Nature and Scope of AgriFood Supply Chain Dynamics

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Nature and Scope of AgriFood Supply Chain
Dynamics

• Tom Sporleder
• sporleder.1_at_osu.edu

Presented at FAMPS Conference May 4-5, 2005
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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

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Motivation for Means to Better Understand Supply
Chains and Networks

• Analysts must understand complexities relative to
  information knowledge
• Cascading events
• Biotechnology
• Food safety
• Animal welfare
• Decreased costs of information flow

SHIFT IN BASIS OF RIVALRY
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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

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Supply Chain Components Food and
Agriculture-Related Cluster
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Grocery Supply Chain
Private Label
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Interdependencies in Supply Chain
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Growth in Agricultural Contracting
Source ERS, USDA
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Selected Commodities and Food Products Mapped in
the Dependency/Differentiation Space
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Typical Transaction Governance Mapped in
Dependency/Differentiation Space
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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)
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The Bullwhip Effect in Supply Chains
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Supply Chain Without Bullwhip Effect

• Customer demand forecast 10 units

Information
Distributors
Suppliers
Producers
Retailers
Products Services
Products Services
Products Services
10 Units
10 Units
10 Units
10 Units
10 Units
10 Units
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
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Supply Chain Bullwhip Effect

• Customer Demand forecast 20 units

Information Flow
Suppliers
Producers
Distributors
Retailers
Products Services
Products Services
Products Services
80 Units
40 Units
20 Units
160 Units
80 Units
40 Units
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
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Amplified Bullwhip Effect from Reciprocal
Dependency
Amplified
Amplified
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Supply Chain Concepts
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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

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Components of Network Embeddedness
Network Embeddedness
Relational Embeddedness
Structural Embeddedness
Connections
Ties
Sparse
Dense
Weak
Strong
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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

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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

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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

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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

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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

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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).
• ECR initiative
• Lesson Path dependency blocks knowledge
  management and learning
• Frito-Lay and Wyandot Foods ??
• More cases need to be explored.
• When is dynamic responsiveness needed?

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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 our understanding of
  supply chains

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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

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