Supply Chain Management in Agriculture - Including Economics Aspects Like Responsibility and Transparency
Supply Chain Management in Agriculture - Including Economics Aspects Like Responsibility and Transparency
Supply Chain Management in Agriculture - Including Economics Aspects Like Responsibility and Transparency
Copyright 2002 by M. Mau. All rights reserved. Readers may make verbatim copies of
this document for non-commercial purposes by any means, provided that this copyright
notice appears on all such copies.
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Supply Chain Management in agriculture including economics aspects like responsibility and transparency
Abstract
Supply Chain Management as a business strategy can combine both microeconomic
and macroeconomic aspects of preferred value chains. This paper (1) shows the impact of SCM, (2) stretches out the three dimensions of performance, costs and quality of the processes along the supply chain and (3) highlights the SCM-enabler. The
method of a process chain analysis is demonstrated for the allocation of resources.
Various results of carried out and studies in progress are given and identified through
the classification into economical and management aspects.
Keywords:
Supply Chain Management (SCM), Activity Based Costing (ABC), Process Transparency, Efficient Consumer Response (ECR), marketing of quality alternatives
1. Introduction
The key statement connected with Supply Chain Management (SCM) is that longterm competitiveness is based on the control of the entire value added chain. The
present article deals with two complementary targets in front of this background.
The business management aspects of cost reduction are obvious. Nevertheless the
context of performance improvement, cost reduction and quality is the main focus on
supply chain optimizations.
Up to now the economic aspects have been disregarded despite of their increasing
importance. According to the three process dimensions: performance, costs and
quality, the focus here is an appropriate supply and marketing of diverse process
variants that show in the extreme completely industrialized agriculture and pure
ecological agriculture respectively. From the economic point of view the process dimension quality is in focus - and quality is considered to be in context to transparent
processes and process responsibilities. Knowing about transfer payment costs and
performances plays an important role if there is a common understanding that efficient process chains should be supported instead of inefficiencies.
It is evident that supply chain observations can take both aspects equally into account. Agriculture in general is reserved about supply chain thoughts. The driving
force in supply chain optimization by now is the processing industry and chances for
agriculture are wasted by this passivity. Because of the tight connection of SCM and
ECR (Efficient Consumer Response) these ECR-cooperations would lead to the
theme likewise. Unfortunately agriculture belongs to the stragglers in ECR as well.
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There is essential need for action. Business management optimizations can take
economic aspects into account if carefully considered. Vice versa economic aspects
require SCM-applications in the enterprises, if additional costs for data collections
should be avoided. Political and social interests can influence the implementation of
SCM in the process chain as well. The interdependencies are evident. And the starting-point is a SCM-implementaion in the process chain. The following explanations
are based on this and link the economic requirements at suitable points again.
2. Basics
Dealing with the entire value chain turns out to be a new dimension in competition.
Success factors are the control over all processes throughout the chain, cooperation
with business partners and the suitable use of information technology. All efforts to
improve the value chain are in context with the concept of ECR.
SCM opens up sufficient potentials within a single enterprise but especially along the
value chain. A large share of the total costs is at the interface of the involved companies. Improvements in operation processes are an appropriate way to increase margins in stagnating industries.
Furthermore focusing the entire supply chain complies with the end-consumers current requirements. Process chain and costs examinations enable detailed economic
viability analysis of alternative production methods and ultimately alternatively
produced products. Figure 1 shows the impact of a diversified product line that is not
adjusted on overall economic viability based on the increasing inventories throughout
the supply chain.
fig. 1: results of the expansion of the product range
50 %
0%
one product
Three
Products
at
constant
revenue
Work effort
revenue
D
C
Sum:
160 %
B
D
C
Sum:
100 %
Three
Products
at
revenue
increase
of 50 %
100 %
Sum:
200 %
C
B
D
Sum:
150 %
C
B
0%
50 %
100 %
Variations in the process chain will expand the number of available products. Beside the cost problem marketing strategies are required to communicate changes in
products to the consumers. The shift in quality must be transparent and sustainable.
In the food industry brands satisfy this quality demand. For agricultural products, respectively improved differentiation of quality levels along the supply chain, brands
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like this are missing. The postulated change to assure the confidence of the consumers can be achieved quasi by the way through a complete implementation of SCM
and ECR strategies.
Improved quality must be reflected in the sales price to make this change in the
process chain worthwhile. An example for this are the costs and revenues for ecofarming and conventional enterprises.
Example: The market output of 1.100 per hectare in conventional farming excels
that of organic farming by 250 per hectare. The resulting difference in performance
among both process chains is partly equalized by transfer payments for the ecofarming processes. Thus the total difference is reduced to less than 150 per hectare. The variable costs in conventional farming are about 150 per hectare higher
compared to eco-farming, which almost or completely renounces the use of nitrogen
fertilizer and (anorganic) pesticides. As a result the net yield is almost identical
(PETERSEN, p. 65).
Public intervention in an over-supplied market is less accepted and according to this
transfer payments will increasingly be connected to defined performance measures.
The political pressure on transfer payments and competitiveness of the production
chains is expected to increase. Technical progress on the other hand is only consensus, if objectively measurable demands (quality, safety, environment) can be sufficed. Crises like BSE tighten those demands. The future profitability of agriculture
(ecological and conventional) compared to other sectors of the economy and to other
countries is closely connected to the political and social acceptance.
The upcoming WTO-negotiations will try to reduce the distortion of competition by an
extensive decoupling of transfer payments and production (PETERSEN, p. 65). All
strategies that stimulate certain production methods and products for instance
through the specification of quality, social and environmental standards - are rated
critical.
The agriculture policy environment plays a prominent role for the prices of ecoproducts . The aspired target of a 20 percent market share of eco-products within 10
years in Germany can only be covenant with sustainable business stability of the enterprises, if the larger supply does not notably lower prices for these products.
3. Supply Chain Management requirements
Part of the responsibility of process management are analysis, valuation, development/improvement as well as supervision and control of the value-added process in
and between companies.
The requirement of supply chain management is the use of the respective enablers:
Technology application (electronic data interchange, barcoding, scanning
etc.)
Process analysis
Activity based costing
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configuration
employees
information technology
raw materials and supplies
work space
.....
process quality
costs
P R O C ESS
process input
cost driver
performance
quality
process output
P R O C ESS
process costs
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Worksteps performed for following processes or customers, produce items or services generate performances as a part of the process output. An holistic evaluation
of the process output includes also the success factors quality and costs
(SCHOLZ/VROHLINGS, p. 58). As a result the three dimensions of the process validation
are shown in figure 2 right.
Process quality
Beside the monetary evaluation of the processes and the performance measures the
quality of the process chain is an increasingly important dimension. Quality measurements extend the average analysis horizon and support process improvements.
The process quality must be measured contemporaneously to identify failures at an
early stage. To limit the process assessment on deviants in performance and costs is
insufficient.
One important quality factor for instance is the process capacity. It specifies the possible (measurable) performance by a given resource input within a time unit. The following quality parameters can be differed (MAU, 2001, p. 24): process time, process
reliability, process preparedness, process condition, process flexibility and process
modalities.
Process performance
The process output can be measured in the majority of cases in activity quantities per
time unit. To obtain a realistic proposition all documents (forms etc.), information and
material (goods, facilities) must be present at the beginning of the output calculation
to ensure a frictionless procedure otherwise the results will be flawed.
Within the scope of an output analysis capacity adjustments according to the demand
of specific performances in and between the process links are of interest.
Process costs
Costs along the supply chain record a consumption of resources in general
(HORVRTH, foreword). To evaluate process costs the overall resource input required
for the process output in the different sub-processes is accounted. Setting a successful design of the process chain requires precise cognition on costs and use of resources in the sub-processes along the supply chain - the cost management of the
affected departments, interfaces and sub-processes is based on this.
4.2 Purpose of process costs recording
The purpose of the process costs recording covers the following four aspects:
Generate costs transparency
Enable a reasonable process configuration
Enable process control
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1
2
3
4
vertical activity analysis
The rating of processes is also starting point for the process configuration or redesign. It is also of interest in respect to process elimination.
Analysis of the process costs are an additional instrument of the process control
(SCHOLZ/VROHLINGS, p. 77). However used, frequently or from case to case, ABC offers essential information for process control in activities, sub-processes and along
the entire supply chain.
ABC facilitates a strategic calculation along the logistics chain and supplies the basis
for outsourcing-decisions, for changes in the process chains as well as the right settlement for logistic services. It serves both, a further cost settlement of the products
and transparent and better planning and control of indirect costs (MAYER, P. 269).
4.3 Evaluation of process costs (resource utilization)
The evaluation of the activity-based costs is a result of the use of single activities by
the relevant process variations. Getting these costs is bounded up in the beginning
with a lot of work. After the relevant activities of each variant are known, the analysis
will be automatically made in the future periods as long as there are no new vari-
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ants. (For the case of new variants, they have to be added to the costs.) The illustration 4 shows the horizontal evaluation of the activity-based costs.
fig. 4: Evaluation of process costs
Process varieties
process costs
1
2
120,-
3
4
The costs for a complete performance of process variants are the result of the added
combining along the process chain. The relevant activities can be summed up, the
appraised activity costs can be seen. These activity-based costs and the marginal
costing can be used for the comparison of cost in the supply chain, so that there is an
instrument for the chain management which serves the aims mentioned above.
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synchronization
of the
process chain
cost reduction,
performance
improvement
transparency and
responsibilitiy
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The willingness of all elements in the supply chain to share information serves to
minimize risk and reduce costs. The largest reluctance to share information is between the foodstuffs industry and dealers.
Decentralized production, central processing of food raw materials as well as longterm connections between producers and processors with only small product varieties lead in the direction of Efficient Replenishment for the delivery to the processors
(STROHM, p. 49f. ). Since suppliers/producers offers are often scattered the crucial
impulses come from the buyers.
Efficient Replenishment is in most cases not only an instrument for decreasing
stocks, the planning of the in time delivery of raw materials by the processors also offers the possibility to expand the control span, at times even to the production of the
supplier resulting in a facilitation of own production planning, and an improved utilization of production capacities. In accordance with ECR applications between industry
and trade this is also denominated pull principle.
Improvement of operating result
Illustration 6 shows the relation of operating result and return on investment in dependence on the companys orientation towards process conformity and co-operation
along the supply chain. The achieved ECR score was utilized as assessment criterion.
fig. 6: operating profit and return on investment (ROI) in relation to process
management and cooperation along the supply chain
8%
6%
20 %
per 100 points the ROI increases by 1,4 %
ROI
4%
10 %
operating profit
2%
0%
-2 %
15 %
100
200
300
400
500
600
700
5%
0%
-5 %
ECR-score
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For all parties involved the described process chain (again illustrated substantially
simplified) begins with the disposition. As seen on the time axis in illustration 7, first
problems arise already at that point. The contract negotiations for the farmer and the
processor proceed in the wrong order. Thus a risk develops for both.
fig. 7: Interfaces along the process chain (cut)
Breeder
Farmer
Anlage 1
Distribution
Storage/shipping
Packaging
Production
Raw material
Farmer
Planting + Cultivation
Disposition
Transport
Mar
Harvest
Feb
Production
Jan
Product. Prep. .
Contract negotiations
With Plant breeder and Veredler
Reception Dep.
Disposition
Transport
Storage / Comm.
Production
Prod.planning
Disposition
WPK
Planning Prod. Transport
Food Industry
Harvest + Processing
Apr
Plant breeding
May
June
July
Growth
Aug
Sep
Okt
Nov
Dec
Storage time
Example agriculture :The risk for the farmer lies in the creation of the land utilization
plan, as he must plan land use already in the fall. Once planned, he cant use the reserved land for other potentially more fruitful crops. The farmer can continue planning
no sooner than January or February after the negotiations with the processor are
completed. If the reserved area is too small, he must till already sown in plots again.
In case the area is too large it has to be cultivated with other crops. Both variants result in disadvantages for the farmer. On one hand costs of additional work arise and
on the other hand diminished yields in relation to the optimal crop may result.
The entire process time is essentially determined by the breeding at the plant
breeder, the growth of the plants until harvest and the storage time of the finished
product at the processor or dealer. These three major periods are to a large extent
uncontrollable, in contrast to the interfaces between the companies where a potential
exists. Through time-window managed delivery the temporary storage at the processor for example can be minimized and the finishing process stabilized. All activities
associated with temporary storage and uneven utilization of processing facilities can
be eliminated by a considerable degree. Illustration 8 right shows the situation in the
manufacturers goods receiving department before the optimization.
Example "harvest mechanization": Another example is the mechanization of the harvest: since a manual harvest in darkness is connected with larger losses and risks
the usage of machines has to be considered. The calculation of such a solutions
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profitability should be based on the production per area. The employment of machines is profitable only if the usage extent rises and thus a high utilization is ensured. The advantage of harvesting machines then consists in lower costs, the facilitation of work and the constant output - no diminishing productivity during the course
of the day. Disadvantages arise as a result of the worse cutting quality, increased soil
residue on the red cabbage, higher harvest losses, stronger ground pressure and
heavier weather dependence. Illustration 8 left shows the cost differences for this alternative of this section of the process chain.
fig. 8: Profitability of Harvesting Methods and
Distribution of Workload
/ ha
Quantity,
Time 45
800
Potential:
> 40 %
2 Frontloaders
600
Tractor
trimming
40
35
Number
Incoming vehicles
Units
Discharge time
30
trimming
450
Loading
by
Hand
25
20
Tractor
cutting
Harvester
15
Harvester
(piece rate)
10
(single row)
at 55
Workhours/
hectare
Manual
(double row)
mechanical
0
6:00
7:00
8:00
9:00
Time of day
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Closed systems should include breeding, propagation, soil choice, planting, growth,
harvest, storage and processing. Guidelines from the farmers customers frequently
include the varieties to be cultivated (in part the seeds are provided), quality characteristics, the cultivated areas and locations, crop rotations (e.g. cabbage only every 7
years), plant protection and fertilization procedures as well as the harvest time
(through cultivation advisors). The obligation to record all measures applied during
the plants growth provide for constant control. The transparency of this chain and the
farmers willingness to share information are guaranteed here.
Successful quality assurance systems count on stage responsibility and interlocking
of the stages with one another. This ensures the consumer a comprehensive protection. Accordingly labeled foods supply the buyer with the necessary orientation for his
purchase decision.
Surely the continuous price competition in the food retail sector contributed to the fact
that products with a test label, which causes additional costs, could not penetrate the
market more successfully.
An underlying factor is that consumers behave differently when actually purchasing
food, compared to what they indicate in questionings. The will frequently expressed
in inquiries to spend more on food of a certain quality is torpedoed by the actual purchase on basis of the lowest price.
Possible causes for the still small demand for organic food in Germany could then be
the wrong address of consumers, the lacking availability of suitable organic products,
deficient marketing strategy and partially also the high price level. The missing protection of the term "bio" is just as critical, as are the missing labels for differentiable
quality classes, to which certain price levels are then attributed.
In the food market two types of segments exist: one with quality-oriented products in the form of branded articles - and one with anonymously produced products. The
majority of the farmers still produce an exchangeable product under the focus of
quantity maximization and cost minimization. Caused by the predominantly horizontal
organization of agriculture (cooperatives, producer alliance etc.) the vertical dialogue
with the following production stages is predominantly limited to the delivery of the
products to be processed. The ability to trace the food origin is generally not possible
which contradicts the demand for transparency (BLAHA, p. 70).
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Different quality standards are associated with different price structures. Consequently in each case alternative quality levels can be offered for the different subprocesses along the chain (see illustration 9).
fig. 9: processes and varieties
Varieties
Processes
Varieties
Planting
Soil
Cultivation
Hygiene
Harvest
Storage
Technology
...
This is sensible only if the necessary activities and resulting costs are borne by the
final consumers as well. The price for example is then justified with the sinking yields
caused by the reduced use of synthetic fertilizers and plant protection agents and the
more complex cultivation methods. Apart from this specialization - by application of
the individual alternative modules to certain plots - the requirement applicable to the
standard solution demands for larger connected plots to enable cost-efficient operations.
In closed production chains quality criteria are defined for agricultural raw materials
as well. An important economic component is the correct marketing of such products.
If this marketing does not succeed, then it is hardly worthwhile for the farmers to produce products of higher quality.
Quality as elementary process dimension
To achieve the goal of "qualitatively exceptional products", all enterprises along the
process chain must assume responsibility. For dealers this happens indirectly, since
they can determine only the quality of the delivered goods, without being able to affect them at that time. An influence is possible by means of an appropriate payment
reserve for high quality of both the trading companies and processors. The adoption
of the responsibility towards more quality requires the development of comprehensible self-controls. They consist of internal audits and certification through third party.
The government administration is limited to control of the self-control. Quality assurance and product liability must be introduced in the context of supplier customer relations for supplied raw goods also. Illustration 10 shows an example of a process assessment using a part of an analyzed process chain.
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fig. 10: Assessment for single activities along the process chain
using the process dimensions
21st discrete activity in entire
process chain (running number)
Mitarbeiter
Process step
Description of specific
quality characteristics
Discrete Activity
2
Picking
Picking
Regular Assortment
Loading
pickings
[21]
[22]
Description
Cost driver
Picking list
Picking list
Assumptions
Time-Max. (sec.)
780
90
Time-Min. (sec.)
360
60
Time-Durch. (sec.)
Material costs
average
700
0,05
7,78
90
Hourly wage:
1,00
20,00
20,00
4,32
Sum
76
18.173
141.344,00
76
18.173
18.172,80
159.516,80
List of literature
BLAHA, THOMAS (2001): Sechs Sulen der Sicherheit, in: DLG Mitteilungen (2001)5,
p. 70-72
GLEINER, HARALD/MAU, MARKUS (1998): Prognose entscheidend;
in: Logistik heute (6/98), S, 77-79
HAU, L. LEE/PADMANABHAN, V./WHANG, SEUNGJIN (1997): Der Peitscheneffekt in der
Absatzkette, in: Harvard Business Manager (1997)4, p. 78-87
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