Everyone is in a Supply Chain
Of course all this supply comes at a cost at each link in the chain. Just as an example, let’s look at potatoes. The majority of potatoes (about 70%) grown in Tasmania are processed for the fast food business. To give you some perspective, the average yield for potatoes is about 65 tonnes per hectare. Cost of production is about $15,000 per hectare or about $230 /tonne. The farmer receives $300 / tonne, so minus costs the farmer ends up with about $70 / tonne. At the consumer end a large packet of French fries is sold at about $2.00. This is for about 200 g of potatoes. This equates to the consumer paying about $10,000 / tonne for the final product. Does this seem fair?
The farmer gets $70, while the retailer charges $10,000. Well, until we find out who gets what in this supply chain, what costs are incurred by the retailer, processor, transporter etc – it does look a bit lopsided. Refer to this link about Jarrod and Susan Nichols from Scottsdale.
Let’s now compare this processed price to the price Tasmanian consumers pay for fresh market potatoes. The following link shows that consumers paid about $2.50 per kg for fresh potatoes in 2012/13. The price hasn’t increased too much since then. This still means that the customer (that’s you and I) pays about $2,500 per tonne – with the farmer still only receiving about $70 per tonne.
This perceived disparity between the cost of raw product to the price paid by the final consumer, has led to an increase of so-called farmer’s markets. However, farmers at these markets are generally not the large scale farmers but the niche small holder farmers and market gardeners. The question remains about the distribution of the money in the chain? We’ll come back to that - let’s continue our discussion about supply chains in general.
In a supply chain, producers are also consumers. This means that each consumer is a price taker. There is always the option of shopping around for the lowest price to increase your profit or to obtain a bargain at the supermarket (might save enough for a coffee?) – but in a supply chain each consumer that is shopping around and bargain hunting is disconnected and acts independently from other consumers or stakeholders in the chain.
So, a traditional supply chain is focused on securing customers and driving supply. Supply chains will continue to exist in business regardless of whether they are managed or not. The strength of the chain relies on efficiency and reliable logistical management. You might like to refer back to your notes on the milk price tumble from ZAB101 as to what can happen in a supply driven chain.
Supply Chain Paradigm
In a supply chain paradigm, powerful actors emerge. The supermarkets are an obvious target. What do supermarkets want? Well, the basic requirements of supermarkets are:
1. Reduced complexity of supply arrangements – instead of dealing with 500 smallholders who may or may not turn up tomorrow with produce, they would prefer to deal with 5-10 larger, more stable suppliers who are reliable.
2. Reduced supply risk which involves:
- Reducing volume and price variation;
- Reducing opportunism;
- Reducing conflict;
- Increasing capability to cope with QA and safety compliance schemes.
3. Reduced price because price is a major decision factor for shoppers and increasing margin to improve profit for shareholders/owners.
As consumers, we are warned about unscrupulous behaviour by product suppliers through advocacy groups such as ‘Choice’.
Even television shows...
This is very good for raising awareness and making people ‘accountable’, but how does it really impact on supply chains?
Well, as a matter of fact, the consumer is becoming the major driver of this change in thinking about supply chains. Other drivers include:
- globalisation (Toto, I’ve a feeling we’re not in Kansas anymore)
- technology - I’ve still got the hammer I was given for my 21st birthday (a good hammer will last a lifetime – and yes it has the same head and the same handle), whilst I have had over 12 computers since I bought my first computer in 1992 – each one was the best you could buy at the time
- policies – with every new government comes a policy decision and how things can be improved
- innovation – there is always another way
When I say consumer, I don’t just mean the final consumer of a product. Remember that consumers exist all the way up and down the chain.
How has Supply Chain Management been described?
“The process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from point-of-origin to point of final consumption for the purpose of conforming to customer requirements (Council of Logistics Management, 1986)”
“The integration of key business processes from end user through original suppliers that provides products, services and information that add value to the customers and other stakeholders (Lambert & Cooper 2000, p. 66).”
You will notice in both these statements that consumer is mentioned. Hold that thought…
So... Where does the extra money come from?
Remember back to the story from Scottsdale. The local farmers wanted a price rise to make it more viable.
In other words, they wanted a bigger share of the pie. However, regardless of the price difference between a french fry and a raw potato, when someone wants more out of the same pile of cash, someone gets less. That’s a pretty hard sell. It’s an easier sell to say there is more money. So, finding value in Value chains is actually growing the pie.
Growing the pie is called Value Creation, whereby there are two groups of strategies. Those that reduce costs through greater efficiency and effectiveness, and those that increase income by delivering to more consumers, more sales per consumers and a higher price. Consumers will pay a higher price – if they perceive the value to be higher.
Sometimes we think that this all occurs in the developed economies of the world like the US, Europe and Australia, but ….
“…you will read about business terms such as ‘strategy’, ‘innovation’ and ‘culture management’. Your first reaction might be that these things don’t apply to poor, traditional smallholders; however, a young Cambodian farmer with just 160 square metres of land to support his extended family recently told visiting Australian researchers, ‘Just tell me how I can produce more from my land so that I can make enough money to buy more land’. Now that’s a strategy! Similarly, in Mt Hagen, a large town in the Papua New Guinea (PNG) Highlands region that can grow excellent cool-temperate vegetables, there are several examples of farmers’ wives who previously had only collected vegetables from relatives in their tribal villages but saw an opportunity to supply the produce to Port Moresby, the national capital. They quickly grew their collecting activities into regional wholesaling businesses, renting facilities, employing people, packing produce into special boxes and using freight aircraft to fly high-value produce one hour to Port Moresby. Each of these women also had a vision and strategy of how they could further develop their businesses.” - Taken from Collins, Dent and Bonney (2015) pp 5.