Estudio morfoestructural

1.2.3. 1 Value-added systems and vertical integration

Agricultural production in the past has largely produced generic commodities for the feed, industrial and food markets (Street 1990; Boehlje et al. 1 999). Agribusiness is evolving from fragmented commodity systems trading on the open market to more closely coordinated, market driven supply chains with a differentiated product focus (O'Keeffe 1 998a; Boehlje et al. 1 999). Boehlje et al. ( 1999) suggest that agriculture in the 21st century will be characterised by: manufacturing processes in production as well as processing, a food supply chain approach to production and distribution, negotiated rather than market coordination, a

more important role for information and other soft assets, and increasing consolidation at all levels raising issues of market power and control. In the future value chains are likely to be competing with other value chains, both nationally and internationally, rather than with other firms (Nitschke and O' Keeffe 1997).

The study of supply chains and vertical coordination is encompassed by a range of disciplines including industrial organisation economics, transaction cost economics (coordination mechanisms), agency theory (outcome uncertainty and risk, goals), political science (power relationships), law (contractual relationships), and more recently business strategy (trust) (Boehlje and Schrader 1998; O' Keeffe 1998a, 1 998b). Value-added systems or supply chains in the agricultural industries or food chain are broadly described in Street ( 1990), O'Keeffe ( 1 994), Boehlje and Schrader ( 1 998), O'Keeffe ( 1998a) and Boehlje et at. (1999).

Four strategies to supply end markets defined by Boehlje et at. ( 1 999) were: blending commodities into a single product that meets a specified commodity standard, sorting raw materials based on various characteristics toward specific end use markets, acquiring only products that will meet specific requirements (e.g. by contracts), and separating commodities into components, then recombining these to meet specific end markets. Future trends will see a shift away from the first strategy towards the last strategy requiring more aligned food supply chains, although it is likely that there will be a place for all strategies in the market.

Low value commodities can be traded relatively cheaply with less integration assuming low asset levels (specificity), efficient information and communication systems or minimal information required, and adequate supplies (Boehlje and Schrader 1 998; Scrimgeour 1999). More integrated vertical chains are relevant if enhanced customer value can be created, and although these can achieve cost efficiencies initially, their primary objective should be to create value (O'Keeffe 1998a; Scrimgeour 1999). Scrimgeour ( 1999) commented in relation to the creation of differentiated products that: brands are expensive to develop and promote; product flows need to be linked with complementary product and people rewarded for their inputs; and promotion needs to be more sophisticated as some products end up as components of other products. These value-added products will have to be sold at a sum greater than the costs of adding value, for value-added returns to be realised (Lockhart and Cartwright 1997).

The food supply chain includes all the steps from producers to customers. The steps

identified in the New Zealand dairy value chain (Lockhart and Cartwright 1997; Spring 1 997)

are:

1 . milk producers;

2. primary processors (processing, manufacturing, packing);

3. shipping (exporters and importers);

4. secondary processors;

5. warehousing and distribution;

6. marketing, sales and customer service; and

7. customers.

Boehlje and Schrader ( 1 998) and Shaw (2001) also identify suppliers of farm inputs in the supply chain, as farmers are increasingly purchasing more of their inputs off-farm e.g. stock, grazing, feed, transport, semen. Linkages in supply chains are changing (Boehlje and Schrader 1 998). The number of linkages are increasing at the top end (more inputs into the farm system), while at the lower end functions performed by a number of firms are being internalised (e.g. wholesaling, retailing and distribution). The types of linkages are also changing e.g. spot markets to contracts. Those at the top end of the food chain (e.g. the producer) are often left with most of the risks while those at the bottom end enjoy most of the value-added opportunities e.g. through branding (Street 1990; ADFF 1999). Boundaries between firms range from free market to contracts, licences, strategic alliances, franchise agreements and complete vertical integration i.e. vertical ownership (Lockhart and Cartwright

1997; ADFF 1999; Boehlje et at. 1999). The better the co-ordination, the stronger the supply chain and the lower the risk (ADFF 1999).

Consumers in the Western world are now becoming more sophisticated in their requirements ("wants" rather than "needs") (Street 1990), and are taking increased interest in quality issues such as taste, freshness, safety, origin and traceability, environmental issues, animal welfare, and production systems, as well as variety, price, convenience and availability (Street 1 990;

Boehlje et at. 1 999; Christie 2000). These changing consumer expectations effect the whole supply chain. The demand for component specific rather than generic commodities by food and industrial markets (Boehlje et at. 1 999) has led to increasing investment in value-added supply chain technology (Street 1990).

Factors contributing to the development of more closely aligned supply chains (Street 1990;

Boehlje et al. 1999; Manhire 1 999; Shaw 200 1 ) include:

1 . more discerning consumers demanding specific products, requiring higher levels of accurate and responsive messaging, and higher pay-offs;

2. government regulations and policies reducing subsidies and protection, imposing food safety regulations, and increasing privatisation;

3. globalisation, which has removed trade barriers making it easier for large retail chains wishing to optimise product supply to source internationally;

4. the shift in resources required to compete in global markets e.g. more sophisticated R&D,

increased importance of information and knowledge, a skilled labour force and sophisticated technology, an efficient distribution channel and global access to all resources (including capital and finance);

5 . attempts to reduce risk and cost (quality, volume, food safety, efficiency in production

costs);

6. the development of food production and distribution technologies e.g. information technology (e.g. computer databases), biotechnology, monitoring and logistics technologies, environmental technologies, economies of scale and efficiencies of specialisation;

7. the potential of biotechnology to lead to the development of new or modified products that compete with traditional products, or improve productivity;

8. more differentiation across the chain rather than primarily In the manufacturing and marketing sectors, requiring better information flow;

9. more differentiation and specification resulting in more complex processing with the associated potential for errors, which are easier to control with a more integrated value chain; and

10. the increasing investment in sophisticated technologies which increases financial risks, therefore requiring a more reliable supply in quantity and/or quality.

The advantages of more closely aligned supply chains (Boehlje and Schrader 1 998; Boehlje

et at. 1999) include:

1 . increased efficiency and lowered costs. Flow scheduling and volume control, specialist products and regulation compliance may need cooperation between different stages of the value chain.

2. management and allocation of risk. Coordination (e.g. contracts) can eliminate some of

the price risk for both parties, as well as ensuring supply availability or consistent quality for those at the lower levels of the chain. Sources of food safety risk also have to be

maintained throughout the chain.

3. greater response to consumer demands.

Boehlje et al. ( 1 999) described the critical dimensions of a value chain as including:

1 . the explicit specification of the value creating activities in a production-distribution process, and provision of a structure for the linkages between these activities and processes i.e. identifying the activities necessary to create the products demanded by the consumer;

2. the specification of the product flow features i.e. transport and logistics of product flow;

3. the financial or cash flow between processes/participants and sharing of financial information;

4. the information flow across the chain;

5. the incentive system to reward performance and share risk; and

6. chain governance and coordination (e.g. from open market through to vertical ownership) which effects who has power and how risks are shared.

The degree of vertical integration is greater with high asset specificity, programmability and non-separability (Table 1 .4) (O' Keeffe 1994; Boehlje and Schrader 1998; Boehlje et al. 1 999). Asset specificity refers to the specialised nature of the assets required to complete a transaction. These can be site, physical, human, or dedicated assets. The greater the asset specificity, the greater the exposure to risk (Dorward 2001). Task programmability refers to the degree of specialisation and negotiation required to complete a task, and separability refers to the ease with which each party's contribution can be identified and rewarded. If the threat of opportunistic behaviour within the chain is high a more vertically integrated structure may be adopted to reduce the risk (Boehlje et al. 1999; Dorward 2001). Dorward

(200 1 ) suggested that asset specificity and uncertainty (related to lack of information, bounded rationality and the scope for opportunism by another party in a transaction) are the key transaction characteristics that affect a firms exposure to risk and determine how different contractual arrangements can be used to reduce its transaction costs. The structure of a value chain is also likely to change over time (Boehlje and Schrader 1998).

Table 1 .4: Predicting organisational forms of alternative business linkages (from Boehlje et al. 1999, p. 28).

Factors Low non­

separability Spot market

Cooperation alliance)

Long term contract Spot market

Cooperation or vertical ownershi Inside contract Ch brid) Joint venture Vertical ownership

Important issues in supply chains relate to product differentiation and power, risk, information, and trust and relationships. Information exchange between stages occurs more rapidly in vertically integrated supply chains enabling them to respond more quickly to changing consumer demands, economic conditions or technological improvements (Boehlje

et al. 1 999). The higher the specification required in products, the higher the potential pay­ off. The fewer the places where this differentiation can occur, the more important it is to have control over these stages because this is where the power to capture value lies.

The mam source of the power in a supply chain is at the point that controls the least substitutable resource (Boehlje et al. 1999), and the owner of this point has the power to capture rents, transfer risk to others and affect what the chain does or does not do. The power in traditional commodity food chains is often held by those who generate the least cost, with capital and labour resources being important e.g. the processors. These resources become less important relative to accurate and unique information on what the consumer wants, and how to produce this (e.g. through genetics or processing) in the more differentiated food chains. Therefore, in differentiated chains the position of power moves from those with the capital and financial resources, to those with the "soft" assets e.g. information, R&D, new technology. This places the power at each end of the supply chain.

The power associated with producers of the raw materials depends on substitutability of their inputs (Boehlje et al. 1999). The genetic material is often the least substitutable, and those with the ability and knowledge to manipulate this (e.g. biotechnology companies) will increasingly hold more power, although processing technology can in some cases produce the same attributes at a lower cost.

Boehlje et al. (1 999) surmises that in future the reduction in real differences between

products will also see weakening brand loyalties, and an associated reduction in processors' power. Processors will rely more on time responsiveness and price to capture market share

with less differentiated products. Retailers' power will increase as consumers demand more unique and differentiated products i.e. retailers will have information on what the consumer wants.

Advantages accrue to those with the ability to understand and utilise the vast amount of information on chemical, biological and physical processes in agriculture, and who have a greater knowledge of processes in the food business and how to combine these in a total system i.e. food chain approach (Boehlje et aL. 1 999). Measuring and monitoring, such as in precision agriculture, become more important at the production level. Access to information, particularly at the production level, has historically come from public and external sources e.g. public sector research, suppliers of farm inputs and processors (Street 1990; Boehlje et al. 1 999). In contrast, coordinated systems also access information from internal sources, often employing their own R&D staff. Information obtained from this source is proprietary and provides competitive advantage. The strategic value of information will see less free exchange of information in the future and intellectual property issues will become more important.

Research and development in coordinated chains also tends to focus on total system efficiency rather than on individual system components. This, along with the fact that they have the capacity to implement technological breakthroughs more quickly allows integrated supply chains to capture more of the innovator' s profits compared to other structures. Greater monitoring and control in integrated supply chains also means adjustments can be made sooner in the case of defective technologies or deteriorating performance (Boehlje et aL. 1999). An information intensive value-chain is more likely to regard short-term profitability and long-term market share as compatible goals. Sharing strategic information between the members of the value chain will shift the focus onto long term strategic objectives rather than short term opportunism (O'Keeffe 1994).

The value captured from the production of differentiated products does not stay constant, and in fact often declines over time (Boehlje et aL. 1999). Loss of intellectual property ownership, substitution or replacement, commodisation of a product as increasing numbers supply the product, and mitigation where buyers buy better products or similar products at a cheaper cost reduce the value of a product. Products are often designed for short life and obsolescence (Street 1990). Thus, continuing product development will be critical.

raw material, increasing financial exposure and risk (Street 1990). Consistent quantity and quality of raw material is required for some products, resulting in closer vertical integration to ensure this e.g. retailers entering into supply contracts with producers (Street 1 990; Boehlje and Schrader 1998). This can also reduce the price risk for both parties compared to trading on the spot market. Food safety risk has become more important in recent years, not only for the firm responsible for the contamination but also those further down the supply chain (Boehlje and Schrader 1998).

Risks are not necessarily less with stronger vertical integration, but different (O'Keeffe 1998a). Price risk may be reduced but financial, marketing and relationship risks may increase. Risk management in the protection of brand investment can be a key force in developing more coordinated food chains (O'Keeffe 1998a). The production of market specific products will increase market risk because the product may be worth less in alternative markets than a non-specific commodity product (O' Keeffe 1998a). Risk may also be transferred to other sectors in the chain, with producers often being those most at risk (O'Keeffe 1 998a).

Integration will not occur unless it is perceived that an economic advantage exists for both parties i.e. flexibility has value (Boehlje and Schrader 1 998). Less integrated firms or producers have higher independence, but also often have higher price risk e.g. auction compared with contract (Nitschke and O' Keeffe 1997). As firms become more vertically integrated some independence is relinquished and interdependence is established between firms (0' Keeffe 1998b). Trust between the firms is critical in achieving effective vertical integration (O' Keeffe 1994,- 1?98b; Nitschke and O' Keeffe 1997).

O' Keeffe ( l998b) found that relationships were more likely to be formed where there were compatible goals, alternatives were limited, there was information exchange and communication between firms, firms understood each other's business, and firms believed the rewards were shared equitably. Relationships where size imbalance (e.g. between producers and processors) exists are not as effective as relationships between firms of similar size (Nitschke and O' Keeffe 1997; O' Keeffe 1998b). If one firm perceives that it is dependent on another then trust must be high for a firm to invest in the relationship (O'Keeffe 1 994). Producers may increase scale by horizontal integration as well as vertical integration to share in value added activities (Street 1990). One firm in the chain may take control. This firm may take more of the risks and have a greater claim on profits (Boehlje et al. 1 999). Further integration between firms at different levels in the chain is encouraged

when firms can not agree on equity.

The are two approaches to engineering trust in a supply chain. The first uses "monitoring" and penalties if criteria are not met. The second relies on "manipulation" with performance incentives and expectations of honesty i.e. guilt and satisfaction as motivators. This strategy works best where monitoring costs are high, communication costs low, the manager is persuasive, and performance is difficult to measure. This is more likely where intellectual skills are involved rather than manual skills e.g. service industries (Boehlje and Schrader 1 998). The role of trust in contract coordination is important in agriculture because of the impossibility of writing a complete contract and the asset specificity associated with modem agricultural production (Boehlje and Schrader 1 998).

1.2.3.2 Cooperatives

Primary producers are price-takers at the fann gate (Spring 1997). However, the cooperative structure of the New Zealand dairy industry allows dairy farmers to also capture the gains along the value-added chain. Cooperatives provide benefits to their owner-shareholders in processing scale, market access and bargaining power, the provision of an outlet that has to accept their produce (which is particularly advantageous with perishable agricultural produce), by providing security to their members by pooling returns and maintaining a market in times of adversity, and capturing marketplace margins through vertical integration that would otherwise go to middlemen (Spring 1 997; Lynch 1998; Ling and Liebrand 1 998; ADFF 1 999).

The disadvantages can include payment of average returns to owner-shareholders with little or no differentiation between suppliers (e.g. on scale, quality, collection or processing efficiency of their milk), other firms can pick off the better suppliers thus reducing the average return to the cooperative, and there can be problems associated with common property rights e.g. new members may have the same rights as established members, life of the cooperative assets may exceed the time of a suppliers patronage of the cooperative (Spring 1 997; Lynch 1 998; Ling and Liebrand 1 998; ADFF 1 999). The Australian dairy is also seeing cooperatives taking a greater interest in equity issues (Langdon 200 1 ; ADFF 1 999).

Ling and Liebrand ( 1 998) classified USA dairy cooperatives into six categories. These were bargaining (obtaining the best price for their producers milk), bargaining and balancing (selling milk and producing commodity products with surplus milk), undifferentiated hard-

product manufacturing, niche market, fluid processing and diversified dairy cooperatives (a combination of the others). The diversified cooperative definition best describes the New Zealand dairy industry structure. Diversified dairy cooperatives are the most vertically integrated. They tend to have large milk volumes, a system of plants that manufacture a variety of products, and can shift milk to the most profitable enterprises. It is anticipated these cooperatives will control most milk in the future (Ling and Liebrand 1998).

Future challenges for cooperatives identified by Ling and Liebrand ( 1 998) include little or no government support, globalisation of the market and greater market access, increasing rules regarding food safety and the environment, and more discerning consumers. Management and business issues include: attracting quality employees, organisational strategies (maximising management competence and flexibility while maintaining producer control), establishing joint ventures and business alliances, meeting capital requirements which are likely to increase with further market integration yet still having to revolve equity to members, and retaining equity between more diverse farm units than in the past (Ling and Liebrand 1998).

The New Zealand dairy industry already has little or no government support, and as an exporter will find increasing globalisation and market access an advantage. However, the other points identified also relate to the New Zealand dairy industry.