Session 1: Basic Business Process

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Building Development Oriented Rural Enterprises
Training and Project Development Workshop
Session 1 Basic Business Process
Workshop Presentation
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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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INTRODUCTION

• A Development-Oriented Rural Enterprise has to be
  an Enterprise, i.e.
• It must sell something of value
• It must make a profit
• It must have a business process
• To start a Development Oriented Rural Enterprise
  you will normally need to
• Conduct on-farm improvements to raise quality of
  supply
• Purchase produce from farmer-suppliers (and make
  sure they dont sell to traders)
• Execute postharvest process (transport, pack,
  sort, grade, process, store, etc)
• Sell packed and/or processed produce to
  customers
• This is Basic Business Process

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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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A NORMAL BUSINESS PROCESS
4. Makes payment (less cost of inputs)
7. Delivers produce needed for fulfillment of
order
8. Delivers produce as ordered
3. Delivers produce as contracted
Sales Marketing Unit
Purchasing Logistics Unit
Suppliers groups
Customers
1. Makes production contract with farmers and
supplies inputs
6. Conveys customer order
5. Places order
2. Provides agricultural training to improve
quality
On-farm improvement unit
Core Business Units
9. Makes payment
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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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ON-FARM IMPROVEMENTS I

• Standardizing varieties
• Improving planting material
• Improving cultural practices
• Improving harvesting practices
• Improving pest control
• Improving soil management
• Developing water resources
• Improving water management
• Installing on-farm and near-farm infrastructure
• Improving supply of credit and agricultural
  inputs
• Certification programmes
• Introducing and improving land use practices
• Improving cropping systems

Kinds of Activity
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ON-FARM IMPROVEMENTS RATIONALE
Rationale
Examples

• Raise quality to standard required by modern
  trade
• Satisfy standards and requirements for food
  safety, handling methods, environmental
  responsibility

Access Superior Customer Segments

• Increase yield, cultivated area and quality
• Improve access to inputs

Improve Farmer Economics

• Increase potential revenues of business
• Decrease potential costs of business

Improve Business Economics

• Reduce problems with spoilage during storage and
  transportation
• Improve produce health to limit postharvest
  pathology

Improve Distribution Characteristics
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ON-FARM IMPROVEMENTS EXAMPLES
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CASE STUDY FCC, CAUCA, COLOMBIA

• Popoyan is a Coca-growing area in Cauca region
  of Southern Colombia
• Many farmers in the area also grow coffee but it
  is very low quality and mainly sold for
  processing into instant coffee
• The Colombian government is trying to build up
  the Federation de Campesina del Cauca to make
  coffee a better cash crop relative to coca

Background

• Rejuvenation of coffee trees (grafting new
  branches onto root-stock)
• Providing training in selective harvesting, use
  of fertilizers, pest control, grading, compliance
  with organic and Fair Trade standards
• Investment in improving water sources (for
  fermentation) and postharvest process, e.g.
  fermenting, drying

Improvements

• Technical support provided by Colombian Coffee
  Farmers federation and USAID contractors

• Farmers have adopted a quality culture in
  which they prioritize the quality of their coffee
• FCC purchases more than US1m of top quality
  coffee from farmers from Cauca for sale to
  specialty coffee buyers in export markets

Impact
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ON-FARM IMPROVEMENTS SETTING FACTORS
General Agricultural Development

• Some regions have very low levels of
  agricultural development, producing few cash
  crops, in small varieties and in small quantities
  (e.g. Wa Region, Myanmar)
• In these areas, on-farm improvement may have to
  be comprehensive as there is little basis for
  commercial agriculture

Farmer Skills

• In some areas, local people do not have a
  farming tradition, e.g. because they are economic
  migrants (e.g. former miners in Chapare region,
  Bolivia) or Internally-Displaced Persons
• In these areas, farmer skills and farming
  organizations may be very weak

Natural Resources

• In some areas, natural resource base is very
  poor, e.g. Pra Baht Huay Tom in Thailand, which
  has very low rainfall and poor quality soil
• In these areas, if major infrastructure and land
  development programmes are not possible, DOREs
  need to focus on non-agricultural options (e.g.
  handicraft)

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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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RATIONALE FOR MAKING SUPPLY CONTRACTS

• By adding stipulations to supply contracts, DOREs
  can
• Ensure that the correct (commercial) varieties
  are used
• Standardize cultivation and harvesting practices
  to improve quality

Control Production

• To sell to large customers, the business needs
  consistent supply, which production contracts
  give by
• Making it very likely that farmers will sell to
  the business
• Improving and controlling farming practices so
  that yields are more predictable
• Improving the flow of information coming from
  the farms

Get Consistent Supply

• The production contract is a key method for
  delivering farmer benefits, and also a way that
  licit crops can deliver some of the benefits that
  illicit crops do, e.g.
• Removing market risk by guaranteeing purchase
  after harvest
• Providing low cost access to agricultural inputs
  and technical support as one of the benefits of
  the contract

Provide Farmer Benefits
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SUPPLY CONTRACT STRUCTURE EXAMPLE
The farmer agrees that
The Royal Project agrees that

• The farmer will deliver an agreed quantity of
  produce to the Royal Project immediately after
  harvest
• The farmer will follow the Royal Projects
  cultivation and harvesting guidelines, as
  described in the handbook
• The farmer will maintain Good Agricultural
  Practices certification meaning that
• - All agricultural chemical use will be strictly
  recorded
• - No agricultural chemicals on the forbidden
  list available at the Project Centre may be used
• - All agricultural chemicals must be properly
  stored and labelled

• The Royal Project will pay for produce delivered
  within 2-3 days of harvest at the pre-agreed
  price
• The Royal Project will authorize the farmer to
  receive credit from the Bank of Agriculture and
  Cooperatives to purchase planting materials,
  inputs, etc

• Most production contracts also give the farmer
  training or technical support, but the Royal
  Project doesnt do this because all farmers get
  training whether or not they are clients of the
  marketing division
• Most agribusinesses have to use their own
  capital to provide credit, but the Royal Project
  arranges for the farmers to get credit from the
  national agricultural bank
• Nonetheless, this is a good example of a
  purchase contract because a sale is agreed,
  credit is provided and there are additional
  controls on cultivation methods used

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DAMAGE DONE BY CONTRACT VIOLATION

• If widespread, revenues may fall noticeably
• Revenue may fall below level needed where it is
  economic to run the business

Capacity Issues

• DORE does not get opportunity to deduct cost of
  credit from payment price
• Cost of fertilizer, seed etc must be written
  off (taken as a loss)

Loss of Credit

• Investment in training the contract-breaking
  farmer is wasted
• Investment in on-farm infrastructure and
  equipment is wasted

Loss of Return on Investment

• How to ensure consistency of supply?
• How do we stop people from breaking contracts
  and selling to other purchasers?

Disappointment of Customers
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REDUCING CONTRACT-BREAKING

• Giving rewards and other attractive things to
  farmers or groups that dont break contracts,
  e.g.
• Financial bonuses
• Awards and certificates
• Priority extension services

Positive Incentives

• Giving punishments and other attractive things to
  farmers or groups that break contracts, e.g.
• Loss of financial deposit
• Withdrawal of performance bonus
• Withdrawal of supplier status

Negative Incentives

• Using social capital to reinforce contracts, e.g.
  
• Public shaming of contract breakers by leaders
• Building community understanding of importance
  of contracts
• Allowing and building recognition of community
  ownership of enterprise

Community Building
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CONTRACTS GOOD AND BAD PRACTICE
Copasso Pucallpa, Peru
El Ceibo Yungas, Bolivia

• Collective of 1,100 cotton farmers in Peruvian
  Amazon
• Contract breaking is common due to working
  capital shortages- business cannot guarantee
  purchase of produce from farmers
• Business has also been built very quickly
  without much community participation and with
  most key functions carried out by development
  workers

• Associated of 38 smaller farmers associations,
  over 500 families in total
• Almost no contract violation due to very strong
  community identification with and participation
  in business, membership fee, high long-term
  benefits of participation

BAD PRACTICE
GOOD PRACTICE
Mayo Tarapoto, Peru
Maize marketing Mai Son, Son La, Vietnam

• Chocolate company owned by 14 farmers and an NGO
  producing about 200 bars per day of luxury
  chocolate
• Cannot form contracts due to high level of
  competition and lack of relationship between
  company and farmers
• As a result, of every 2 farmers trained, only 1
  usually sells to Mayo

• Major maize producing district with other
  9,000Ha of Maize produced and sold to local
  traders
• Sale is under informal forward purchase
  agreements
• Violation of agreements was rife but
  representatives of farmers and traders sat down
  and resolved disputes and misunderstandings, and
  level of violation is now low

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CONTRACT MAKING SETTING FACTORS
Economic Development

• Some regions, like central Vietnam and northern
  Thailand, have very active regional agricultural
  economies with many processing companies,
  traders, service providers, etc
• In these areas, there are many potential buyers
  for produce and many people trying to get farmers
  to break contracts. More work must be done
  building community commitment and a contract the
  farmers can accept.

Human Capital

• In some areas, local people naturally join
  together to solve their problems and have strong
  community groups (e.g. Yungas region of Bolivia,
  Pashtun areas of Afghanistan)
• In these areas, farmers are less likely to
  violate contracts with DOREs

Low Processing and Handling Requirement

• Some kinds of produce do not need special
  processing or handling in order to be sold
  (especially horticultural produce). This means
  that it is easy for small traders to buy produce
  from farmers, in violation of contract.
• In areas with this kind of produce, more work
  must be done to strengthen community commitment
  and develop attractive contract.

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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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FIELD HANDLING (PERISHABLES)

• Minimize damage during harvesting and collection
• Minimize field heat
• Reduce later handling costs

Principles

• Control harvesting practices
• Ensure adequate equipment is used for harvesting
  and storage
• Harvest and collect produce in the early morning
  or evening
• Conduct basic sorting in the field (e.g. remove
  damaged produce)
• Find other ways to manage/reduce heat transfer
  to produce

Best Practices
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PACKING CENTRE OPERATIONS

• Assemble produce in form needed by customer
• Maintain produce in best possible condition

Principles

• Maintain hygiene
• Control temperature (using modern and
  traditional methods)
• Control methods used by packing line
• Identify best storage practices for individual
  crops
• Distinguish between pack for storage and pack
  for delivery to customer
• Train workers, delivery staff, etc

Best Practices
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TRADITIONAL COOLING METHODS
Gabelled roof for shade
Trees provide shade from sun
White colour
Insulated walls
Vents open at night and closed during day
Built partially below ground level
Water to retain relative humidity
Cubic shape minimizes wall area
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CASE STUDY ROYAL PROJECT, THAILAND
Delivered by Royal Project refrigerated trucks
3. Delivered to Chiang Mai Packing House
Delivered by farmer vehicles
2. Produce cleaned, sorted, pre-cooled and packed
1. Farmers collect produce in field
4. More grading, checking, packing, etc.
5. Produce available to channels
Delivered by Royal Project refrigerated trucks
Kept in storage
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A HUB AND SPOKE MODEL FRUITIMACIZO, COLOMBIA
4. It is transferred the city of Popoyan prior to
transfer to one of 4 market centres in Southern
Colombia
2. It is transferred to one of 4 local collection
centres for the first round of sorting and packing
1. Produce is grown and harvested in the
companys orchards
3. It is transferred to the main collection
centre where it is sorted, cleaned and packed
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PROCESSING

• Two varieties
• - Processing that turns produce into niche
  produce with better economics, e.g. turn herb
  into beauty product
• - Processing that is necessary to make produce
  saleable, e.g. extraction of oil from oil palm,
  drying of maize
• Captures economic return on investment
• Usually improves distribution characteristics
  (but not always)

Principles

• Carry out processing as much as possible given
• - Available investment funds for infrastructure
• - Likely capacity utilization
• - Ability to manage organization/process
  complexity
• Study market/customers carefully to find
  requirements for processing
• Build strong systems and human resources to
  ensure consistency

Best Practices
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PROCESSING COFFEE EXAMPLE
Packing Centre
On-farm
Collection Centre
Location
Roasted, ground and quality-tested beans
Packed, roasted, ground and quality tested beans
Produce Form
Dried, fermented and graded beans
Loose beans
Produce Value
30/tonne
100/tonne
1000/tonne
500/tonne
(Farm), Harvesting Tools, Storage
Drying Equipment, Fermenting Equipment
Storage, Roasters, Grinders, Q.C. Labs
Storage, Vacuum-packing, Labeling material and
equipment
Invested Capital
Royal Project Coffee Processing Facility
Implementer
Farmer
INCREASING COST, BREAK-EVEN VOLUME AND COMPLEXITY
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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
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SALES ENABLING FACTORS AND BEST PRACTICES

• Commercialized production (commercial varieties)
• Continuity of supply
• Adequate processing, packing, sorting, grading
  capacity
• Alignment of product attributes with customer
  needs
• Adequate storage and distribution network for
  order fulfillment
• Adequate working capital

Enabling Factors

• Build and maintain customer relationships
• Get regular customer feedback
• Participate in trade associations, fares,
  exhibitions, etc
• Exploit sales promotions schemes of government,
  etc
• Maintain price and discount structure
• Do marketing before sales (as discussed in
  session 5)- if the marketing is done properly the
  sales strategy is obvious

Best Practices
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SALES SALES TARGET ANALYSIS TOOL
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CASE STUDIES OF SALES STRATEGIES
Buyer Networks

• The Oro Verde coffee association in Tarapoto,
  Peru, is an association of 350 coffee producing
  farmers and is recognized as one of the best
  coffee producers in the country
• The managers of the association travel to fairs
  and expos for specialty coffee in Europe and
  North America and make contact directly with
  buyers. After visits and further discussion, they
  start to sell coffee directly to the specialty
  buyers.

Own Channels

• The Royal Project Foundations Doi Kham food
  company buys around 10m of produce from farmers
  living in Royal Project areas and sells it in the
  modern trade market
• In addition to using other channels, Doi Kham
  has 10 own-brand retail stores in Chiang Mai,
  including one in Chiang Mai airport and one in
  each of Bangkoks airports.

Long Term Customer-Supplier Relationship

• Capital Rice Ltd. of Thailand sells over
  500,000 of organic rice per year that it sources
  from three villages in northern Thailand.
• Capital Rice was asked by a customer to start
  supplying organic rice, so arranged for the
  producers to get training and organic
  certification so that the company could supply
  the customers need. The arrangement is now
  semi-permanent.

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DOCUMENT OVERVIEW
INTRODUCTION OVERALL PROCESS ON-FARM
IMPROVEMENTS MAKING SUPPLY CONTRACTS POSTHARVEST
PROCESS SALES GROUP ACTIVITY
32
BREAKOUT GROUP ACTIVITY
Group
Activity

• Make a list of the kinds of on-farm improvements
  that farmers in your areas of operation usually
  need
• Identify, for each of these improvements, the
  degree to which each investment would help a DORE
  that was buying and selling produce from farmers
  to appeal to customers, improve farmer economics,
  improve its own economics and improve distribution

1. On-farm Improvements

• Make a list of strategies for reducing farmer
  contract-breaking/sales to 3rd parties (at least
  one positive incentive, 1 negative incentive, 1
  regulatory or legal, and one community building
  method)
• Identify strengths, weaknesses and overall
  attractiveness of each strategy

2. Supply Management

• Make a set of handling guidelines for the
  farmers and staff of a Colombian tree-tomato DORE
  for each stage of the process (e.g harvesting,
  transportation, packing, etc.)
• For each stage, identify what the objective of
  the stage of the is, and what farmers/workers
  must do and must not do

3. Post-Harvest Process

• Identify the main kinds of customers that DOREs
  can serve
• Identify the method of contact and
  organizational requirements needed to make a sale
  to each kind of customer

4. Sales
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EXAMPLE BREAKOUT GROUP OUTPUT
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Thank You
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ON-FARM IMPROVEMENTS MANAGEMENT

• How do you prioritize on-farm improvements?
• What will make farmers accept and continue to
  use new technology?
• What learning/transfer methods will be used?
• How do we maximize the return on on-farm
  improvements?
• How do we ensure that technology and investments
  are properly adapted to local conditions?

Management Issues

• Prioritize agricultural investments based on how
  the 4 rationales (accessing superior customers,
  improving farmer economics, improving business
  economics and improving distribution)
• Use participatory methods to ensure uptake and
  adaptation to local conditions
• Monitor and control use of new practices,
  provide continued support
• Make the use of new practices part of the Supply
  Contract if possible
• Mix traditional methods (study tours, workshops)
  with non-traditional methods (peer-to-peer
  extension, Farmer-Managed Service Groups)
• Measure and manage the impact of extension
  programs and their Return on Investment if
  possible

Best Practices
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PRINCIPLES FOR LOCATING PROCESSES

• Do processes in an urban facility if
• There are very high economies of scale and using
  an urban area will increase volumes available
• If electric power is needed and not available
  near the production areas
• If processes will increase fragility or
  perishability
• If they are final checking or preparation for
  customer

• Do processes in a central but nearby facility if
• There are high economies of scale
• It will add value and reduce cost, especially if
  it will improve transportation to urban area

• Do processes in or near the field if
• They add value and reduce cost
• They have low economies of scale
• Investment is available and wont create
  contract violation risk
• It will ease capacity burden on rest of chain

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ILLUSTRATION OF LOCATION PRINCIPLES I
In nearby collection centre

• Proper collection and packing in the field will
  prevent damage and spoilage en route to
  collection centre

• Do process if it reduces costs and increase value

• Drying of coffee beans can be done by individual
  farmers and doesnt require a large joint
  investment to be economical

• They have low economies of scale

• Investing in local storage structures is risky
  because when farmers can store their own produce
  into the off-season, they may attract local
  traders who will come and encourage them to break
  contract

• Investment is available and doesnt create
  contract violation risk

• Drying cocoa takes a lot of floor space, and if
  it is all transferred to a central area to be
  dried there may not be enough space- it needs to
  be dried before being transferred
• If the collection centre is overflowing, some
  sorting and grading can be done in the field
  instead

• It will ease burden on capacity of the rest of
  the chain

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ILLUSTRATION OF LOCATION PRINCIPLES II
In nearby collection centre

• It is cheaper and more efficient to dry tea in
  large batches, so tea should be transferred to a
  central facility for drying
• Good handling of horticultural produce requires
  specialized systems and kinds of workers (packing
  line operators, drivers, managers, etc) and so
  must be done on a large scale

• Do process if there are high economies of scale

• Fermenting and drying coffee beans makes them
  very durable and easy to transport over poor
  roads so this should be done near the field

• It will reduce costs or add value

• Properly packing horticultural produce in crates
  with proper lining and ventilation, and properly
  stacking and bracing crates in vehicles will
  reduce damage during transportation greatly, so
  this should be done in a local facility prior to
  transportation

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ILLUSTRATION OF LOCATION PRINCIPLES III

• Processing of cocoa and rubber requires
  expensive machinery and to sustain it the
  business may have to source inputs from several
  districts. In this case the urban area may be the
  most accessible location for all of the
  districts.

• Do process if there are very high economies of
  scale

In urban centre

• Many horticultural products need to be cold
  stored, and so if electricity is not available
  they have to be transported to an area that does
  have electricity
• Industrial processing equipment will usually
  require electrical power

• If electric power is needed and not available
  near the production area

• Some produce becomes more delicate after
  handling, e.g. once processed into chocolate,
  cocoa will melt and spoil, so this should not be
  done in the (tropical) production area

• If processes will increase fragility or
  perishability

• With some horticultural products the form that
  you transport the produce from the final area is
  not the form you want to deliver to the customer,
  so a final check and re-pack may be needed once
  the produce arrives in the city

• If they are final checking or preparation for
  the customer

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ADVANCE PAYMENT AND CREDIT FUNDS
Business must have fund to buy produce before
payment is received (advance payment fund)
Business pays farmer at this point
Business receives payment at this point
Delay of 1-2 weeks or longer
Business takes payment for inputs at this point
Delay of 10 weeks or longer
Business must have fund to give inputs to farmers
before payment is received (input fund)
Business gives inputs at this point