Sunday, 15 September 2013

Value funnel (in collaboration with Bolaji Ayoola)

Under the right conditions, a car dealer can sell three cars in a day; but no matter how auspicious the conditions, three mechanics cannot assemble one car in a day. This is why the dealership can afford to employ one salesman but the assembly plant cannot but employ auto-mechanics in droves.

Again, under favourable conditions, one real-estate agent can comfortably sell all the eight flats of an apartment block in a day; but eight builders can never complete a house in one day even under paradisiacal conditions. That is why a real-estate agency can run efficiently with few hands but a housing construction company will collapse without a large work-force. We will continue with this line of thought later, but let’s digress for a bit.

We are all used to the term “value-chain” which in simple definition, describes the usefulness added to an item, beginning from its raw-material stage and ending with the finished product. For instance, the value chain of milk begins with penning and grazing dairy cows, to milking them, to transporting the milk to processing firms, to turning the milk into cheese, yoghurt, ice cream, evaporated or condensed or powdered milk, to packaging, to distribution, to retail and finally to the customer’s dining table.  However, I wish to introduce another dimension to this supply chain namely, the “value-funnel”, which describes the quantity of manpower that goes into each stage of the chain from raw-material to finished product.
Value-funnel of the auto-industry

Take for instance our first analogy of the car salesman and auto-mechanics: the number of workers involved in manufacturing the vast array of vehicle components as well as the number involved in assembling the car is quite much. This ensures that job is created for a large number of people, but as we move closer to the bottom of the funnel, this number drastically shrinks that by the penultimate stage we have a single dealer selling the cars. Don’t get me wrong, we need the service industry comprising the transporters, distributors and salesmen etc, but as an entrepreneur, the task of nation-building is better achieved by manufacturing because, among other things, it employs more people.

My heart aches when I see shops springing up everywhere while industries on the other hand are closing down. Why? Because it simply means we sell what other countries make and no one buys ours; it also means we want what other countries give but no one gets ours. Let’s be honest, no economy has emerged, let alone developed, by becoming a net consumer of what its peers produce. In my state of residence, the moment someone makes some money and decides to go into business, he chooses one of establishing a school, building a hotel or setting up a filling station. Personally, I think we need more schools in my state but the other two options are no-goods and this is because we have too many of these businesses that give too little.

Bear with my analogies a while longer; but you need to see the cost outlay in Naira for setting up a modest four-pump filling station (a sales business) and that of a garment making factory (a manufacturing business) and where they stand in the value-funnel in terms of size of workers employed.

Filling station startup costs                                                                                          
Canopy (roofed structure) and back office:             3,000,000 to 10,000,000 (depending on size & location)
3 Underground tanks:                                            2,250,000 to 2,550,000 (depending on cubic capacity)
Pump (4):                                                             3,600,000 to 4,000,000 (not top-of-the-range)
Total:                                                                   8,850,000 to 16,550,000 (excluding land lease & permits)
Employees:                                                           4 to 6
Startup capital required to employ one hand:     1,475,000 to 4,137,500

Garment making factory startup costs
Shop lease                                                            150,000 to 300,000 per annum
Industrial sewing machine (6)                                 300,000
Industrial button sewing machine (2)                       500,000
Embroidery machine (3)                                         210,000
Office furniture                                                      150,000
Total:                                                                     1,310,000 to 1,460,000
Employees:                                                            10 to 14
Startup capital required to employ one hand:     94,000 to 146,000

This breakdown is by no means exhaustive nor does it cover all the ramifications of the comparison but it suffices for the purpose of displaying the input cost as opposed to employee size, especially since the remuneration of both groups of employees is comparable. This piece is not to denigrate the importance of sales businesses but I know that there is hope that we can still rebuild our national economy and one way entrepreneurs can contribute their quota in that regard is to also focus on manufacturing. Those already in sales may also consider some form of backward integration to achieve this goal.

I shall leave you with words of Alhaji Aliko Dangote: "Manufacture, don't just trade. There is money in manufacturing even though it is capital intensive. To achieve a big breakthrough, I had to start manufacturing the same product I was trading in; which is commodities". [Source].
Maybe that is why Forbes Lists named him Africa's Richest Man, for three years running.

1 comment:

  1. it's so sad that even things as little as HB pencils and erasers are imported from China.