Supply Chain Management and the Poultry Industry
By Rick Kleyn, SPESFEED (Pty) Ltd.
The production and supply of agricultural products has changed dramatically over the past few decades, and will continue to change in future. Figure 1 shows how the food marketplace has evolved. In addition to changes in the food market place per se there have been changes in the business arena in general which have also impacted on the way in which we currently do business. Some of these major trends are discussed are:
 | A move towards specialised or customised products and away from an emphasis on cost-reduction through efficient large scale production and supply; |
| Shrinking product life cycles; |
| A shift from open markets to vertically co-ordinated transactions; |
| A move towards agricultural industrialisation; |
| A move towards outsourcing be it for technical input, product manufacture or logistics |
| A demand by customers for ever higher levels of service. |
Figure 1: The evolution of the agricultural marketplace (Dill and Makovec, 2003).
There have been a number of drivers of change of agricultural markets:
| Deregulation of national and international markets; |
| Advances in technology; |
| Changes in consumer demand; |
| Changes in the agricultural supply structure. |
The net result of these changes is that our industry has become more sophisticated, which in turn involves increasingly higher levels of management. "Supply Chain Management" has become one of the more recent buzzwords in business management and this is a methodology that should actively by the poultry industry.
A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products (manufacturing), and the warehousing and distribution (logistics) of these finished products to customers. The complexity of the chain may vary greatly from industry to industry. Increasingly, quality issues have become an important part of supply chains, particularly where food products are concerned.
Figure 2: An example of a supply chain for the poultry industry.
Every supply chain comprises a number of dimensions:
| Those activities or processes involved in delivering the final product to the consumer. These activities create the attributes that satisfy the consumer’s needs and are often referred to as the value adding activities. |
| Food safety, traceability and quality control can and should be maintained across the entire chain. |
| Product flows across the chain. Transport and logistics play a role in ensuring that the different elements are in the right place at the right time. |
| There is a financial or cash flow across the chain. Sharing of this information is important if the chain is to function effectively. |
| There is an information flow across the chain. This information is necessary to control primary business processes in chains and to generate management information to assist with decision making. |
| Supply chains function as incentive systems that reward performance and share risks. Conflicts that arise out of inflexible contracts often result in the inequitable sharing of gains and losses. |
| The last and perhaps most important dimension of a supply chain is the governance or co-ordination system. Alternative systems could include open access markets, fixed contracts, strategic alliances, joint ventures, franchising arrangements, co-operatives and vertical ownership. The choice of governance system will have a significant impact on the distribution of power and control. A continuum of governance structures exists as can be seen from figure 3. |
Figure 3: Alternative governance structures for managing produce marketing (Standard Bank, AgriReview, Nov 2002)
The question that needs to be asked is where does this fit in practically, particularly in terms of the poultry industry. Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organisations along the supply chain operated independently. Each organisation, or part of an organisation, has it’s own objective and these often conflict with the other components of the chain. Marketing's objective of high customer service and maximum sales may conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximise throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan or strategy for the organisation or supply chain. There are as many strategies as there are business units.
Clearly, there is a need for a mechanism through which these different functions can be integrated together. It is important for example that an egg producer knows that the demand for Omega 3 eggs is higher in Mpumalanga Province than in Guateng, while a broiler producer may find in interesting that the sales of spatchcock chickens is higher in winter than summer. Similarly, a retail store needs to know that a new, fashionable, Thai Green Curry dish is in the pipeline so that they can start promoting it. Information such as margins on each product probably needs to filter back to the farm.
The purpose of supply chain management as a strategy, is that it represents a mechanism through which through the integration of information can be achieved. Setting up effective supply chains in the poultry industry is not easy. It is true that there are some integrated companies where many of the links of the chain are to be found, but this integration usually falls short of retailing and hence the final consumers.
From a practicle perspective the information generated in the supply chain needs to be managed in some cohesive manner. There are any number of Enterprise Resource Planning (ERP) packages in the market which purport to do just this. A recent South African report (FM April 2002) says that 57% of SAP customers (SAP being a leader in the ERP market) have not seen a return on their investment after using the software for an average on 2.8 years. SAP in turn make the point that many of their systems are implemented without the company doing a proper study of what they want to do, and without the support and understanding of senior management. A report in the Journal of Management Information Systems found however that companies that have installed ERP systems consistently perform better across a wide variety of measures than those that haven’t.
In the poultry industry as it is currently structured, it may not be possible to effectively implement an ERP. It is therefore essential that partnerships evolve if a successful supply chain is to be established. These partnerships need to be trusting relationships in which information is shared, along with the risks and the potential profits of the supply chain. It is unlikely that these relationships will just "happen" and are likely to evolve over time, as is illustrated in figure 4. Most firms co-operate and co-ordinate through contracts. However
Figure 4: The key transition from open market negotiations to collaboration (Standard Bank, AgriReview, Nov 2002)
The successful implementation of some form of supply chain management system allows all stakeholders within that chain to make decisions in two broad categories, namely strategic and operational. As the term implies, strategic decisions are made typically over a longer time horizon. These are closely linked to the corporate strategy, and guide supply chain policies from a design perspective. On the other hand, operational decisions are short term, and focus on activities over a day-to-day basis. These decisions allow us to effectively and efficiently manage the product flow in the "strategically" planned supply chain.
The bottom line
If poultry production in South Africa is to become less risky and more profitable for all players, stable relationships will need to be built between the various stakeholders of our supply chains. The benefits of successful supply chain management can be summarised as follows:
| Reduce costs through improved synergistic performance; |
| Increase opportunities joint planning and strategy; |
| Improved customer service; |
| Improved traceability and food safety; |
| A reduction of risk; |
| Improved competitive advantage. |
One only has to look at how successful Woolworths have been in establishing long term relationships and effective supply chain management strategies with their suppliers to appreciate just how profitable the whole process can be for all parties concerned.