkages with the support industries such as insurance and freight forwarding
    • Create partnerships with the public sector to intensify research and development
    Cut Flowers Roses
  • 12. Actions/Way Forward
    • Establish a working system of breeders’ right protection with eventual membership in the UPOV - gain observer’s status in UPOV as an intermediary step;
    • Establish clearing house facilities at airport and increase cargo freight fleet by Ethiopian Airlines; and
    • Increase spending in research and development.
    Public Sector Cut Flowers Roses
  • 13. Value Chain Analysis for Cotton-to-Garments
  • 14. Market Opportunities and Characteristics Cotton to Garments Polo Shirt Ethiopian Exports (Textiles/Garments): $3.6 million (2005) Global Demand: $183 billion (2005) China: 60% of US Market AGOA: 1.3 billion sme (only 11.7% quota filled)
    • Multiple fashion trends in one season, mass customization and shortened lead times
    • Increased leverage and market power of large retailers who can and do downward price pressures on suppliers
    • Quota removal has removed competitiveness from suppliers relying on quota preferences for market access
    • AGOA window of opportunity narrowing: proliferation of AGOA-type preferential treatment on the part of the USA extended to many countries.
    • Chinese temporarily withdrawal from knit shirt and cotton trouser market, key segment of African apparel exporters
  • 15. Cotton to Garments Polo Shirt
  • 16. Cotton to Garments Polo Shirt Diagram XXX: Value Chain for Exported Polo Shirt, Private Firm, Ethiopia
  • 17. Cotton to Garments Polo Shirt Key Findings from the Value Chain Analysis : An Example of Polo Shirt Production
    • Lack of transparent cost accounting (SOE)
    • Poor labor skills
    • Excise duty on fabrics hamper competitiveness
    • High cotton fabric waste (SOE)
  • 18. Poor Labor Productivity Cotton to Garments Polo Shirt
  • 19. Cotton to Garments Polo Shirt
  • 20. Cotton to Garments Polo Shirt Room for Improving Lint-to-Yarn Conversion Ratio
  • 21. Cotton to Garments Polo Shirt High Cost of Ginning
  • 22. Cotton to Garments Polo Shirt Irrigation – Key to Competitive Cotton Production
  • 23. Cotton to Garments Polo Shirt Need for Improving Farming Practice
  • 24. Key Constraints and Challenges
    • Poor training know-how and non-existent institutional support in the area of skills improvement;
    • Counterproductive Government taxation in the form of VAT and excise duty;
    • Inefficient and wasteful public textile companies unable to supply sufficient quality and quantity of fabric for garment exporters;
    • Cotton lint production dominated by large scale companies with no access to irrigation (private companies) and thus have low cotton yields; and
    • Large scale farms with access to irrigation (mostly SOEs) are challenged by an overburdened administrative overhead cost structure.
    Cotton to Garments Polo Shirt
  • 25. Actions/Way Forward – Garments and Textiles
    • Improve productivity training; and
    • Reduce waste on the part of SOEs both at fabric and textile level.
    Firm Level Industry Level
    • Create research and training centers; and
    • Pool resources for marketing efforts abroad.
    • Privatize textile assets;
    • Remove or reduce excise duty on textiles; and
    • Expedite VAT refunds.
    Public Sector Cotton to Garments Polo Shirt
  • 26. Actions/Way Forward – Cotton
    • Improve farm management and remove OH redundancies at both farms and ginneries;
    • Invest in seed production; and
    • Maintain high GOT levels.
    Firm Level Industry Level
    • Develop market linkage mechanisms to help link the most productive farms (usually irrigated farms) with the most efficient ginners
    Public Sector
    • Extend the irrigation network;
    • Establish and enforce rules for chemical usage at farm level;
    • Increase spending on cotton research; and
    • Stimulate seed sector.
    Cotton to Garments Polo Shirt
  • 27. Value Chain Analysis for Skins-to-Leather Shoes
  • 28. Market Opportunities and Characteristics Leather Shoes Fresh Sheepskin Production Africa (Total): 154,285 MT (8.6% of World Production) Ethiopia: 10,0800 MT Ethiopia’s Export of Dried Salted Skins: 2,888 MT (73.2% of African exports) (6.6% of Global exports)
  • 29. Leather Shoes Raw Sheepskin Supply Chain in Ethiopia: High Waste and Damage
  • 30. Leather Shoes Declining Share of Grade 1-3 and 4 Skins Poor Quality of Skins
  • 31. Leather Shoes High Cost of Wet Blue Production
  • 32. Leather Shoes High Opportunity Cost of Ekek
  • 33. Market Opportunities and Characteristics for Leather Shoes Leather Shoes EU Demand for Shoes: €61.8 billion Sourcing from Developing Countries: 24% - 53% Italy (Largest EU Consumer): 395.3 million pairs/year Ethiopian Production Formal Sector: 1.9 million pairs/year Informal Sector: 3.5 million pairs/year
    • Low capacity to respond to international orders both in quantity and time;
    • Poor finishing due to lack of skilled labor and appropriate technology;
    • Slow responsiveness to change shoe models;
    • High production costs; and
    • Lack of marketing skills.
  • 34. Key Findings from the Value Chain Analysis Leather Shoes
    • High cost of raw material (Birr 79.77/pair)
    • High wastage of material during cutting (15%)
    • High cost of material for lasting and finishing (27.6% of shoe manufacturing)
  • 35. Leather Shoes Poor Labor Productivity High Assembly Costs
  • 36. Key Constraints and Challenges
    • Raw sheepskin
    • Ekek attack(almost 80%of sheepskin from highland Ethiopia) ;
    • Unorganized supply chain in raw sheepskin;
    • Per piece pricing does not reward quality;
    • Poor slaughtering and post slaughter handling; and
    • Low awareness for quality of sheepskin along the entire supply chain.
    • Leather
    • Overall shortage of sheepskin and under capacity operation (48%) and
    • High cost of input raw sheepskin (60% of production cost);
    • Defect of raw sheepskin (80% Ekek , 10%lack of preservation, and 10% lack of proper handling): and
    • Shortage of skilled workers.
    • Shoes
    • High cost of raw material (upper shoe leather 90% of cost);
    • Lack of skilled labor and inflexible technology to respond to market;
    • Dumping of low price and low quality shoes from China; and
    • Low capacity utilization of shoe producers (56%).
    Leather Shoes
  • 37. Actions/Way Forward
    • Install and strengthen the finishing lines in the tanneries;
    • Conduct training of workers; and
    • Improve environmental performance.
    Firm Level Industry Level
    • Establish a quality-based pricing system for sheepskin;
    • Assist improvement and expansion of slaughter houses and raw sheepskin storage;
    • Form Public-Private Partnerships to eradicate Ekek;
    • Arrange supply of semi-finished skin to tanneries that process finished leather so that shortage is avoided and prices normalized.
    Leather Shoes
  • 38. Actions/Way Forward (Cont’)
    • Take immediate action on ekek control and eradication;
    • Strengthen and expand extension services on skin and hide;
    • Give incentive to tanneries that process sheepskin to finished leather;
    • Strengthen LLPT1 as a center of excellence that provides training and conduct R&D to support tanneries;
    • Encourage export of meat and suppress export of live animals;
    • Encourage investment in animal husbandry farms;
    • Expand modern slaughterhouses; and
    • Expand veterinary services.
    Public Sector
  • 39. Value Chain Analysis for Housing and Construction
  • 40. Housing & Road Construction Housing: Profile Building Height: Ground + 6 floors Total Building Area: Multi-family apartment (24 units) 175.23 m² Site Work: 850 m² of asphalt pavement Engineering Estimates
  • 41. Housing & Road Construction Housing Construction Value Chain Construction Phase
  • 42. Housing & Road Construction
  • 43. Housing & Road Construction High Cost of Input Material
  • 44. Housing & Road Construction
  • 45. Housing & Road Construction Low Road Density
  • 46. Key Findings from the Value Chain Analysis (Road)
    • The bulk of the value added comes from construction of the road (90% of the total cost of road construction);
    • The highest cost of construction for base-course (constitutes 48% of road construction work );
    • Quarry rock production activity is the highest (33% of base course cost) during the base-course phase due to high cost of equipment (constitutes 49.37%)
    Housing & Road Construction
  • 47. Housing & Road Construction High Equipment Input Requirement
  • 48. Housing & Road Construction High Cost of Equipment Rental and Finance
  • 49. Key Constraints and Challenges
    • Housing
    • Unavailability of adequate standards and norms;
    • Limited design checking/review and approval procedures;
    • Lack of IT know-how and training;
    • Lack of Standard Contract Documents;
    • Shortage of construction material;
    • Shortage of construction machinery;
    • Scarcity of finance and lack of management skill; and
    • Lack of Building Code.
    • Road
    • Shortage of equipment rental company and high rental cost;
    • Limited access to Finance;
    • Shortage of qualified national engineers and technicians;
    • Lengthy dispute settlement mechanism and lengthy judiciary process;
    • Bureaucratic and lengthy bid analysis practices; and
    • Absence of proper mechanism for addressing material cost escalation.
    Housing & Road Construction
  • 50. Actions/Way Forward
    • Facilitate and provide proper training and capacity building programs to overcome the shortage of skilled human resource to deliver efficient services; and
    • Applying the use of contemporary IT software and equipment.
    Firm Level Industry Level
    • Introduce a mechanism whereby design fees reflect industry wide quality standards; and
    • Implement industry-wide Code of Conduct and certification program to ensure a quality rather than price driven project bidding process.
    Housing & Road Construction
  • 51.
    • Public Sector
    Actions/Way Forward (Cont.)
    • Introducing land policy reforms;
    • Creating favorable loan provisions by banks;
    • Upgrade skills of City Administrations and regional bureaus staff;
    • Reduce prevailing government ownership and control over sales and distribution of major inputs for construction materials such as cement; and
    • Implementing Building Standard Code.
  • 52. An Overview of the Integrated Value Chain Analysis™ Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC™