DISTRIBUTION CHANNEL FOR MOROCCAN ARTISANS By
Zyad El Jebbari
M.Sc. Science and Executive Engineering Ecole des Mines ParisTech, 2010
SUBMITTED TO THE ENGINEERING SYSTEMS DIVISION IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF ENGINEERING IN LOGISTICS
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DISTRIBUTION CHANNEL FOR MOROCCAN ARTISANS By
Zyad El Jebbari
Submitted to the Engineering Systems Division on May 8th, 2015 in Partial Fulfilment of the Requirements for
the Degree of Master of Engineering in Logistics
Abstract
The handicraft sector in Morocco represents more than 9% of the nation's GDP and employs 2.3 million people. However, despite their talent and expertise, Morocco's artisans are struggling to reach markets other than local regional or national markets. The main distribution model used so far has been the classic retail distribution model, which does not add value to the artisans' work, with most downstream actors playing the role of the middlemen. Other Ecommerce models such as the marketplace model or the crowdfunding model did not solve all the issues faced by artisans and customers. This paper provides the framework for a new distribution channel for Moroccan artisans to improve the efficiency of the value chain linking them to the American consumer by eliminating all unnecessary steps, overhead, and overall inefficiencies of the current distribution models. We first identify the models that are currently used to bring the artisans' crafts to the end consumer in developed markets: the market place (used by the platform Etsy), the crowdfunding model and the classic retail distribution model involving middlemen. We assessed the benefits of all the models by developing a new framework allowing to score each one of them. We then switched our focus to a hybrid model: a crowdfunding platform where the company partners with the artisans to align the different stakeholders' interests. To the extent of our knowledge, this model has not been used yet. It was found that our methodology could help artisans access international markets more efficiently. We finished by determining the optimal strategy using social media to market this platform and engage more efficiently potential customers.
Keywords: handicraft, supply chain, crowdfunding, retail, social network marketing
Thesis Supervisors:
-Dr. Edgar Blanco: Research Director, MIT Center for Transportation & Logistics
-Dr. Tauhid Zaman: Assistant Professor of Operations Management, MIT Sloan School of Management
Acknowledgments
I am appreciative of those individuals who have assisted with my thesis research. I am
indebted to the following people:
To my family for their support and encouragement.
To the Moroccan Minister of Handicraft and Social Solidarity Economy Dr. Fatima Marouan for her support and commitment to the project.
To Dr. Bruce Arntzen for encouraging me to pursue an independent thesis project based on my interest in global supply chain.
To the management team and staff of the Legatum Center, Dr. Fiona Murray, Dr. Iqbal Qadir, Elizabeth Henry, Julia Turnbull, Anna Omura, Kwadwo Poku and my mentor Ajit Janghiani for their support of and collaboration on my thesis project.
To Mrs. Kathleen Campbell, purchasing director of Ten Thousand Villages for generously offering her time and insights on the crafts market in the United States and improving my understanding of the mission of a Fair Trade retailer such as Ten Thousand Villages. To my MIT ORC and EECS colleagues Krishnan Rajagopalan and Sourav Das for their thoughtful input on my research.
To Dr. Sinan Aral for generously offering his time, insights and support to improve my understanding and application of his methodology to flexibility in digital marketing.
And especially to my thesis supervisors, Dr. Edgar Blanco and Dr. Tauhid Zaman, for their invaluable advice and guidance during many hours of discussion throughout the academic year. It has been a great pleasure to have had the opportunity to work with you both over the course of this thesis project.
Table of Contents
A b stra ct... 2
Acknowledgments... 3
L ist of F igu res ... 6
L ist of T ab les ... 7
1. In trodu ction ... 8
1.1. Artisans' platforms and current distribution ... 9
1.2. Motivation & Contribution ... 12
1.3. Thesis Outline ... 13
2. Literature Review ... 15
2.1. General Supply Chain Management Processes and Physical Flows:... 16
2.2. Funding and financial flows in the supply chain ... 18
2.3. Information flow and relating to the seller/content... 19
3. M eth od s... 22
3.1. Artisans' platforms background ... 22
3.2. Hybrid platform building and proof-of-concept... 24
3.3. Social network experiments: ... 24
4. Evaluating Traditional Supply Chains for Handicrafts... 26
4.1. Data collected from interviews on the Retailer model... 26
4.2. Data collected from surveys on the Marketplace Etsy ... 28
4.3. Data collected from surveys on the crowdfunding model ... 30
4.4. Initial scoring of the traditional models ... 32
4.5. The customer survey sent to understand customers' preferences ... 33
5. The Hybrid platform ... 37
5.1. Description of the model... 37
5.2. Proof of concept on Kickstarter ... 38
5.2.1. The Supply chains... 39
6. Evaluating Social Network Impact in the MoroCrafts Hybrid Platform... 44
6.1. Introduction to M arketing and social networks ... 44
6.2. The Social network experim ents ... 45
6.2.1. The m ost efficient strategy... 45
6.2.2. Causal relationship between gender and engagement on social media... 50
7. D iscussion... 52
7.1. Scoring of the different m odels ... 52
7.2. Selection of the right supply chain ... 53
7.3. Relevance of Facebook Ads ... 53
7.4. Best strategy on social networks for social engagement ... 54
8. Conclusion... 57
8.1. Sum m ary ... 57
8.2. Further research ... 59
Appendix... 61
List of Figures
Figure 1 The classic retail distribution model ... 10
Figure 2 The four types of crowdfunding models ... 12
Figure 3 Flows between suppliers and customers in a supply chain (source clerm iston .com ) ... 15
Figure 4 The eight essential supply chain management processes... 16
Figure 5 Differences between existing artisans' models... 23
Figure 6 How buyers heard about Etsy (source Etsy)... 29
Figure 7 Breakdown of items bought on the Etsy platform (source Etsy) ... 30
Figure 8 The number of crowdfunding platforms in 2012 (source C orw dsourcing.org)... 31
Figure 9 Breakdown of the different crowdfunding categories in terms of number of platform s (source M assolution)... 32
Figure 10 Scoring of the first 4 different models... 33
Figure 11 Some articles offered for sale during the campaign/pilot test ... 39
Figure 12 Share of revenues and profits per SKU... 40
Figure 13 Breakdown of costs and margins for each SKU ... 42
List of Tables
Table 1 Price point and number of items sold for each SKU... 39
Table 2 Breakdown of costs and margins for each SKU... 41
Table 3 Description of the accounts and actions performed during the social network experim ent on T w itter ... 48
Table 4 Results for social experiment 1: most efficient strategy... 48
Table 5 Logistics regression analysis ... 50
Introduction 1. Introduction
According to the Ministry of Handicraft and Social Solidarity Economy in Morocco, 20% of the population is represented by the artisans who are living in poverty with no access to the main necessities of life (Ministry of Handicraft, 2012). The Moroccan handicraft industry represents 9% of the total GDP, which is considered a high percentage given that more than 20% of the country's population works in the handicraft industry
(Ministry of Handicraft, 2014).
There has been an increased demand for authentic handmade products recently due to consumers' awareness of global handicrafts items and their seeking to explore new cultures. Even though the products are widely available in Morocco and there is high demand for them, there is no linkage between the supply and demand.
According to a report from the Moroccan Ministry of Handicrafts, the handicraft sector has historically focused its activity on three pairs of products/customers:
- Crafts targeting domestic retail consumption, which generates a revenue of $30 million.
- Crafts targeting domestic and international tourist consumption, which generates a revenue of $1 billion, mainly from the domestic Moroccan customers.
- Crafts with a strong cultural content production to be exported outside the country (Moroccan Ministry of Handicraft and Social Solidarity Economy, 2007).
This last category has not being able to exceed $70 million in revenue despite its great potential for both local and international customers and a strong global demand for the items relating to Moroccan civilization, art, and culture. In 2007, the Moroccan government
put in place a strategy to multiply the revenue generated from exported crafts by 10 by 2015, but this objective will not be achieved. Because the market is inherently fragmented and Moroccan producers are not organized, structured or developed enough to adapt to new distribution channels and access international markets, the Ministry accepted help from "reference actors" (big companies producing crafts items), which intended to drive international exports. But this strategy was not successful because these companies lacked the necessary technology and operations expertise to access the American market: the revenue from exporting crafts to the US market remained the same, at around 10 million dollars (Moroccan Ministry of Handicraft and Social Solidarity Economy, 2012).
1.1. Artisans' platforms and current distribution
In the classic retail distribution model that the reference actors used (Figure 1), the consumer had to pay a very high price compared what the artisans earned because of a lack of supply chain and technology optimization in the process. It is a rather fragmented model with actors that try to transfer (inventory and financing) risk to each other: artisan, Moroccan wholesaler, exporter, US wholesaler/importer, retailer. At best, it was found that in general the final retail prices paid by consumers for artisan crafts represented, on average, 5 to 6 times the initial price paid to the artisan. This is explained by the fact that each actor is taking a risk (e.g. inventory risk, capital risk, assets deployed, demand risk) and a profit margin for that risk
We took the example of Ten Thousand Villages to illustrate how a fair trade retailer could improve the typical retail model by cutting some unnecessary middle men in the chain. Today, Ten Thousand Villages is a nonprofit fair trade retailer that markets handcrafted products made by disadvantaged artisans from more than 120 artisan groups in more than
among her family and friends in the United States by selling handcrafted products to help reduce poverty among artisans. Ten Thousand Villages' model eliminates the Wholesaler and the Wholesale Distributor in Figure 1. Ten Thousand Villages is the importer, the wholesale distributor and the retailer (they also wholesale to other retailers). Some of their product are shipped directly from artisans and they connect to some artisan workshops through in-country fair trade organizations that help them communicate design, organize shipping and transfer funds. These single organizations would cover the functions that have been broken out into two actors of Wholesaler and Exporter.
WholesalerI
Artisan Wholesaler ( xotr$ Importer Dsrbtr Retailer
Figure 1 The classic retail distribution model
The other widely used distribution model is the marketplace model illustrated by Etsy. Etsy is an e-Commerce website focused on handmade or vintage items and supplies, as well as unique factory-manufactured items. The items include art, photography, clothing, jewelry, edibles, quilts, and toys. Etsy is modelled after open craft fairs that give sellers personal storefronts where they can display their goods. The company charges artists a flat listing fee (20 cents per item), and takes a commission of 3.5% from all items sold. Etsy
charges also payment fees through direct checkout: 3% + $0.25 fee on total sale price
(including sales tax and shipping). Since its launch in June 2005, the site has continually added new widgets and features, and has seen corresponding growth. However, as a marketplace, Etsy does not take care of the shipping and logistics, which are left to the seller, who might not have expertise in this area. While it has been extremely successful at providing access to markets for artists, Etsy does not address some main concerns: financing costs should be paid upfront by the artisan, there are no quality controls in place, no "artisan" background checks are done (sometimes wholesalers use it while claiming they are artisans), and it does not "emotionally" connect buyers with the artisans' stories.
A final model used is the reward-based crowdfunding model whose early success
came from sites like Kickstarter and Indiegogo. Kickstarter is a global crowdfunding platform based in the United States. Kickstarter was launched on April 28, 2009, by Perry Chen, Yancey Strickler, and Charles Adler (Wikipedia). The app is aimed at users who create and back projects and is the first time Kickstarter has had an official mobile presence. Kickstarter is currently open to projects based in the United Kingdom, Canada, Australia and New Zealand, Denmark, Ireland, Norway, and Sweden. Kickstarter has reportedly received more than $1.5 billion in pledges from 7.8 million backers to fund 200,000 creative projects (Wikipedia, 2014). There are 4 main categories of crowdfunding: reward based, lending based, equity based and donation based (Figure 2); one of the most popular is rewards-based crowdfunding (the kind used on Kickstarter and Indiegogo).
-1
Figure 2 The four types of crowdfunding models
Rewards-based crowdfunding has been a source of funding for small businesses. Businesses and non-profits of all sizes post projects looking for funding on a crowdfunding portal, targeting a certain amount to raise. In return for a donation from backers, a business or non-profit gives some type of incentive for participating (Lambert and Schwienbacher, 2010). However, this model is only present in the US and Western Countries since artisans from the rest of the world (especially Africa) do not have the connection or credibility to leverage the platform to reach users. The crowdfunding market is essentially American
(72%) and European (26%), the rest of the world sharing the remaining 2%. The reason is certainly above all confidence in online transactions and possible legal remedies (Crowdsourcing, 2012).
1.2. Motivation & Contribution
The motivation for this thesis is to develop a new model of distribution for Moroccan and African artists to help them access international markets. We will use a hybrid crowdfunding platform that we will call "MoroCrafts" to better link artisans to markets by
providing customers with authentic handmade products. This platform aims at increasing the artisans' profit margin and improving their quality of life. This project will be used to explore the supply chain and social media dimensions of this business.
The results of this research directly enhance the distribution models used to export art and craft items in the context of a global supply chain. When the prepayment of items through a crowdfunding platform is combined with an efficient internal supply chain, both artisans and consumers will be more satisfied. The scoring framework we developed during our research can be applied to assess the efficiency of distribution channels for all sorts of items that countries would like to export to international markets (e.g. traditional cosmetics, accessories, authentic home decor). In addition, social media strategies can be used within this new model to target and engage the right audience. Using the tools developed for MoroCrafts on Twitter to spread the word and build a linked community, the analysis highlights strategies that can be expanded to other social network tools such as Facebook,
Instagram or Pinterest.
1.3. Thesis Outline
Chapter 2 presents the literature review, which provides an overview of the
frameworks used to assess supply chain efficiency and performance. It also provides research done in the field of social media and digital marketing in the field of the handicraft and e-Commerce. Chapter 3 describes the methodology applied in the research, specifically the methodology for evaluating and scoring the current distribution models for art. We also present a new hybrid crowdfunding model and address the issues identified within this scoring framework. We implement a pilot test to assess the score of the platform through the framework and see if this hybrid model performs better than the current models in place.
We will finally experiment various digital marketing strategies to engage e-Commerce customers.
Chapter 4 examines the results of the data analysis. Chapter 5 presents the recommendations based on the findings in terms of the potential implementation of the model and the use of social network strategies in the e-Commerce space. Chapter 6 concludes with a summary and suggestions for further research.
Literature review 2. Literature Review
Previous research has tried to solve the problems described in chapter 1 separately (i.e. reducing the financing and inventory risks, eliminating the middlemen, funding) but no study has focused on providing a comprehensive solution for e-Commerce supply chains linking artisans in developing countries to international markets.
We will focus on the three supply chain main flows: the materials flow, the information flow, and the cash flow (Figure 3). In the next section, we will review the research done in the area of efficient processes in the supply chain and the physical flows. In section 3, the classic retail distribution model is evaluated in the context offinancialflows. In section 4, we will outline the challenges of the information flows within the context of the e-Commerce channel, particularly in relation to the emotional linkage between artisans and customers.
MATERIALS
INFORMATION
CASH
Figure 3 Flows between suppliers and customers in a supply chain (source clermiston.com)
2.1. General Supply Chain Management Processes and Physical Flows:
One of the most prominent articles specific to streamlining the supply chain in the classic business model and cited numerous times by other researchers is by Douglas Lambert. The article outlines the "eight essential supply chain management processes" to efficiently manage a retail distribution channel (Lambert, 2004).
AK
VI
Figure 4 The eight essential supply chain management processes
These processes span from the customer relationship management, where the company should focus on the segmentation of customers, to product development and commercialization (Figure 4). Within that framework, the product returns management should ideally focus on product quality to minimize item returns and use promotions to ensure products will be sold and avoid obsolescence. However, in internet supply chains, inaccurate demand forecasting often leads to larger volumes of product returns for e-Commerce retailers (Rabinovich & Knemeyer, 2006). Lambert focuses on including
customers and suppliers in the same ecosystem to be sure to maximize the value for everyone (make the pie bigger) and the importance of coordination between all the stakeholders of the system.
Some important actors in the Internet Supply Chains are the Logistics Service Providers or LSPs (Rabinovich & Knemeyer, 2006): LSPs are intermediaries who help internet sellers add value to their supply chains by consolidating orders and finding lower transportation rates. The last mile delivery can then be outsourced to FedEx or UPS. Rabinovich & Knemeyer studied the operations and economics of the Supply Chain specifically pertaining to the optimization of product delivery to meet customer needs. In situations where the product demand is high, it is crucial for the business to maintain a large enough product inventory as to ensure efficient and time-sensitive product processing and delivery as Rabinovich found that the majority of customers are time sensitive.
From the demand side, in order to maximize revenue by optimizing the cost per product, the supplier must maintain high product demand. A lack of demand can induce high costs to pick, pack and ship small orders and impact the client's willingness to buy the product. Rabinovich's research has also shown that a new company can gain a competitive advantage through asset specificity by using outsourcing and LSPs at three levels: company and strategy level (Netflix), transaction level though segmentation (FreshDirect.com), and product level with the distribution of niche products (seasonal products such as flowers). However, outsourcing to LSPs is not recommended for sellers with high asset specificity (LSPs are reluctant to make specialized investments) and high uncertainty (the seller needs to take control of its logistics network). These conclusions suggests that additional research needs to be done for our case.
2.2. Funding and financial flows in the supply chain
Another problem that can arise for small artisans and cooperatives is the lack of financing (Ibrahim and Verliyantina, 2012). High transaction costs incurred by the credit procedures makes this bank loan instrument not very well adapted for the small businesses. An alternative is to get rid of these funding risks by using the fair trade model that provides the artisans 50% of the initial funds to start the production. The microfinance model is also available to artisans but interest rates are very high (between 20% and 30%
and sometimes even higher). As far as the fair trade model is concerned, it is still a middleman model involving many intermediaries where the artisan only receives a small percentage of the proceeds.
An alternative to mitigate the inventory, funding and financial risks is the crowdfunding model: "Crowdfunding involves an open call, essentially through the Internet, for the provision of financial resources either in form of donations or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes" (Lambert and Schwienbacher, 2010, p. 6). This model of raising capital can take the form of donations, sponsoring, pre-ordering/pre-selling, and as a result, the complexity of processes varies greatly.
The idea of Community Driven Development (CDD) for individual and group-based microfinance can be implemented using the crowd funding mechanism that has already been proven as an established way to fund social and/or not-for-profit projects, particularly in the Third World (Hemer, 2011). Organizations which have a long tradition of fundraising for social and/or not-for-profit projects (e.g. the Red Cross, Oxfam, NGOs and other organizations for development aid) already employ the crowdfunding model extensively.
Ibrahim and Verliyantina propose a crowdfunding system that serves as a bridge to link the different stakeholders of the project/business: crowdfunders, field partners, coaches and
non-profit organizations, which work together to screen, supervise, and manage the use of funds. His proposed solution/model provides a comprehensive solution to the financing problem for Small and Medium Enterprises (SMEs). Such a system could be leveraged in a web-based ecosystem that exploits the capabilities of social networks, especially the "viral networking and marketing" functionalities, but the study in question did not assess the impact of the physical and financial flows, which will be part of our distribution model. In addition, trade-offs between transportation costs, lead time, product variety and customer service should be assessed as well (Trent, 2004).
2.3. Information flow and relating to the seller/content
The process of crowdfunding also relies on social and viral marketing to encourage people to back and fund a project/business. Research has found that single men were more influential than married men/women with regard to spreading the word regarding a topic (Aral, 2011). This remark is challenging in our case, as we will show later that people who usually buy crafts online are mostly female. Aral explores how companies can incentivize users to recommend on their behalf. The more "generous" shared-incentive model (discount/promo offered to both the sender and receiver of the sharing) generates more sends than the "selfish" single-incentive did. In fact, people shy away from spamming their friends unless they can pass a benefit, promo, discount along to the friends with whom they are sharing the idea/concept. These results are very much in line with the sociological notion of a "gift economy," in which generosity confers status. Also, passive broadcast in social media (generating automated notifications to peers) is found more efficient at recruiting new users globally than active personalized techniques of word of mouth (personalized invites) in the case of a Movie App company (Aral, 2012). This finding will also need to be tested and further studied in the case of real assets. One should also the performance of these tools as
way to acquire customers or early adopters through social network since they could be overestimated by homophily features (Aral, 2009). Homophily is the tendency of individuals to associate and bond with similar others. When assessing an efficient strategy to engage users in the internet, we should make sure that our strategy is the real driver that grows the audience and is not only due to the "birds of a feather flock together" effect.
Lambert talks about the information flow needed between a regular company's suppliers and customers for its supply chain to work smoothly and efficiently (Lambert, 2004). However, although e-Commerce appears to be an emerging sales channel, only limited sales are occurring through it (Stoddard et al, 2012). This finding may be attributed to the hedonic nature of arts and crafts consumption (appeals to emotions). Indeed, an artistic product may not exist to fulfill a market need, a utilitarian concept, but rather a want, a hedonic concept. It makes arts, crafts, and cultural product marketing different compared to other types of products, and thus creates some marketing challenges (Colbert, 2003).
Various studies have shown that tourists are important consumers of crafts (e.g., Stoddard, Evans, & Dave, 2008): 60% of craft artisan retail sales are tourism. In 2008, Etsy posted the results from a customer profile survey. Results from the survey of 30,000 customers indicated that Etsy's online buyers tended to be young (32 years old on average), predominately female (96%), and highly educated (63% graduated from college, 17% still in college). The survey also found that online users were mainly from the United States
(82%), but their international user base was growing. They had "registered users" from 172
countries by 2008. The profile for these consumers is enlightening since other studies have found traditional arts and crafts consumers to be older, highly educated females with high incomes (e.g., Evans et al., 2006). Perhaps these findings suggest an emerging segment of arts and crafts consumers who feel more comfortable with electronic purchases. Evans' results also indicate there is a strong connection between retail craft galleries and shops in
tourism destinations, which suggests that an effective marketing strategy for craft sales should reproduce this experience online so that people can connect emotionally with the artisans and the products.
The literature review showed that some processes such as returns management, supplier and customer relationship management used in the regular distribution channels could be used in our particular case, especially when it comes to managing the physical flows from the suppliers to the end customers. However, the classic retail model does not optimize the returns for the artisans, especially if one needs to carry and manage the inventory risk to set up a responsive supply chain (Fischer, 1997). Outsourcing some risk to LSPs in internet supply chains is not recommended for products that exhibit high asset specificity. On the other hand, the crowdfunding model developed by Ibrahim and Verliyantina for a microfinance platform could be used as a starting point to manage more efficiently the financial flows to fund the artisans. This aspect should be further studied in the case of an international supply chain which deals with real assets. Finally, even if the classic information flow within the whole supply chain (as described by Trent and Fischer) plays an important role in internet supply chains, arts products are rather different from regular consumer products in the sense that they appeal to a hedonic concept rather than a utilitarian concept. We may need to study more in depth the dynamics that could help connect the consumer with artisans through the user experience on the platform and see how likely a consumer is to stay engaged in the community (Aral, 2009). Studying the lead time incurred by the latency of the crowdfunding model will be essential in our project. To the best of our knowledge, no holistic research has been done to optimize a crowdfunding distribution channel from artisans to end consumers in the developed markets.
Methodology
3. Methods
Based on our initial findings and literature review, we argue it is important to develop a new hybrid model that improves the way artisans' crafts are distributed to American clients. In this section, we will focus on three major points. First, we collected data for existing platforms and compared them on the basis of profit margins, lead time, financial risk and trust. We then explored how to design a hybrid platform to optimize these parameters and target the right customer segment (e.g., Evans et al., 2006). Finally, experiments on social networks were conducted to attract these potential customers on the platform.
3.1. Artisans' platforms background
The first step in our methodology was to analyze the features of each of the models: the classic retail distribution model (e-Commerce website or fair trade organizations), the marketplace model, and the crowdfunding model.
We then evaluated and scored them using 6 criteria taking both the artisan and the customer perspectives:
- On the artisan's side: we assessed access to funding, profit margins, and access for artists in developing countries. In December 2014, we conducted interviews with the artisans during a field study in partnership with the Ministry. These 3 issues were identified as the top 3 challenges for artisans to get access to international markets.
- On the customer's side: we evaluated supply chain and logistics management, emotional link and trust, and lead time. We also conducted customer surveys
with potential buyers and retail stores and these issues were also mentioned several times as the top 3 criteria for a client to buy crafts coming from Morocco.
Figure 5 shows an example how of how we will score the different models based on these 6 criteria from a scale of 0 to 2.
At cfe irSloan Reasonable Margin Ameesi for Emotnl link and Trust LIly Cn Lead timne
Figure 5 Differences between existing artisans' models
Depending on the model, data was collected through different means. First, we interviewed the purchasing director of Ten Thousand Villages to get a sense of the different tradeoffs between trust, lead time, supply chain control and profit margins for a fair trade retailer.
Second, we relied on the existing literature and print sources from customer surveys, such as the one published on the Etsy's website, to gather additional data on the dynamics of the marketplace and crowdfunding models such as Kickstarter.
3.2. Hybrid platform building and proof-of-concept
After we scored the different models, we developed a new model that will solve the issues of the current models to import/export artisans' crafts. This hybrid model will be a crowdfunding platform that will display existing and new features to help artisans access international markets. The platform will reduce the inventory and financing risks, and increase the artisan's profit margins. A pilot test of the model has also been conducted between Moroccan Artisans and American consumers on Kickstarter, and we collected data concerning the market segment (sex, income, degree of study), conversion rate and cost of acquisition to target them more efficiently on social networks.
In addition, a market study was conducted in collaboration with the Moroccan Ministry of Handicraft and a consulting company (Jola) to better assess the customer behaviors and tastes. A survey was sent to 12,000 customers across the United States (the survey can be found in the Appendix).
3.3. Social network experiments:
Once the right audience is identified in the prototype phase, we will develop the platform and try to build the community around the project. To do so, we will use experiments on social networks and especially Twitter and Instagram. Twitter is an online social media platform where users can post 140-character segments of text to share with friends. These "status updates" can contain both original text passages as well as links to other sites.
There are a few ways to engage with fellow users on Twitter:
1) When one "follows" another user, the status updates of the followed user, or the friend,
2) When a user wants to endorse another user's the post, he can re-post, or re-tweet, the original status.
3) A user can also reference a fellow user in his post by mentioning the other account name
or directly replying to a post.
In this experiment we investigated the efficacy of 3 different strategies: following, retweeting and replying, and measured the incremental benefits of combining 2 strategies (following and retweeting, following and replying).
Once the successful strategy is identified, we used it to determine whether there is a causal effect between the gender of the artisan and the number of followers acquired. Indeed, from the interviews and initial research we conducted, potential are women and we want to test the hypothesis whether they are more likely to get interested in buying a craft because a woman or man produced it. We will run the same experiment for one more week by a male artisan and female artisan using the strategy that has been identified as being the most efficient.
Evaluating Traditional Supply Chains for Handicrafts
4. Evaluating Traditional Supply Chains for Handicrafts
The question we try to answer in this thesis is the best distribution channel and supply chain to distribute the Moroccan artisans' crafts in the United States. In this section, we first highlight the main differences between the different models existing to export artisans' crafts in the American market based on the interviews and customer surveys we conducted or found on the internet. Second, building on these insights, we built a framework for a new hybrid platform optimizing the main 6 parameters identified in the previous section: access to funding, profit margins, and access for artists in developing countries on the artisan's side, and supply chain and logistics management, emotional link and trust, and lead time on the customer's side. A proof-of-concept has been carried over and existing crowdfunding platform and we collected some interesting metrics. That means that we used an existing crowdfunding platform called Kickstarter to run a campaign in January and February, 2015 to test the logistics and the customers' preferences. Finally, experiments using social networks (essentially Twitter) were implemented in March and April, 2015 to develop the best strategy to build a community around this hybrid model.
4.1. Data collected from interviews on the Retailer model
We interviewed Ms. Kathleen Campbell, the purchasing director of Ten Thousand Villages as part of our research study to learn more about the brick and mortar retail model. We learnt that the organization made around $28M in revenues each year, purchases account for $7.2M and 650 new items/year are added to the portfolio including jewelry scarves, hair accessory). They hold around $9M in inventory in their warehouses, which means that the items remain around 4 months in the warehouse (Inventory Turn=3).
Ten Thousand Villages uses 2 channels to reach their customers:
- Retail stores: 38 stores and 40 independent franchises under contract.
- e-Commerce /website: $2M revenues and 17% growth year on year. Ms. Campbell confesses that she still has some difficulty conveying the story of artisans through this medium: people do not spend enough time to create the connection and experience as is the case in the store. Clients usually spend more time on the store than online and can learn more about the artisan's story and the culture of the country where the craft has been made.
The suppliers are not individual artisans but rather coops or organizations (spanning from a few to hundreds of artisans in Bangladesh, for example). Designers usually attend workshops to get a sense of the new trends and colors, artisans provide samples, and designers/buyers (4 buyers who spend 6-8 weeks traveling in their respective region) guide the artisans without constraining their creativity. The advantage of the approach is that the organization gets an immediate feedback from stores. However, the design process needs to begin 14-16 months ahead of the next season. The production begins 6-8 months later and shipping takes around 2 months.
Concerning financing, 50% paid in advance to artisans and 50% at the time of delivery. Providing this upfront payment to artisans to help them buy the raw materials they need is a requirement for every Fair Trade Organization. Invoices are sent to artisans' communities separately. The exporter consolidates the items to be shipped to the United States from the supplier and the bill of lading is then sent to him. 90% of the time, products are packaged at the origin.
The inventory risk is carried by Ten Thousand Villages ($9M in inventory in warehouse). UPS manages domestic logistics. There are very few product returns (less than
2%). In terms of pricing, some products are price sensitive (unique products fall in this category) and discounts do not affect the sales volume. Other products, such as ceramics for example, are not very price sensitive (offered at WalMart or Target at lower prices). Gross margin is around 55% to 60% and the price in the store represents 4 or 5 times the initial price in order to get a 10% margin bottom line for the organization. This data allows us to quantify 2 criteria in our scoring model: margins and logistics management.
4.2. Data collected from surveys on the Marketplace Etsy
In 2008, the website Etsy ran a survey with more than 30,000 participants. A similar
survey was realized in 2010 as well. Almost 46% of the participants were buyers, whereas the other 10% represented sellers, and 39% did both. Ninety-six percent of Etsy's users are
highly educated females. Both buyers and sellers are a highly educated group, with 63%
graduating from college and 17% still in college. Buyers, on average, are 32 years old and sellers are slightly older, averaging 35 years old. The customer base is mainly from the United States: 82% of buyers and 86% of sellers are from the United States even though the website registered users from more than172 countries. Many buyers find out about Etsy through blogs: 26% find out about Etsy on blogs and 17% find out about the handmade products they buy on blogs. More than 50% of the sellers who responded to the survey participate in blogging, which seems to be the best way to get attraction.
The most frequent way buyers find out about Etsy is through a friend (33%) (Figure
6), so word of mouth and networking are of paramount importance: 72% of buyers and 78%
of sellers have a profile on at least one social networking site. This suggests that Facebook, Instagram, Twitter or Pinterest pages may be a great marketing tool.
How buyers hear about Etsy Friend3% C r1% Web seapr 19% Other 8% Social networkig site 6%
Mawim 9
%
Craft Fai or other event 2
AdVerisementM Television rA
Where buyers learn about handmade products
Oine 50%
Frienids 14%
Craft Fairs Is%
.G-q.stoms 6%
Mag14nus 4%
*| l wr aN
Figure 6 How buyers heard about Etsy (source Etsy)
Buyers shop on Etsy primarily to find unique items, because they value handmade goods and they want to support independent artists. Figure 7 shows that the major items bought on the Etsy platform are jewelry accessories.
Topre caegkowe fo buyes bTgopo te ten ateorie (soreesy
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t 4% st
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Figure 7 Breakdown of items bought on the Etsy platform (source Etsy)
Buyers, who represent 80% of all respondents, are also willing to pay more for high quality, well-crafted items. A recent article in Business Insider raised some concerns about the authenticity of crafts on Etsy. While Etsy started as a way for artisans to get access to a larger market, scale became an issue over time since supply of handmade crafts became a bottleneck for the platform. It is estimated that Etsy makes $47 million a year in fees from sellers. It's the fifth most-visited marketplace in the world, after Amazon, eBay, Best Buy, and Wal-Mart. Many items offered for sale are made wholesale imported from other countries, which does not align with the original mission anymore and may hurt their brand image in the future. All this data allow us to score the model according to the 6 criteria pf our framework.
4.3. Data collected from surveys on the crowdfunding model
In 2012, the company Crowdsourcing LLC conducted a research study concerning the crowdfunding platform in the world. The global crowdfunding market has reached 6
Top ten categories for sellers Top ten categories for buyers
billion in 2013 (vs. 500 million in 2009), a growth rate of 88%. According to a study by the World Bank, it is estimated that the global crowdfunding market will reach $ 1,000 billion
in 2020. Now, the crowdfunding market is essentially American (72%) and Europe (26%), the rest of the world sharing the remaining 2%. The reason for this geographic concentration is certainly the tax exemption of contributions devices (friendly regulations) and above all confidence in online transactions (Figure 8).
N S" NUMBER OF CFPs, 2012 6 BELGIUM jS 4 POLANDl S191 UNITED SLE 4 rA SWEDEN -ID DENMARK I IRELAND f 3FICLAEND C ' CZCH REP. A 1 AUSTRIA E I ESTONIA L I LATVIA 'IPA MN N 1 NORWAY I 1 ROMAMA SMI A 1 HUNGARY 2 MEXICO HONG 1 HKAMJAPAN PHIWPINES 2 ARGENTINA 6 NEW ZEALAND
SOL rcF: Eased on Cr asoourcir.g.org Directory of Sites as of Apr 201.2
Figure 8 The number of crowdfunding platforms in 2012 (source Crowdsourcing.org)
The reward-based model that a platform such Kickstarter uses represents 62% of the
whole market (Massolution, 2012). Figure 9 shows the split between the different models
and we can clearly see that the Kickstarter model is the largest in terms of number of
platforms represented. It is also the category that experienced the highest growth in the past
143 41% cAGR DOWAnON-BASED 79% CAGR REWARD-BASED 3.
U50%
CAGR 21 LENDING-BASED 114% cAem EQUITY-BASED 2007 2005 2009 2010 2011Figure 9 Breakdown of the different crowdfunding categories in terms of number of platforms (source Massolution)
Project launchers need to have a bank account in the countries where Kickstarter is present. African and Asian artists are excluded. Kickstarter applies a 5% fee on the total amount of the funds raised. Their payments processor applies an additional 3-5% fee.
4.4. Initial scoring of the traditional models
Based on the interviews, each model received a score of
- 0 (no sign): no access to free loans, no reasonable margin for the artisan, no
access for African artists, no emotional link and trust for the customer, no reliable shipping and logistics management by the platform, long lead time to the customer.
- 1 (one X): adequate access to working capital, relatively good margin for the
artisan, relatively good access for African artists, adequate emotional link and trust for the customer, relatively reliable shipping and logistics management by the platform, relatively short lead time to the customer.
- 2 (two X): good access to free loans, reasonable margin for the artisan, good
access for African artists, good emotional link and trust for the customer, reliable shipping and logistics management by the platform, short lead time to the customer.
The following table sums up the different findings (Figure 10). The retail model has been split between the classic online retail model and the fair trade retail model.
Online Retail Fair-Trade Marketplace Crowd- MoroCrafts
Model Reail Model Funding Hybrid Mods
Priterh Reasonable X XX XX Emotional link X X X XX and Trust cusler X Lead time Xx xx X X
Figure 10 Scoring of the first 4 different models
4.5. The customer survey sent to understand customers' preferences
In collaboration with the Ministry of Handicraft and a consulting firm, a survey was sent to over 12,000 consumers across the United States.
The consumers surveyed for this report purchase home furnishings several times a year. They usually buy home accents more often than any other category, but also seek out and purchase more practical items such as furniture and lighting. They buy these items at home decor retail stores more often than anywhere else, but make frequent online purchases as well.
-58.5%purchase home furnishings several times a year
-25% buy home decor when making a purchase
-68% shop in home accents stores -47% shop online, too
They are inspired by visiting retail stores and by shopping online. Nearly 90% have purchased home decor online. Social media also plays a role, but shelter magazines barely register. They love Pinterest. Seventy-one percent go to retail stores for inspiration. Sixty-seven percent go online to get ideas. Once online, nearly 90% make purchases and 29.5% use social media to get information on products 76.5% love Pinterest. There is a growing interest in handcrafted home decor. A majority of these consumer have purchased artisan products, and a significant portion would pay more for such goods because they believe
artisan products have more value. Most of these purchases were made in gift stores.
-70.5% have purchased artisan or fair trade products in the last 12 months
-38% would pay more for such goods. Of those, 54.5% would pay up to 20% more
-73% believe that artisan products have more value
-49% of purchases were made in gift stores
-24% were made online
The majority of these consumers had not purchased Moroccan products. They are more interested in price and design than in provenance. A little more than half would be hesitant
to purchase from a Moroccan company without a US presence, and in general, they were not interested in learning more about Morocco.
-22.5% have purchased Moroccan products - 71.5% have not
-20.5% say it is important that Moroccan design is made in Morocco -43% would purchase from a site that shipped directly from Morocco
But only 22% are interested in learning more about Morocco. In spite of that, when asked for their impressions of Morocco and Moroccan design, the most prevalent words and phrases were as follows: Exotic and unique, Bright and colorful, Rich culture, Beautiful, Warm and inviting
Only a small number of those surveyed had visited Morocco. Of consumers who have purchased Moroccan products, most did so at retail stores. A smaller number did so online. For future purchases, they are most interested in home decor and jewelry. A significant number are also interested in rugs. Only 3.5% had visited Morocco 14.5% want to in the future
Of those who have purchased Moroccan products, 70% did so at a retail store 23% did so
online. From these customers:
- 67% are interested in buying home d6cor products - 61% are interested in jewelry
- 36.5% are interested in rugs.
The initial results suggest that the average consumer surveyed is an active customer of home decor products. They like to shop in retail stores and online. They are responsive to social networks such as Pinterest and Twitter. They are willing up to 20% more for
authentic handcrafted, artisan-made and socially responsible products, only if the design and the price are right.
The Hybrid Platform Design and Results
5. The Hybrid platform 5.1. Description of the model
Based on our preliminary study, we imagined and designed the requirement of a new platform that solves the issues of the current models in place to import/export artisans' crafts as described in the methodology section.
The platform reduces the inventory and financing risks, and increase the artisan's profit margins. Given the nature of the crowdfunding model, artisans produce only crafts requested (and paid for) by consumers, which allow us to put in place a low-to-no inventory model and increase the artisans' margins. Artisans cannot afford holding inventory and taking on the risk that is associated with it and find themselves at the bottom of the supply chain, being squeezed by middlemen/retailers who can take on that inventory/financing risk.
Also, given the structure of the crowdfunding model, the artisans are not disconnected and far removed from the end-users as they are able to align their production with the customers' tastes, preferences, and behaviors. As a result, the demand and offer will meet at the "right", optimal price.
Additionally, the platform gives the artisans a means to share their stories and emotionally connect with their users in a beautifully designed environment such as Pinterest: it offers a visual discovery, collection, and sharing channel emotionally linking and connecting the craftsmen and buyers (which allows users/buyers to travel and discover remote areas of the world through the platform). That proximity will be even more stressed
To solve the marketplace model issues, specifically the lack of background checks and quality control, we are partnering with community managers. These managers constitute another line of defense with regard to quality controls and partner with and handhold artisans to improve their processes, design, and administrative duties. This way, the artisans can focus on their core strength: building beautiful products for buyers across the world. The community managers assist artisans optimizing the lead time (from sourcing to end consumer) through a reliable direct Supply Chain.
The business model is rather simple: we set up a visual discovery/sharing, crowdfunding platform and a commission is taken on crafts sold by artisans to customers. The artisans are managed by community managers and costs are limited to the investment in the platform, community managers' salaries and marketing to grow user base if needed. The platform that we will call "MoroCrafts" on the rest of the study will rely heavily on social media and viral marketing to grow that part of the business and solve for that side of the equation.
5.2. Proof of concept on Kickstarter
We started with a pilot test between Moroccan Artisans and American consumers and sold 18 items or SKUs as if they would be sold in our platform. Figure 11 shows some of the articles we offered during this campaign: teapots, candleholders, mini tagines, traditional leather bags, silver necklaces and bracelets, rugs, lanterns...
67$ LANTERNE BOIS BLEUE
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Figure 11 Some articles offered for sale during the campaign/pilot test
5.2.1. The Supply chains
After one month, we could raise $10,212 on Kickstarter from 91 different backers.
$1,996 were donations without any counterparty while $8,216 were items bought by
customers. If we exclude the website fees of 8% and the donations, the average amount purchased for this campaign was around $53. Table 1 shows the price point for each SKU
Item Retail Price Quantity
Rugs $ 350.00 6 Bracelet $ 110.00 8 Necklace $ 70.00 4 Small bag $ 15.00 14 Medium Bag $ 25.00 12 Large bag $ 30.00 8 Mini Tagine $ 20.00 36
Bougie bois petit $ 34.00 10
Bougie khmissa metal petit $ 34.00 4
Teapot colore petit $ 45.00 10
Teapot point petit $ 45.00 12
Petite lanteme bronze $ 60.00 2
Bougie bois carre grand $ 65.00 4
Bougie khmissa metal grand $ 65.00 4
Teapot colore grand $ 65.00 2
Teapot point grand $ 65.00 6
Lanteme bois bleue $ 67.00 10
Lanterne bois bronze moyenne $ 95.00 2
Table 1 Price point and number of items sold for each SKU
profits for each item:
Share of revenues and profits per SKU 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 0 O '\ 06 ' C
U Share of Revenues 0 Share of Profits
Figure 12 Share of revenues and profits per SKU
We can notice that there are only 3 items that represent more than 10% of profits and revenues: rugs and bracelets which are high value items and the mini tagines which are affordable (they are the ones that were bought the most in terms of volume. We could consider them as A items.
In general, revenues and profits are pretty much correlated expect from the small bags and the blue lanterns that were underpriced by comparison to other items.
We used two different supply chains for these products:
- A direct supply chain for expensive and bulky items such as rugs through FedEx.
Lead time was less than 2 weeks and logistics costs were around 15.3% of the
final retail price.
- An indirect supply chain for customized and smaller items: we sent them by bulk to the fulfillment center to reach a critical mass and then sent them back to
customers via the regular US domestic post office. Lead time was significantly higher (more than 6 weeks) and logistics costs were around 26.4% of the final retail price. (Written after items sent to customers next week).
Figure 13 and Table 2 summarizes the breakdown of production cost, shipping costs and margins per item:
Item Share Production cost Share shipping cost Margins
Rugs 35.0% 15.3% 49.7% Bracelet 36.5% 5.0% 58.5% Necklace 35.0% 8.6% 56.4% Small bag 47.6% 36.7% 15.7% Medium Bag 32.7% 22.0% 45.3% Large bag 30.6% 18.3% 51.1% Mini Tagine 12.8% 30.0% 57.2%
Bougie bois petit 13.5% 29.4% 57.1%
Bougie khmissa metal petit 13.5% 29.4% 57.1%
Teapot colore petit 27.2% 17.8% 55.0%
Teapot point petit 27.2% 17.8% 55.0%
Petite lanterne bronze 29.8% 36.7% 33.6%
Bougie bois carre grand 12.6% 55.4% 32.1%
Bougie khmissa metal grand 12.6% 55.4% 32.1%
Teapot colore grand 37.7% 15.4% 46.9%
Teapot point grand 37.7% 15.4% 46.9%
Lanterne bois bleue 38.8% 29.9% 31.3%
Lanterne bois bronze moyenne 29.5% 26.3% 44.1%
Average 28.3% 25.8% 45.8%
Breakdown of the price for each SKU 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% quo o %Q e
0 Share Production cost N Share shipping cost 0 Margins
Figure 13 Breakdown of costs and margins for each SKU
Again if we exclude the commission fees from the Kickstarter website, on average, margins were around 45.8% (small bags had a very low margin, suggesting a misprice), production cost were around 28.3% and shipping cost were around 25.8%. We can notice a difference between the first supply chain were shipping cost represent 15.3% of the final retail price and the second supply chain where they represent 26.4%. Inside the second supply chain, we notice differences as well since the jewelry items that are quite light benefit from the economies of scale from the bulk order: shipping cost represent only 5% or 8.6% of the final retail price for these items. Shipping prices are very high for bigger candleholders because they are on average much heavier than the rest of the items (2.6 kg vs 0.8 kg on
5.2.2. Main challenges
Mainly delays appeared because we faced technical difficulties when customizing products by engraving initials of the customers. We also needed to wait for artisans to send their items from different regions of the country to a consolidation point where the community manager was based. As for rugs which were sent directly to customers, the process was much smoother and clients were generally satisfied.
The goal of the campaign was also to better assess the customer's tastes with regards to crafts, artisans' stories and shipping/delivery preferences. People who received their items quickly were extremely happy while answers were mixed with people receiving their items with a higher lead time. This will encourage us to focus on a few products that will be offered in the crowdfunding section (rugs and jewelry), while we will build some inventory for smaller and cheaper items.
