Bringing a supply chain back to life in Afghanistan

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?

An Afghan shepherd tends his flock. Note the various colors of the sheep's wool. (Credit: Steve Leahy)

Members of the team having dinner, at the Serena Hotel, creating the concept that would become ACOFE. Two days later, four Taliban gunmen penetrated this very room, killing nine and seriously injuring many others. (Left to right: Security, Steve Geary, Najlla Habibyar, Ahmad Shams, and Gerry Brown.) (Credit: Tina Hagar)

Two weavers work together to painstakingly knot a carpet. (Credit: Esmat Gulistani)

Caption: ACOFE members participate in an educational workshop organized by the nonprofit organization. (Left to right: Basir Jamshidzada, Hadi Farzam, Hashim Tavakkoli, and Zainab Tavakkoli.) (Credit: Esmat Gulistani)

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:

• Plan: Identify key markets, and create and launch a marketing plan (product, price, promotion, place/distribution, and people), including a unified trade show plan. Forecast volumes and market trends, and reconnect the industry with customers.
  Revenue opportunity: Organize trade show participation, purchase space at selected shows, book travel to trade shows, and earn a commission on all of these activities.
• Make: Develop relationships with international banks. Explore microfinance; find working capital and/or letters of credit to support orders. Capture more of the finishing work prior to export.
  Revenue opportunity: Earn placement or referral fees from the banks.
• Deliver: Access to cost-effective and reliable global logistics networks. Use air freight to "hop" over Pakistan, and consolidate shipments across exporters at an international hub like Dubai.
  Revenue opportunity: Establish a national logistics contract, using classic pooling approaches to reduce costs and improve service. Make the contract available to all members, and earn a royalty on all freight moving through the contract.
• Source: Develop reliable joint sourcing contracts for key inputs like chemical dyes, wool, and cotton.
  Revenue opportunity: Negotiate joint sourcing contracts with selected, high-quality suppliers on behalf of and available exclusively to ACOFE members. Earn a royalty on all purchases made through the contracts.
• Knowledge transfer: Serve as a knowledge hub and the source for the development of basic skills and exposure to best practices. Include accounting, banking, communication, marketing, and competitive strategy, reinforced by international study tours to China, India, and Dubai.
  Revenue opportunity: Sell training and organize international study tours tailored to the carpet industry, and earn a profit.