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Nature and Scope of AgriFood Supply Chain Dynamics

Tom Sporleder
sporleder.1@osu.edu

Presented at FAMPS Conference May 4-5, 2005

Agenda
Schematic approach to defining a supply

chain Highlight the importance of perishability and differentiation in commodity supply chains Present conceptual framework for supply chain analysis
Supply chain system Decision scope Network environment

Classify major supply chain types Comments about dynamics and

heterogeneity

Motivation for Means to Better Understand Supply Chains and Networks


Analysts must understand

complexities relative to information & knowledge Cascading events: SHIFT IN


Biotechnology Food safety Animal welfare Decreased costs of information flow

BASIS OF RIVALRY

Intellectual Capital vs. Intellectual Property


Capital is the

broader concept Property is a class mostly of the intangibles of a firm Brand equity Patents Licenses

Supply Chain Components Food and Agriculture-Related Cluster


S e c t o r s o f t h e A g r i c u l t u r a l a n d F o o d C l u s P F a r m P r o d u c t i o n D E W R F a r m I n p u t s M a c h i n e r y a n d A C F o o d ( H R S e r v i c e I ) A C w a y f r o m H o m o n s u m p t i o n e t o n H o m s u m e p t i o n h o l e s a l i n e t a i l i n g g a n d o m e s t i c x p o r t r o c e s s i n g F o r e i g n E x p o r t

Grocery Supply Chain


Distribution Warehouse Affiliated with a National Grocery Retailer National Brand Food Manufacturers: Campbell Soup, Kraft Private Label Heinz, Kellogg Self-distributing Stores: National Chains 1 ,11 1 1 stores in 1111 , Median selling area 1 ,11 ft. 1 1 sq. DSD

Small Food Processor without Significant Brand Equity

Food Wholesalers: Super Valu, C&S Wholesale

Wholesaler-supplied Stores: Independents 1 ,11 1 1 stores in 1 1, 11 Median selling area 1 ,1 1 ft. 1 1 sq.

Interdependencies in Supply Chain

Growth in Agricultural Contracting

Source: ERS, USDA

Selected Commodities and Food Products Mapped in the Dependency/Differentiation Space


Differentiated Dole Bagged Salad Pharmaceutical Corn Tyson Chicken Breast

Dole Canned Peaches Private Label Pickles

High Oil Corn

Organic Sweet Corn

Sequential Dependency

Reciprocal Dependency

Baby Greens Fed Cattle Soybean Oil Generic

No, 1 Yellow Corn

Raw Milk

Typical Transaction Governance Mapped in Dependency/Differentiation Space


Differentiated

* Specification buying Under Contract * Just-in-time deliveries *Joint ventures

* Long - term contracts * Strategic partnering *Ownership integration

Sequential Dependency

Reciprocal Dependency

* Buffer Stocks * Cash Market Transactions Generic Seasonal Contracts

Supply Chain Bullwhip Effect Defined

The bullwhip effect refers to the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (demand distortion) and the distortion propagates upstream in an amplified form (variance amplification)

The Bullwhip Effect in Supply Chains

Supply Chain Without Bullwhip Effect


Customer demand forecast = 10 units Information
Products & Services
10 Units 10 Units 10 Units

Suppliers

Producers

Products & Services


10 Units

Products & Distributors Services


10 Units 10 Units

Retailers

Cash
Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.

Key:

= Inventory Levels

Supply Chain Bullwhip Effect


Customer Demand forecast = 20 units

Information Flow
Suppliers Products & Services
80 Units 160 Units 80 Units

Producers

Products & Services


40 Units

Distributors Products & Services


20 Units 40 Units

Retailers

Cash Flow
As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.

Key:

= Inventory Levels

Amplified Bullwhip Effect from Reciprocal Dependency


Differentiated

Amplifie d
Reciprocal Dependency

Sequential Dependency

Generic

Amplifie d

Chain Governance Structures -Spot Markets


-Contracts -Alliances

Supply Chain Concepts


Decision Scope Chain Production:
-Firms -Facilities -People -Physical Processes

Operations and Control: -Inventory


-Dependencies -Quality & Process Control -Structural and Relational Embeddedness

k t or e n w m et n N iro v En

Supply Chain System -Trade Customs -Information Technologies

-Trade Regulations -Uncertainty -Globalization

Network Embeddedness
Interdependency that develops

from interfirm relationships Two types:

Relational - strong or weak ties Structural - sparse or dense networks Interaction?

Better connected firms have a

competitive advantage

Components of Network Embeddedness


Network Embeddedness

Relational Embeddedness Ties Weak Strong

Structural Embeddedness Connections Sparse Dense

Supply Chain Classification


Chain master: supply chain managed

by a domain firm Chain web: individual firms move in and out of multiple chains on an as needed basis Chain organism: the chain competes as one entity without a dominant member

Supply Chain Classification


Chain Master Dominant agrifood supply chain model Strong in generating chain efficiency Weak on incentives for learning Chain Web Computer industry and smaller food firms (without brand equity) Strong when firms must compete in multiple chains Weak on incentives for learning

Supply Chain Classification


Chain Organism Strong in creating chain efficiency Strong in creating incentives Toyota supply system as key example (Dyer and Nobeoka)

Network-level KM systems exist Intellectual property rights reside at the network level and not at the firm level The creator of knowledge appropriates 100% of benefits in the short run Trust is a key element

Learning Supply Chain


An integrated supply chain that has

an added dynamic, agile ability to learn from and respond to changing markets. Added capacity: knowledge and intellectual capital held and applied collectively by the supply chain Benefits:
Greater responsiveness and flexibility Greater efficiency

Prerequisites for a Learning SC


The ability to manage knowledge

exists at the supply chain level.


Capacity:

IT for explicit knowledge Human processes for tacit knowledge

Incentives through fair distribution of

returns:

To motivate knowledge sharing To overcome classic coalition problems

Application to Agrifood System


Agrifood examples LoSatSoy oil supply chain (King)

Lesson: Dominant actors control either the critical production knowledge or the critical end-consumer knowledge (chain master). Lesson: Path dependency blocks knowledge management and learning

ECR initiative

Frito-Lay and Wyandot Foods ??

More cases need to be explored. When is dynamic responsiveness needed?

Concluding Remarks
Dynamics are not uniform across supply

chains The role of spot markets tends to remain robust in commodity or undifferentiated portions of supply chains that rely on buffer stocks for coordination The bullwhip effect may lead to vertical information transfer within supply chains Supply chains are complex at least 3 dimensions: system, decision scope, network environment Factors of embeddedness and brand equity are not well-understood but enrich

Concluding Remarks
Two types of agriculture have emerged:

cost-based and value added

Supply chains coagulate to serve the unique

economic and logistical requirements of each Rapid movement to identity preservation and traceback, motivated primarily by cost minimization & inventory control incentives

Recognition of the chain master model

could benefit analyses of supply chains (i.e. similar to principal-agent but more dimensionally-complex) Much research remains:
Testing of stylized facts Implications for supply chain and food firm

performance