THE WEEKLY Link

Co-operative supply chain strategy

CHRIS CATTO-SMITH

Trade liberalisation, urbanisation, concentration of retailers, and quality, environmental and safety requirements are leading to rapid changes in the viability and cost structures of many traditional Thai exporters. As access to international supply chains increases, exporters must focus on competitiveness to ensure ongoing growth and poverty reduction - particularly for agri-food related industries.

Traditionally, many producers within certain markets have been fiercely competitive with each other, often at the expense of investing in standard infrastructure and common standards for marketing and logistics.

As consumers are demanding more information on the food safety, ecological, and social aspects of the products they buy, market-driven trading is now replacing supply-driven and product-oriented business activity. Closed and co-ordinated supply chains are quickly bypassing open wholesale and spot markets as credence factors, carbon-emission measures, cold-chain integrity, fairness in business and organic products begin to dominate buyers' decisions.

Large supermarket chains, sourcing food from global markets, are increasingly acting as gatekeepers for consumer markets. Conversely, in developing countries, supermarkets are rapidly increasing their share in the overall food market and establishing their own internal wet-market trading outlets. Supermarkets that have been able to establish "closed and co-ordinated" supply-chain practices with suppliers from a particular region are replacing open markets, especially for perishable food, but increasingly also in food-staple markets.

Co-ordinated supply chains are institutional arrangements that link producers, processors, traders, retailers and consumers. They regulate the flow of products, payments and capital, technology, ownership rights and information among these participants and exploit synergies for market expansion and cost reduction. For example, a single buying executive in the UK can influence if a major commodity is sourced from Thailand, Kenya or Chile. Decisions are now made based on analysis of various dimensions (not just price) and can affect the livelihoods of hundreds of thousands of workers in that industry.

Producing commodity products in uncertain quantities and qualities (supply-driven), which is typical in agriculture, is becoming obsolete and is being replaced by demand-driven supply chains, requiring major changes in relationships, production, technology, and common logistics infrastructure.

A recent World Bank report highlighted the benefits of well co-ordinated supply chain, particularly in regard to greater profitability and employment. Supply-chain co-ordination can:

- provide access to new market outlets and thus increase producers' ability to match production and demand (on and off season);

- provide access for producers and small enterprises to information and technology, financing, and market requirements for improved quality and quantities;

- better control product quality and safety through tracking, tracing, and certification;

- share risks among chain partners, especially for large investments or advisory services;

- reduce lead-time and losses of perishable products through joint planning, sharing common infrastructure and co-ordination of specialist supply-chain activities by a common (neutral) service provider;

- provide a means to pool production, transport, cold-chain handling, freight consolidation and thus develop economies of scale;

- increase employment and protect farmers through collaborative participation in value-adding activities.

Supply-chain competitiveness depends on good logistics and low transaction costs. The public sector can also contribute to efficient private-sector supply chains, but government capacity to support supply chain development and increase involvement of smallholders is typically limited.

Supply-chain development for handling perishable products in particular needs reliable cold-storage facilities and managed services at every link of the chain and across businesses - but who will pay for the initial proof of concept?

In 1998, Royal Ahold (Tops supermarkets) and Central Retail Corporation of Thailand began a supply-chain project in which I was involved, aimed at providing Thai consumers with high-quality fresh fruits and vegetables at affordable prices; reducing lead times and post-harvest losses; and raising knowledge of supply-chain functions and principles.

The project involved building a fresh distribution centre for quality control, sorting, washing, packaging and processing. Standardised crates, pallets, and crate-washing facilities were introduced openly to competitors and widely accepted by the Thai retail industry.

The emphasis of the supply-chain development strategy has changed from supply-chain optimisation activities such as reducing post-harvest losses, shrinkage and handling costs, to integral chain care such as Hazard Analysis Critical Control Points (HACCP) good agricultural practices certification. Supply-chain partners have established alliances with research institutes and the Agriculture Ministry to improve food-safety assurance and certification systems.

Development of supply-chain entities involves much trial-and-error organisational learning. Knowledge about chains is essential for developing a workable structure, and knowledge within chains (such as product design, packaging and distribution, market and customer preferences), is essential for ensuring the chain's sustainability and efficient functioning.

Next week, we will discuss ways of boosting national capabilities in supply chain development.

Weekly Link is co-ordinated by Barry Elliott and Chris Catto-Smith, as an interactive forum for industry professionals. Comments and feedback are welcome at:

BElliott@OliverWight-AP.com

cattoc@inet.co.th

Bangkok Post
Wednesday January 31, 2007