April 1, 2011

Partnerships provide value

Growers, suppliers and retailers can benefit from working together


Margins seem to be getting tighter each year, as costs continually go up with pressure to keep prices down. These ongoing challenges make it ever harder to maintain profitability. Combine this with the uncertain economy, and it seems more difficult than ever to find a competitive advantage. This is especially so, when as an industry we appear to consider many of our products to be commodities, rather than premium or added-value products.

We must continually look for trends and accept the need for change. If you keep doing what you've always done, you'll always get what you've always got. It is hard to know where to go next. In an age where technology and communication devices are endemic, we can be overwhelmed with information, but it is quality, not quantity, we need. Information directly related to our business can help us make informed decisions, reduce risk and add value to our products.

We all work in some form of supply chain, albeit informal, the buying and selling products or services, marketing, finance, etc. This arrangement, however, lacks the benefit of structure and a strategy linking each of the elements, e.g. production, marketing, logistics and sales through to the end user; often it just sort of happens. A formal supply chain is a network of interconnected businesses, linked together by one or more of the processes of getting a product from the point of production through to the end consumer. Both styles, informal and formal, tend to be adversarial, where often a minority, or even just one member of the supply chain, reaps the most benefit.

Another approach is the value chain. While similar to the supply chain, a value chain is a collaborative approach, where each member recognizes and acknowledges the other's need to be profitable and successful. This is a relatively new concept to horticulture and agriculture, although it is common in other industries. Some parts of the overseas automotive industry have worked within established value chains for many years and it is considered an integral part of their business strategy; essential to their mutual success. By way of example, Toyota has been an innovator in developing many manufacturing strategies; Lean Manufacturing evolved from the Toyota Production System and closely tied to the TPS is the value chain the company works within. These systems and the way they interact with their value chain are what have helped Toyota weather the financial crisis.

Why a value chain?
A significant difference between supply and value chains is that a supply chain focuses mostly on the efficiency and management of current operations, the core focus being trying to improve profits by reducing costs. A value chain involves many of the same processes as the supply chain,   however, it is a more collaborative approach, focusing on adding value to the product and achieving a better price as well as trying to reduce cost. It offers value for all members of the chain.

Increase perceived value
Value chains are often formed in response to consumer demand and market opportunity. They are created by businesses that recognize interdependence on each another and their agreed mutual benefit. The objective is to increase the value that consumers perceive the finished product offers, hence the name value chain, and ultimately, maintaining or improving profitability. The partnerships this value chain creates, allow risks and rewards to be shared up and down the chain. There is information sharing as well as a willingness and desire to work together, allowing member businesses the opportunity to respond quickly to consumer needs and market opportunities, while keeping the value of their product high. This does however pose greater challenges when dealing with commodity-priced items.

A closely connected value chain often contains vertically- and horizontally-linked members. Horizontal linkage could be several growers or retailers in a chain together, and vertical links would be suppliers, growers and retailers. To work within a value chain, and for it to have any chance of success, a number of factors must exist, including commitment from all parties, a compatible business culture, shared vision, governance, acknowledgement of each others' need to be profitable and strong leadership. In a value chain, if one partner loses, no one wins.

Starting a value chain
Starting can be a challenging and complex process. It is worth noting from the beginning that not all value chains are successful and starting one is not a guarantee of success. Often agriculture-oriented value initiatives have lasted only a few years. This often occurs when one or more of the key elements for success are not present between the group members. It is also important that the group possess the capability to create and sustain any competitive advantage developed.

Map your supply chain
Mapping your current supply chain is the first step in identifying which opportunities may exist in developing a value chain, and begin to give a better understanding of how the products move though your market channels. This will also help identify who you need to involve in your value chain and it can be helpful in determining where the greatest opportunities lie.

Evaluate your market: Developing new products and markets requires considerable work. What are the trends and future scenarios? Find out whether markets and sales opportunities exist.

Assess resources, risks and capabilities: Take time to prepare a summary of your potential chains, resources and capabilities. You'll want to evaluate the factors that could interfere with the success of your chain. This evaluation process will be a useful tool when choosing and talking to potential partners and developing a pilot project plan.

Build relationships: Relationships are the most important element of a successful value chain. Often little time is spent developing the required business relationships when groups embark on projects. In fact most businesses want a trusting relationship with customers, but think it is acceptable to be tough on suppliers. Experienced alliance developers say that carefully selecting the right partners is the most important factor in establishing a successful value chain.

Define a clear project focus: Start by setting goals, objectives, measures and action plans. Involving chain partners in developing these plans is necessary to building commitment and trust, as well as preventing misunderstandings in the future. Your first value chain venture should be a pilot project, a small, trial-size version of a potential value chain. It allows you and your partners to commit yourselves in stages, by minimizing risk and allowing you to work out the bugs while proceeding on a small scale.

Know your partner
The characteristics of a good partner are the same wherever we are in the chain. A successful partnership will develop where there is mutual economic gain supported by mutual respect, an acknowledged interdependence and clear understanding of each other's roles and responsibilities. Ultimately the supplier wants to make a profit and the purchaser wants good value; to be a mutually beneficial relationship this balance must exist. Unless agreements are advantageous to both parties, there can be no win. Squeezing the last dime out of any member of a chain may help increase short-term margins, it will not, however, develop into a successful, mutually beneficial business relationship.

Apple computer actively seek suppliers and maintains ongoing relationships. Its statement on www.apple.com/procurement says, "We value suppliers who take the time to learn about and understand our business and who look for ways to add value."

The early stages of building a working relationship take the most effort. As an understanding of each other's business evolves, less time need be spent on getting to know each other's ways; more time can be spent maintaining the relationship with partners in the value chain.

Limitations and barriers
The rewards and benefits of a closely aligned value chain can be quite favourable. They do, however, have constraints and limitations. A number of factors can influence the outcomes of the chain, including external factors such as government policy and legislation, subsidies and changing social issues.

Where the necessary key internal factors are absent, or are neglected by group members, this can cause frustration and the demise of a value chain. Group members need to be of a similar mindset, corporate culture and values to have the best opportunity of success. A value chain is, as the name suggests, value-oriented. Organizations in an industry that traditionally focuses on productivity may have to readjust their mindset to a quality, value and innovation oriented process.

The last word
Successful businesses build strong relationships with their suppliers. We are not isolated entities that simply purchase goods and services from any organization who happens to have them available at the particular time we are looking to buy or those that simply offer the lowest price. Overall, suppliers and purchasers can be better served when they come together to form strong, mutually beneficial and secure business relationships. When these relationships exist, they can help drive the growth and profitability of group member organizations.

Caveat emptor
Supply chain and value chain management and processes is a vast subject, and as with any business decision, requires thorough research and due diligence and risk assessment prior to embarking on such a venture, to be sure it is right for you and your organization. There are risks as well as benefits. This article is an introduction to the possibilities that value chains present.

To obtain further information on value chains or to contact your provincial resource on value chains go to Agriculture and Agri-Food Canada's value chain website, www.canadianvaluechainnetwork.ca.
Stephen Head has worked in the green industry in retail and wholesale capacities, and as a training and merchandising consultant. He now operates a wholesale nursery in British Columbia, specializing in herbs.