Are shorter supply chains really benefitting farmers?
Supply chain models are continually evolving

Are shorter supply chains really benefitting farmers?

Tomm Leighton

Laurence Olins Poupart
Laurence Olins

Poupart chairman Laurence Olins was invited recently to address the Oxford Farming Conference on the fascinating subject – Are shorter supply chains really benefitting farmers?

View a video and slideshow of his presentation or read the transcript that follows to find out what Olins told a distinguished audience about the supply chain and the effects of different retailer models on the grower/farmer.

“I would like to state at the outset that any views I express today are purely my own and do not represent any of the companies to which I am currently connected. These include those shown on this slide and they extend from farming, exporting, importing, distribution, manufacturing and the marketing of meat, fresh produce and branded goods. I will, however, draw on examples, where relevant, from my own experience, having spent the better part of 45 years actively involved within the food industry.

“It is, however, the growers and farmers producing and supplying fresh produce, and their relationship with the multiple retail sector that I intend focusing on throughout today’s presentation.

“I think it prudent at first to define the meaning of the term “supply chain”. I believe the definition is “every company or process that relates to a product on its journey from seed to shelf”. For example, the fresh produce supply chain will encompass the companies producing the product, marketing it, delivering it and selling it to the final consumer. Our produce supply chains have the added complexity of meeting the consumers’ needs throughout the year, rather than just in the UK season. This means that both the Northern and Southern Hemispheres need to be joined up, so that the shoulders of the seasons are smoothly run. The shortening of the supply chain is characterised by either shortness in time or distance, the frequency of processes or the number of intermediaries between producer and consumer.

“That said, I believe there are two parts to the supply chain that require examination today in order to answer the question posed. The first part is the physical supply chain and the second part is the management of the supply chain.

“I believe that by reducing the number of processes in the supply chain the producer is better off. There are many examples of this and I will highlight some of the most familiar.

The Physical Links

  • The delivery of produce direct from farm to retail distribution centre (RDC)

  • The harvesting of produce by mobile packing rigs

  • Packing into retail packs at source

  • The use of retailer vehicles to backhaul from farm to depot

  • The use of cross-docking delivery to one RDC for onward delivery internally

  • Delivery to local stores or depots by farmers own transport

“All these initiatives have driven down costs to the grower in terms of distribution and packing, reduced the number of times a highly perishable product is handled, and speeded up the time taken to bring produce to the consumer in a fresher condition, thereby giving it a longer shelf-life and delivering a higher net return for the grower.

“From the retailers’ perspective, such examples have also made the task of traceability easier, given the fewer links in the chain. In addition, this reduces their stock holding levels and wastage.

“However most of these initiatives require collaboration from the multiple retailer. This sometimes complicates the issue, but also means that the full value of any savings is shared between producer and supermarket.

“And not always equitably!

“Often the opportunity to deliver direct to depot has been curtailed due to the retailer not being able to handle such direct deliveries. Or being unable or unwilling to store and roll stock for more than the day of delivery. On balance however, it would be fair to say that the shorter and more direct the chain of distribution and packing, the more to the growers advantage.

“The current retail environment has not only put focus on the physical supply chain but the management of the chain.

“This has been driven by the rapid recent change in consumer buying habits, which have moved to convenience and online shopping, and away from the hypermarkets that the existing supply chains were developed for.  

“It is this second part of the supply chain picture, namely its management, that I now wish to devote time to.

“We are now familiar with the predicament that the four major retailers face. Being under attack from both the discount end of the spectrum and the costlier end of the marketplace. The growth of both the convenience and dotcom sectors has put additional margin and market share pressure on the UK’s leading retailers. In part, their answer to this loss of margin has been to focus on how best to manage their supply chains. They have been exploring ways of dealing directly with the producer and taking out the service provided by the middle man, whose role and expense are deemed to be expendable.

“I believe there is a cost to this change, both financial and physical, and some of it will inevitably fall on the producer.

“In preparing this paper it occurred to me that there is a correlation as regards to supermarket winners and losers when comparing the management of their supply chains. Those retailers who have expended time and expense in attempting to manage their own supply chains have lost market share, whilst those who have not focussed on this area of their businesses have been the winners.

“My experience has shown that, in fact, the discounters and top-end retailers have stuck loyally to their existing longer supply chains. Their policy to concentrate their expertise on their ultimate consumers has proven to be the more successful. This in no way means that those retailers have no knowledge of their supply base, in fact the contrary is the case. However the actual management of those farmers and growers has been left to others further down the chain.

“So the question posed is – when retailers manage their own supply chains has the result been of benefit to their growers and farmers?

“It is best we pause at present to examine how the chain is now being managed:

Supply Chain Management Types

  • Management by Retailer

  • Management by Intermediary

  • Joint Management

I will examine each of these options individually; seeking both the advantages and disadvantages from a grower’s perspective and then in my conclusion, attempt to make a recommendation to producers as to how best to approach this new landscape of supply chain management.

Management by Retailer

“First, supply chains solely managed by the retailer are clearly the shortest of all the options. They bring the grower or his Producer Organisation into direct contact with the customer. The retailer negotiates the price and programme with the producer, who then organises all the logistics for delivery to the RDC.

“This closeness between producer and multiple can offer influence to the grower and help solve mutual problems, which don’t get lost in interpretation by someone in between.

“This type of relationship is best suited to larger growers whose product range is not overly complex.

“Given the directness of the relationship, costs should be driven out of the supply chain. 

“However, in practice the ultimate savings are not always achieved due to the complications of dealing with very large retailers. The biggest challenge for a producer who is linked exclusively to a major multiple is that marketing and consumer data is only coming from one source. Without access to information relating to the whole marketplace, a grower could be in danger of making wrong business decisions. These could relate to pricing, timing of supply, promotions and capital investment to name only four. A farmer with a direct customer representing a high proportion of his production is very dependent on that customer maintaining their volumes and paying a fair market price.  

“In practice retailers in this position have made sure their direct growers are looked after as regards volume. However if their own business is losing market share then all suppliers will suffer, and the solely committed grower has fewer options if the market declines.

“As regards pricing, one has to ask whether a grower linked to one major customer is negotiating on a level playing field. In my own experience, the weakest negotiators are such producers, who are afraid to say ‘No’ when necessary.  

“Personal relationships in business are very important and in the direct buying model a grower is often faced with a new buyer each successive season. This is a pattern that rarely changes with the larger multiples and the loss of personal continuity can be a problem when each season brings its own new challenges. A grower can often be faced with inexperienced buyers who can make marketing decisions, relating to retail pricing and promotions, which can be out of sync with the crop situation. Such decisions can be very costly to those involved further down the chain. Waste goes up as gluts remain unsold, and conversely artificial shortages are created when low prices or aggressive promotions wrongly coincide with a tight crop.

Management by Intermediary

“The second way a supply chain can be managed is by an intermediary, in the form of an exporter, importer, packer or marketing company. Their presence within the supply chain will clearly add cost.

“This type of management can suit growers of all types and sizes, but particularly those with a complex and highly perishable product range.  

“To justify their cost the intermediary must provide extra services and investment that neither the multiple or the grower can provide themselves. In this instance the intermediary must look in two directions at the same time to justify their position. Let us examine some of the services that the middleman provides, which allow the farmer to focus on producing a high quality crop and the retailer to focus on their ultimate consumers:

Services for The Producer

  • Marketing the whole crop to best advantage

  • Financial support

  • Consumer insight data

  • Out of season use of a farmer’s facilities

  • Back office services

  • Access to unique varieties

  • Continuity of personnel and service

Services for the Retailer

  • Continuity of supply 12 months of the year

  • Category management and long term business planning

  • Analysis of consumer insight data

  • Provision of supplier personnel

  • Full technical support and product traceability

  • New product development

Joint Management

“The third way the supply chain is currently being managed is by a combination of the two methods so far mentioned. This has manifested itself in various ways. Asda has set up and owns a procurement company that aims to source around 70% of the multiple’s fresh produce requirements. However, it gives the balance of its purchasing programme to a marketer to cover.

“This ensures that during difficult periods of supply, the services provided by that company can be accessed. Tesco has set up its own global buying team, based in the UK with overseas technical offices.

“This operates directly with producers worldwide. It then has a parallel in-country buying team to manage the local retail arena. This has led to the use of additional companies in the chain, supplying either logistical or administrative services and has not precluded the use of the traditional marketer company when the product category is more complex.

Morrisons owns facilities that both stores and packs produce, leaving the supplier to delivery to these units in bulk. Sainsbury’s is increasingly dealing directly with larger growers on commodity lines, whilst leaving traditional intermediaries in the chain for security and difficult products.

“This combined model of supply chain management is still in a fluid state and has seen complexities enter the chain, in some cases, delaying decision-making processes and not benefitting either the producer or the customer. It has also been less successful in taking out costs.

“In conclusion, it is plain to see that the physical shortening of the supply chain has been of benefit to both producers and multiples. Though, on the other hand, the benefits may not have been shared in equal proportion to the effort or investment needed to shorten the chain.

The real challenge is whether the various forms of supply chain management are benefitting growers. This I believe depends very much on how involved the farmer is in the chain.

In order to make the direct relationship work with the large multiple, the producer must be prepared to play an active role, beyond just supplying the product. This puts a new responsibility on his business and will test the robustness of it in all areas.

“If the grower has the resource and appetite for this role then they should be able to make it work to their advantage. If, however, they feel that the responsibility, effort and cost is too much and that farming is where they are best placed, then the traditional route of an intermediary would best suit their business.

“Although it would appear that the multiple decides which type of supply chain management they wish to operate, the choice is still the producer’s as to which multiple they choose to supply, and therefore which supply chain they wish to be involved with.

“As I have shown, there is no one set way of supplying fresh produce to the consumer. I can’t see this trend ending and would suggest that in this dynamic environment, further models in the supply chain will emerge. Farmers should be aware of these changes and exercise their choice of customer carefully and to their best advantage.  

“This is the farmer’s or Producer Organisation’s decision alone, but I fear it is one that is not taken seriously enough, or reviewed often enough to ensure that the supply chain works to business’s best advantage. There are cost savings the shorter the chain but there are many challenges to achieve them.

“The choice is Yours!!

“Thank you for your attention.”




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