September 16, 2013
special report | Defense

Ace says Afghanistan is the place

Ace says Afghanistan is the place

In partnership with a local firm—one with a firm grasp of logistics—Ace Hardware will open its first hardware store in Afghanistan next year.

By Steve Geary

In chaos there is opportunity.

A case in point is Afghanistan, a nation that's been living through some sort of civil strife continuously since the 1970s. As the current war winds down (U.S. and international troops are scheduled to depart by the end of 2014), Afghanistan is left contemplating an uncertain future. Years of conflict have taken their toll on the country, leaving much of its physical infrastructure damaged or destroyed. Before its citizens can get on with their lives, a lot of rebuilding will need to take place.

That may not be as simple as it might sound. There are no Home Depots or True Values—that is to say, retail operations with broad reach that stock the tools and supplies needed for building projects. In fact, it's not uncommon to hear stories about construction delays caused by shortages of basic supplies. When advised it would take weeks to get a required item, a building engineer at one project reportedly said, "What we really need is an Ace store around here."

He may soon get his wish. Earlier this year, the Afghanistan Investment and Reconstruction Task Force, an office in the U.S. Department of Commerce, announced that Ace Hardware had reached an agreement with an Afghan corporation to open a franchise in that country. The deal calls for the nation's first Ace Hardware store to open in Mazar-e Sharif, in the northern part of the country, in early 2014. Eventually, the companies expect to open 15 outlets across Afghanistan.

ALL IN THE FAMILY
Ace's partner in the endeavor is Safi & Safi Enterprises, the latest spin-off from the Safi Group, a conglomerate owned and operated by the Safi family. Long prominent in Afghanistan, the family has investments in oil, steel, real estate, and hotels, according to **ital{The Wall Street Journal.} The enterprise also owns an airline, Safi Airways, and is involved in construction businesses, the largest property development project in Afghanistan, and logistics-related ventures. Today, the Safi name is among the most widely recognized in the nation's private sector. According to officials at the U.S. Embassy in Kabul, "The Safis are one of the top families, for sure."

Partnering with local talent is nothing new for Ace Hardware. "We go in with local entrepreneurs who already know the landscape and are used to operating in the country," Bob Moschorak, president of Ace Hardware International, told CNBC. "You have to align yourself always with the right partners; otherwise you are always doomed [to] failure."

The Safis, too, are bullish on the new venture. "What better business than one that provides the tools to help rebuild a society in need of infrastructure?" said Najib Safi, the managing owner of Safi & Safi Enterprises, in an interview with NBC News.

SPOTLIGHT ON LOGISTICS
Press reports suggest that the Safis expect to invest $40 million to $50 million in the Ace Hardware expansion. A significant portion of that will go toward logistics—which will come as no surprise to anyone in the industry. While the business opportunity seems vibrant, the backbone of retail sales lies in logistics. If you can't put it on the shelf reliably, you can't sell it.

But getting it to the shelf won't be easy. Ace's closest distribution center is in Dubai, more than 1,000 miles from Mazar-e Sharif as the crow flies. And there's no easy way to move freight between the two locations. In theory, you could ship from Dubai via Iran, but for a variety of obvious reasons, that option is not available.

That leaves Pakistan as the best alternative. While it's a relatively easy 750-mile sea journey from Dubai to the Port of Karachi in Pakistan, from there, things get dicey. Points of entry into Afghanistan from Pakistan by ground are limited to a handful of mountain passes. The most direct route for intermodal cargo shipped via the Port of Karachi to northern Afghanistan is through the Khyber Pass. However, shippers who use this route have to accept both delay and risk, with attacks, hijackings, and pilferage commonplace. As for the timing, Ace sees a best-case transit time from Karachi to Kabul of about two weeks but is expecting four weeks to be more typical.

Yet it can be done. "Somehow, the successful Afghan businesspeople are able to move things around the country," says Thomas Muenzberg, a foreign commercial service officer at the U.S. Department of Commerce in Kabul. "There are logistics companies that know how to deal with that."

Ace has come to much the same conclusion. "The Safis know more about getting product into Afghanistan than we do," says Brian Cronenwett, vice president, international distribution and logistics at Ace Hardware International.

Ace is taking full advantage of that knowledge. While the company is working closely with its franchisee to manage the transportation network, the inbound shipments to Afghanistan are the responsibility of the Safis. Title transfers when the shipment launches. That takes much of the risk off Ace's shoulders and takes the issue of security out of its hands.

One thing that will work to the Safis' advantage here is the broad sourcing leeway Ace gives its franchisees. The company permits them to incorporate locally made products into their inventory, so long as they meet corporate quality standards—a freedom the Safis could leverage to reduce the amount of cargo they must import through Dubai.

"That got our attention because in that way we can support our local industry and sort of motivate them to bring in their products," Karim Safi, another member of the family, told CNBC. Left unsaid is the advantage of shorter supply lines and avoidance of international border crossings.

MANAGING RISK
All this goes a long way toward explaining why, unlike most retail startups, the Safis chose to begin by opening a distribution center, rather than a store. The distribution facility, which is located in Kabul, will hold buffer stock. For most of us, "just-in-case" inventory is evil, but most of us aren't trying to establish a pipeline with the logistics uncertainty associated with a war zone.

The Safis' grand plan calls for the buildout of its own local sourcing and distribution network, connected to the Ace global network. The Kabul facility, which began receiving shipments this summer, will serve as the anchor for that distribution network. As for how much inventory the site will house, Cronenwett expects the franchisees to adopt a conservative approach to stocking at the outset. "My hunch would be they will start with about 8,000 to 10,000 SKUs."

The next step will be the opening of the store in Mazar-e Sharif in 2014. The franchisee says it chose the location for reasons of both security and geography. "The right place for us was Mazar-e Sharif because it's a secure city and there are a lot of other regional places we can target from there," Najib Safi said in the NBC interview.

As for what's next, the Safis plan to open a second store in Kabul and perhaps Herat after that. And that may be just the start: While the franchise agreement only covers Afghanistan, future northward expansion into the central Asian nations of Uzbekistan, Turkmenistan, and Tajikistan is possible.

About the Author

Steve Geary
Editor at Large
Steve Geary is an adjunct faculty member at the University of Tennessee's College of Business Administration, and is on the faculty at The Gordon Institute at Tufts University, where he teaches supply chain management. He is the President of the Supply Chain Visions family of companies, and Chief Operating Officer at ROSE Solutions, 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. He is listed in Who's Who in America, Who's Who in the World, Who's Who in Science and Engineering, and Who's Who in Executives and Professionals. In November of 2007, Steve was recognized for "Selfless Service to Our Nation and the People of Iraq" by the Deputy Secretary of Defense.

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