Planning, consolidation and coordination the keys for small farmers to advance in the fresh produce value chain J. Rene Villalobos*, A. Mason, H. Flores and C. Wishon International Logistics and Productivity Improvement Laboratory Arizona State University Tempe, AZ 85287, United States of America *Corresponding author, email:
[email protected]
Abstract The supply chain of fresh vegetables has traditionally been unregulated and highly variable in terms of market prices. The uncertainty caused by this variability is one of the reasons that small farmers do not usually perform activities of distribution and instead rely on intermediaries to consolidate, process and distribute their products. The downside of this approach is that the farmer only gets around 20% of the prices paid by the final consumer. If small farmers want to improve this situation they need to associate with other farmer to be able to efficiently reach higher echelons in the value chain of fresh produce. In this talk we present a series of decision support tools, and associated solution techniques, that aim to make the farmers’ production process more efficient and expand their share of the revenues from the supply chain. Keywords: Fresh Produce, Small Farmers, Supply Chain Planning
1. Introduction One of the characteristics of the supply chain of fresh produce is the high variability observed in the prices received by the farmers of these products. One of the main reasons for this variability is the perishability of these products which limits the inventory opportunities through the supply chain. Another characteristic of the supply chain of fresh produce is the small fraction of the value chain captured by the farmer, particularly the small farmer. This is due, among other things, to the large number of intermediaries involved in the distribution of these products and to the reduced marketpower of individual farmers. Over the past few decades, the global fresh produce industry has undergone major changes in the way supply chains compete, and arguably, the main driver of change has been changing demand and consumer expectations (Dimitri, Tegene, and Kaufman 2003; Boehlje 2002). Today’s consumer demands a wide assortment of products of high quality, at competitive prices and available at all times. However, given the perishable nature of products such as fresh fruits and vegetables (FV), this can only be obtained through agile and sophisticated supply chain networks that are able to move the product from its source to the consumer within a limited time window. If there is an inefficient match between supply and demand, this results in the product quickly losing its market value and eventually leads to product loss. Global supply chains have adapted to this new environment in different ways. For example, in Europe, simple competitive structures have now been substituted by complex supply and demand networks which have set the stage for fierce competition between retail and production over evermore diminishing margins. Any marginal gains within this environment come at a large cost and are usually obtained through strategic partnerships and investments in innovation and product differentiation at both sides of the supply chain. In retail, this has resulted in heavily integrated distribution channels at the consumer level. For farmers, this has morphed supply networks into vertically integrated farmer cooperatives aimed at protecting the interests of the farmers from those of retail (Bijman and Hendrikse 2003). In the US, on the other hand, these developments have contributed to the emergence of grower/shipper entities (Perosio et. al., 2001) in charge of not only production but also of the distribution of products directly to retailers.
2 However, despite the emergence of these entities, there is reasonable concern that growers are still not prepared to confront future changes in the industry, especially in the case of the most vulnerable, such as small farmers. For these entities, one important step in their survival is integration, and as they lag to do so, their interests are compromised as the retailers slowly increase their stake in the FV supply chain. Furthermore, the resulting power imbalance not only hinders the farmers’ potential growth within the chain but also is fundamental in adding to the observed inefficiencies. The reason behind this is that as the leverage increases on the side of retail, the competition between growers-shippers to secure limited demand contracts from supermarkets incentivize growers to overproduce in order to avoid shorting their customers and losing large accounts (Cook 2001) resulting in a monetary loss to the farmers. But most importantly, this is a prime example of how food waste is created within the supply chain and by the supply chain structure/incentives alone (Simchi-Levi, Kaminsky, and Simchi-Levi 2003) .
Figure 1 – Estimated Dollar Sales for Fresh Fruit and Vegetables Value Chain, (bn) To further elaborate on this issue, Figure 1 presents a schematic of the supply chain of the fresh fruit and vegetable industry in the US for the year 2010 (Cook 2011). In this figure, the revenues created at the consumer level are roughly five times the amount actually received by the farmer; this is an important imbalance given that risk, in terms of yields and prices, is very often higher for the grower than for some other participants in the supply chain that take a higher fraction of the value generated (usually known as value chain) (Jang and Klein 2011). This demonstrates clear incentives for farmers to become active participants in the supply chain, where growth opportunities exist. In fact, growing evidence suggests supply chains are continuously changing such that growers play an increasingly larger role in the echelons downstream, either as grower-shippers or as part of farming cooperatives (Cook 2001) that market and distribute their own products (Diamond and Berham 2012).
2. Fresh Produce Supply Chain Figure 2 details the general flow of information and physical goods between the different segments of the supply chain in today’s fresh produce industry. At each transition, from one point to another, a transaction cost occurs in relation to transportation, inventories, or profit taking, for example. In this structure, demand and other market information is indirectly relayed, through order placement, from the consumer towards the source of production, which often can be delayed or distorted traveling through the supply chain. The result leaves farmers to work with aggregate information for market prices and the observed information from its direct customers, rather than undistorted, more granular and accurate information. This distortion of information is a common phenomenon observed in all supply chains and is better known as the bullwhip effect (Lee, Padmanabhan, and Whang 1997). In essence, the bullwhip effect suggests that the quality of information traveling up through the supply chain decreases while apparent demand is perceived to be more volatile, leading producers to increase inventory levels to cope with the perceived variability. In the specific case of fresh produce, the delay in information and the lower information quality results in supply chain inefficiencies from (1) cycles of product shortages and overages, which affect product prices, and (2) spoilage of the product whose inventories must grow to satisfy demand.
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Physical goods
Information
Inventory
Farmers:
Shippers:
Wholesalers and retail:
Consumers:
F
S
W
C
Higher Variability
Higher revenue
Figure 2 – Typical structure of the fresh produce value chain
3. Farmer Coordination Unlike manufacturing, in agricultural supply chains most of the products that are finally sold to the end consumer do not undergo major physical transformations. Thus, a farmer, or a group of farmers, could in theory conduct some of the activities normally performed by intermediaries such as brokers and wholesalers. This vertical expansion of activities can be accomplished through the grower/shipper business model, focusing on additional services and competitive advantages such as increased product variety and stable supply of products throughout the year; in this way farmers can capture a larger margin of the overall supply chain. This business model allows farmers to shorten information gaps, reduce their exposure to risk, and also capture higher margins for their products (Figure 3) (Matson, Sullins, and Cook 2010) For this new breed of growers, the use of adequate planning models represents potential opportunities for lowering costs, increasing revenues and most importantly reducing product waste by obtaining robust strategies for the operation of their enterprise in an uncertain environment. Wholesalers/ Grower-Shipper: Consumers: Retailers: F
S
W
C
Figure 3 – Supply chain from with grower-shipper expansion In theory individual farmers could use planning tools like those proposed by Ahumada and Villalobos (2011a, 2011b) and Ahumada Villalobos and Mason (2012) to embark in the direct distribution of their products. In particular, these authors propose a two-phase hierarchical methodology for an envisioned supply chain of fresh produce. In the proposed methodology tactical and operational planning tools are used in a coordinated manner. At the beginning of the season the tactical tool is used to decide the timing, size and location for the planting of the different crops. Once the harvesting time approaches factors such as demand, market prices and labor availability are used to determine the exact harvesting time as well as the destination of the product. Figure 4 presents a schematic of the process and some of the factors considered in each planning phase. Nonetheless, thus far, the main barrier of entry to this market segment has been the large range of products and the high level of service that brokers or wholesalers can offer to the customers such as the large supermarket chains. In particular, the most attractive sources of revenue that can be achieved from this transition are 1) product differentiation through private labeling and/or food processing, and 2) an edge over competitors from increased product variety and year round availability. Therefore, for this vertical expansion to be viable, a grower should have a considerable size before expanding its operations since without the existence of these two value-added activities the benefits of vertical integration will remain limited. Ultimately, since few growers have the sufficient scale and variety by themselves, another alternative for vertical expansion is for the grower to coordinate his/her production with a larger group, which will be discussed below.
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INPUT Seasonal demand Available resources Crop requirements Expected price Cost information
INPUT Weekly prices Weekly demand Transportation req. Daily maturation Production capacity
OUTPUT Crops to plant Weekly production
Tactical Plan
OUTPUT Weekly harvesting Weekly shipments Available inventory
Operational Plan
Figure 4: Data linkage and hierarchy between planning models To this effect, some farmers have already begun to integrate themselves to larger farming associations, while still maintaining their autonomy. This has resulted in the establishment of cooperatives. For instance, lettuce growers in California have been able to better maintain profitability through cooperative management of supply, pricing, and returns (Cook 2011). More frequently, farmers have been able to use the co-op model to their advantage, employing varying schemes, from non-profit to for-profit models, as well as consumer-driven and producer-driven models (Diamond and Berham 2012). The emergence of cooperatives, or other means of collective bargaining consolidation mechanisms, is particularly vital for small and mid-sized farmers, which have the greatest difficulty competing successfully with larger producers who can offer more variety and lower prices (Stevenson 2008). Recently, among the emerging models for farmer cooperation, consolidation, and distribution, the food hub has become prominent. Food hubs are entities that marry local and regional food production with the storage and distribution capacity of larger food companies. These cooperative-inspired models show promise for farms with smaller operations as well as those that operate more remotely, because the logistics of distribution can be outsourced to a consolidation center. In turn, by investing in joint consolidation and marketing, a number of operational benefits are obtained, such as: enabling access for local foods, coordinated sharing of information, offering transportation and distribution, facilitating efficiencies of scale, providing brokerage services, increasing product variety and extending production seasons (James Matson, Martha Sullins, and Chris Cook 2010). Co-op: Farmers: F-1
Wholesalers:
Consumers:
W
C
F-3 S F-2
Figure 4 – Envisioned Supply Chain Environment for Farmer Cooperation Specifically, the cooperative model allows for information sharing within members, an attribute which holds great promise for risk reduction and waste elimination, as the existing variability in the production level can be pooled and supply can be better matched to demand at an earlier phase. Moreover, the cooperative model also allows for growers of varying backgrounds, geographical locations and production capabilities to work together, thus enabling higher flexibility, more product variety and extended growing seasons. Because of this specific trait, there is a distinct possibility that a well-coordinated cooperative based business model may create significant efficiencies throughout the supply chain.
4. Small Farmer Centric Supply Chain Design Each of the three supply chain structures described above (traditional farming with contracting, grower-shipper operations, and integrated farmers through a co-op) will ultimately have their own strengths and weaknesses. Moreover, each structure may operate best under a variety of environments. For instance, a coop consisting of several
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small, specialized growers may be able to capture niche, higher value markets better than a grower/shipper; by the same token, grower/shippers may be able to better capture high volume contracts with wholesalers. Moreover, each business structure may perform differently under different circumstances. An illustration of the different business structures and the markets which they are most suited for is depicted below.
Better Profit Margins Higher Volumes Lower Variability Single Farmer (Traditional) Contracting with shippers who take product downstream
Single Farmer (Grower-Shipper) Grows and distributes its own products. Sells to wholesalers and distributors
Traditional Markets
Several Farmers (Cooperative) Multiple products and seasons. Must coordinate production
Single Farmer (Local Market) Brings products to farmers markets and other direct-toconsumer alternatives
Niche Markets
Figure 5 – Relative advantage of varying business models to target different markets Among some of the main features that characterize each supply chain structure, primary aspects include: the way in which information is managed, the approach to manage inventories locally as well as globally, the ways in which growers cope with risk, and the main challenges faced by each business structure. These challenges can be barriers to increased supply chain efficiency. For instance, the cooperative business structure requires careful analysis to determine the extent to which this institution can deal with the added logistical complexity of dealing with distribution, planning, and coordination decisions (James Matson, Martha Sullins, and Chris Cook 2010). In particular, significant game-theoretic aspects related to coordination and information sharing may arise (Karina, Bamber, and Gereffi 2012) that limit the effectiveness of farmer cooperatives or even compromise their sustainability altogether, On the other hand, in the case of the grower-shipper model, the most important challenge is marketing intelligence and risk reduction capabilities. Since the grower-shipper performs broker-related activities in serving its customers, this model needs to assess market demand signals and correctly predict upcoming demand. Unfortunately, there is only a limited body of research in the development of models that can capture the perishable characteristics of the fresh produce supply chain. Especially important is the need to develop models that capture the dynamics of all three instances, while providing insight for what are the decisions that can be taken in order to optimize the supply chain. Such a model should be based on correctly capturing the relevant parameters which affect the decisions of various supply chain players; thereafter, there is also the need to assess the impact of rational, optimal decisions made by growers to the performance of the supply chain in terms of overall profits, as well as levels of food waste. This could potentially aid decision-making for policy design purposes. Equally important are the application of these models to the problems viewed by specific players of the supply chain, which can directly apply them as an aid to better match supply and demand.
7. Conclusions The trends in the global market of fresh produce demand the development of decision support tools for the planning and coordination of the supply chain of these products. The models used in these models need to capture the perishable characteristics of these products as well as the associated intrinsic volatility of prices and inventories. Especially important is the need to develop models that address the problems experienced by specific players of the supply chain to have a better match of supply and demand of fresh produce.
8. References ¶(6pt)
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