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(Chapter II-IV formed together the meeting's background document sent out prior to the meeting)

Supply chain management

Supply chain management is the management of the entire set of production, distribution and marketing process of a specific product or product group.2

The food industry has been slow to adopt supply chain management as compared to other industries. According to O'Keeffe (1996)3 there are four characteristics in the food sector that impede the process of trust building, necessary for supply chain management:

  1. In commodity markets the sum of value created is fixed and the major issue is how it is divided among chain participants.
  2. Auction systems and regulated markets isolate farmers, thus farmers do not gain insight into their customers. Likewise processors have not needed to or have not had the opportunity to develop relationships with growers.
  3. Supply Chain Management does not remove the volatile nature of prices and supply in the agriculture sector. Price volatility puts pressure on the relationship.
  4. Interdependence is difficult to achieve owing to size imbalance between processors (/retailers) and farmers.

Maybe as a consequence of those characteristics of the food chain, supply chain management seems to have mainly taken the form of increasing requirements imposed by retailers on suppliers, usually without any increase in producer prices. In an effort to increase the efficiency of supply chains, inventory levels are cut down. Reductions of inventories at the retail end have often caused increases in inventories at the side of the supplier/shipper, who sometimes have established distribution centres closer to the markets. Reductions of inventories have also resulted in reductions of production lead times. Farmers are asked to deliver desired quantities at the latest possible moment, putting pressure on their labour force. In addition, traceability systems are put in place, mainly addressing the need to be able to locate the source of a food safety problem quickly and with the additional effect that more responsibility and liability is transferred to the primary producers and packers.

Example of developments in supply chain management:

Automatic collection and analysis of Point Of Sale data.

With the use of new computer technology, sales data are automatically collected via scanners at the checkout counter and orders for replacement are automatically transmitted to the manufacturer. Since the introduction of standardized product-look-up codes for fresh produce, such automatic data collection is also possible for fruits and vegetables. Fruits and vegetables were previously sold without UPC bar codes (the black stripes), but now consumers in supermarkets are asked to weigh their desired amount and put the sticker on the bag themselves. This allows for lower inventory levels at the shop, more efficient use of shipping trucks, improved storage operation and a reduction in unsold goods. It also allows for better and easier monitoring of consumer behaviour, reactions to promotional activities, new products or packaging. 4a

Increasing non-price demands on produce, have also changed sales-buying relationships, according to Perosio et al.4. They argue that in the past the principal communication between supplier and customer took place mainly via the sales agent and the buying agent and price was the main point of negotiation. Nowadays progressive suppliers/shippers in the US have formed sales "teams" and retail firms have formed buying "teams" with category managers, quality assurance personnel and warehouse managers. A few shippers even organize shipping point seminars to allow the wholesaler/retailer to fully appreciate the unique features of the products, resulting in a better understanding of the vendors' typical dilemmas.

The above characteristics of supply chain management mainly address efficiency of the chain and product quality. Such decisions on efficiency and quality measures along the chain are usually dominated by one or two powerful actors in the chain. When it comes to increasing environmental and social performance, supply chain management is often confined to what is called "ethical sourcing". The powerful buyer adds social and environmental criteria to the list of requirements their preferred suppliers have to meet. This has the danger that the buyers in developed countries dictate what constitutes environmentally and socially responsible business, even beyond their borders. It does not necessarily address the priorities of the suppliers, their work force and the communities in which they operate.

On the other hand, vocal consumers have given rise to environmental and social certification initiatives (see chapter 1.1). The involvement of both retailers and traders in the development of these schemes has often been minimal and in some cases also producers were not actively involved. Similarly to buyer-dominated "ethical sourcing", these NGO-dominated certification programmes have the danger that those (European and US based) NGOs decide on what constitutes environmentally and social responsible production and trade.

Building partnerships along the chain and giving all actors a voice in the management of the chain might provide better opportunities to work towards responsible trade.

Building partnerships along the supply chain

"Partnership" is a widely used concept, but is not well defined. The Social Security Administration of the US defines partnership as follows in its handbook: "In a partnership each partner contributes in one or more ways with money, property, labour, or skill and shares in the profits and risks of loss in accordance with the partnership agreement or understanding."

Examples of building partnerships

ETI. In ETI pilot projects local tri-partite groups (companies, unions and NGOs) research how to implement the ETI Base Code, with regular communication and guidance from the UK-based tri-partite group. Trust is built and learning is shared within the ETI. Unfortunately, due to confidentiality agreements, not all the results are open to a wider public.

Fair trade. The fair trade initiatives aim to create long term trading relations between fair trade producers and licensed traders. FLO also organizes activities to bring producers into contact with the market in which their produce is sold, and information is provided to consumers about the producers behind their fair trade food. With the recent reorganization of FLO's structure, producers and traders gained positions in the Board, which is further stimulating partnership building within the fair trade initiative.

Fearne and Hughes (2002) point out that effective communication between and within all organizations involved is necessary but that sharing information poses threats to independence and is extremely difficult when trading partners lack trust. They select three major conditions for successful partnerships in supply chain management: Clear benefits for all participants in the chain, sharing of the same long-term objectives, and an aim for leadership in quality.5 According to Senge (1990), successful chains will be those that embrace the notion of the `learning chain'. This requires a shared vision, challenging conventional wisdom and current practice without inducing defensiveness while engaging in systems thinking.6

Example of relinking the producer and consumer

In the US Community Supported Agriculture tries to built partnerships between consumers and producers. Community Supported Agriculture consists of a community of individuals who support a farm so that it becomes the community's farm, with the growers and consumers providing mutual support and sharing the risks and benefits of food production. Community farm members pledge in advance to cover the anticipated costs of the farm operation and farmer's salary. In return, they receive shares in the farm's bounty throughout the growing season, as well as satisfaction gained from reconnecting to the land. Members also share in risks, including poor harvest due to unfavourable weather or pests. (Adapted from USDA definition)

From a development and fair trade perspective, the NRET has come to very similar conditions and characteristics of partnerships in trade. Tallontire (1999) characterises partnerships as a relationship with a shared time frame, participation, balance of responsibilities, clear boundaries, autonomy of partners, accountability and transparency. The conditions for such partnerships are shared understanding, mutual commitment, distinct contributions, shared objectives and trust.7

The link with the consumer

With the globalization of trade, the link between the producer and consumer has been eroded. Some consumers are romanticising rural life or lack basic knowledge about food production. This may be illustrated by the fact that some urban consumers think that milk is produced in a factory. Many consumers are unaware that selecting totally unblemished fruits indirectly results in more pesticides being sprayed. Consumers do not (and most of the time can not) know how much of the final price is going to the different actors in the chain, and whether these actors make a profit from that share or not.

At the other end of the chain producers are hardly aware about how their produce is presented to the final consumers, what place it takes in their diets and how these consumers value their produce.

However, recent food scares, mainly in Europe, have made more consumers aware that it does matter how food is produced and that their food has travelled many miles before reaching their plates. Furthermore the growing organic and fair trade markets indicate that some consumers do care about production methods and labour conditions.

With these growing "ethical" markets and a proliferation of other initiatives, there is a growing number of "responsible actors" in the fresh produce sector. This creates opportunities for building partnerships and "responsible supply chains". However, for this to be possible, the "responsible actors" need to find each other and create an enabling environment to act responsibly.

Effective communication between actors in the chain is essential to reach mutual understanding of what improving environmental and social conditions would mean at each step. While talking about the environmentally responsible chains, a store manager might think about reducing waste from unsold produce by better and more uniform quality, while the producer might think of spraying less chemicals, which may lead to more blemishes on the product.

Challenges and opportunities for producers, exporters and shippers from developing countries

Trust building in the food supply chain is difficult because of the nature of commodity markets with volatile prices, isolation of farmers from markets and size imbalances between the different actors in the chain. The actors from developing countries are often most isolated from markets and are the smallest and least powerful actors in the chain.

Supply chain management in the fresh produce sector has so far mainly addressed efficiency and product quality and has been dominated by the most powerful actors in the chain, which are often the retailers. While producers and packers from developing countries face many difficulties when trying to comply with efficiency and quality requirements, they have in most cases not received higher prices for their products.

This type of supply chain management does not appear to be designed to increase environmental and social performance of the chain. Building partnerships between the actors of the chain might provide better opportunities for responsible chain management. This poses many challenges for communication along a global supply chain with great distances to bridge, different languages and cultures and differences in access levels to telephones, e-mail and internet. However, without communication, without "knowing each other", building of trust between actors is extremely difficult, if not impossible.

Supply chain management innovations have so far mainly tried to increase efficiency and reduce costs, and more recently increase food safety. Improving social and environmental responsibility might increase costs. The big question will be who is to pay for these. Or could the chain combine the two: costs saved by increasing efficiency to be reinvested in social and environmental projects?

2 Adapted from: Woods E. 1999. Supply chains: What are they and why be interested? ACIAR Postharvest Technology Workshop. 1-2 December 1999. Canberra
3 O'Keeffe M. 1996. Establishing Supply Chain Partnerships: lessons from Australian Agribusiness." In: International Journal of Supply Chain Management, vol.3 no.1.
4 Perosio D. J., McLaughlin E.W., Cuellar S., Park K., 2001. Fresh Track 2001; Supply Chain Management in the Produce Industry. Cornell University, New York.
4a Cook R. L. 2001. The U.S. Fresh Produce industry: An Industry in Transition. University of California, Davis.
5 Fearne A. and Hughes D. 2002. Supply chain partnerships in a global food industry: towards a sustainable competitive advantage. In: Outlook, A Journal for Western Australia's Agribusiness Industry, Autumn 2002.
6 Senge P. M., 1990. The Leaders' New Work: Building learning organizations. In: Sloan Management Review. 7, Autumn 1990
7 Tallontire A. 1999. NRET Working Paper 6. Partnerships in fair trade. Reflections from a case study of Cafédirect.

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