1、,Supply Chain Issues in Small Agricultural Enterprises,by Cerry M. Klein and Wooseung Jang,Preview,Introduction Problems and Objectives Models Conclusions,Introduction,Agricultural Production Large sector of economy Leading exporter Embraces new technology Derivatives, GPS, etc. Small Farm Enterpris
2、e 350,000 “Large Farms” 95% of inputs 95% of outputs 63% decline in farm ownership 97.5% decline for minorities 1,000 acres needed to break even Federal Subsidies - $27 billion 10% to farm owners most of which were large farm owners (policies not helping),Introduction,Concentration Ratios in Agricul
3、ture CR4 = % market controlled by 4 largest firms Flour Milling CR4 (1982) = 40%; CR4 (1997) = 62% Soybean Crushing CR4 (1977) = 54%; CR4 (1997) = 80% Pork Packing CR4 (1987) = 37%; CR4 (1998) = 57% Beef Packing CR4 (1990) = 72%; CR4 (1998) = 79% Source: Heffernan (1999),Introduction,The Farming Ent
4、erprise $185 billion annually on inputs such as chemicals, seeds, land, supplies, etc. and in return sales of $210 billion worth of outputs 1950s net farm income as a percent of gross farm income was 35 percent. Today it is 17% Industrialized agriculture has embraced new technologies and management
5、procedures including supply chain management and web-enabled methodology The small farmer does not have the size or production capacity to realize the necessary efficiencies of industrialized agriculture,Introduction,Source: Economic Research Service (2000),Farmers Share of the Food Dollar, 1954 to
6、1998,Introduction,Rural Communities and The Farming Enterprise“Decentralized land ownership produces more equitable economic opportunity for people in rural communities, and offers self employment and business management opportunities. Farms, particularly family farms, can be nurturing places for ch
7、ildren to grow up and acquire the values of responsibility and hard work.” “As small farms and farm-workers succeed.they will fuel local economies and energize rural communities across America.” The National Commission on Small Farms (1998),Introduction,Small Farm Enterprises For the small farm ente
8、rprise to be viable it must be able to respond quickly to product differentiation and to establish niche areas of product,“farmers will increasingly be producing commodities with specific attributes called for by food processors who are responding to retail demand. Traditional patterns of farming wi
9、ll change; more products will be produced for niche markets and for international tastes. There will be higher pay-off for the entrepreneur on the farm” (Kinsey and Senaur),“market segregation may provide niche opportunities for producers who are willing to keep their product segregated and sell bas
10、ed on specific attributes rather than in bulk.” (Baumel),Introduction,Small Farm Enterprises “Rural people are disadvantaged regarding access to the basic technical knowledge to use the expanding infrastructure effectively”. U.S. Dept. of Commerce report on the digital divide (U.S.DoC, 1999)This is
11、borne out in the Hopkins and Morehart (2001) study that shows only 0.33 percent of all sales and purchases in agriculture during 2000 were conducted online. In addition only 1% of all farms connected to the internet conducted sales online.,Introduction,Small Farm Enterprises Do not have readily avai
12、lable tools and methodology to assist in effectively accessing or “organizing” new value-added or niche markets for their products They lack the capability to take advantage of the newly developed technologies in information systems to construct supply/value chains that reduce their vulnerability to
13、 risk while increasing their direct profit. An area devoid of contributions at the research level,Problems and Objectives,Strategic Decision Making “links between food manufacturers, wholesalers, and retailers are complex, ill-understood, and changing rapidly” Kinsey (2000) Logistics unlikely that a
14、 group of homogeneous small farmers will be in a common geographical area Information Technology and E-commerce web-based technologies and e-commerce will be essential tools in the development and management of supply chains The advantage of this is to provide enhanced market access for rural small
15、business and for organizing markets and supply chains“the role of information technology has largely been ignored” (Buhr 2000),Problems and Objectives,To efficiently deliver products small farmers need to: Create or reengineer their supply operations to meet the requirement of speed and flexibility
16、Integrate and coordinate the system, which includes customers, suppliers, information, productions, inventories, transportations, quality, prices, partnerships, and interdependencies. The lack of predictive models to analyze supply chains and e-commerce might be part of the reason for the low visibi
17、lity and chaotic situations that exist in supply operations. New business models are needed to help assimilate, simplify and manage supply chain operations.,Problems and Objectives,To become and remain competitive through niche markets small farmers need to: Develop virtual co-ops for leverage Embra
18、ce e-commerce and web-based technologies to expand their markets. Interact globally with suppliers and buyers Create “new economic spaces” (Greenspan, Kelly and Gottlieb and Fisher),Models,Models,Strategic Planning and Decision Making Decisions include: To join or form a co-op What type of product t
19、o produce and how much Determination of when to take a product to the market Contract and pricing, capacity decisions, etc. To join or form a co-op seems to be a very important decision and is considered here.,Models,Co-op Problem Without joining co-op can only sell individually and directly to cust
20、omer If join a co-op, usually more stable demand and larger customer base. Also, not necessary to sell directly to customer Question is whether to join or not, which is dependent on co-op size. What is the optimal size of the co-op?,Models,Co-op Problem Assumptions Multiple homogeneous farmers produ
21、cing one specific product Production quantity is assumed to be Q Each farmer faces local demand X, which is stochastic and has probability density function and cumulative distribution function The price of the product for the local and direct farmer-consumer sales is equal to p1 local demand and pri
22、ce is not affected by outside factors such as other co-ops and grocery stores,Models,Co-op Problem Suppose that the demand from wholesalers and institutions is expected to be D, and the sales price per item is , where p2 D. Assume each farmer sells D/n items through the co-op and the rest, Q-D/n, to
23、 local customers If a farmer only sells products directly to local customers without using a co-op, then the revenue given by is f(0),Models,If a farmer is a member of an n-farmer co-op, then the revenue is given by,It is possible to show that f(n) is an increasing function in terms of n 1 , when,an
24、d unimodal if,Models,Can use this model to determine whether or not to join a co-op.There exists a Q* and an n* such that,Models,In other words: A farmer should not join a co-op if the expected marginal price of direct selling is larger than the price obtained through the co-op participation A farme
25、r should always join a co-op if his production quantity is larger than a certain threshold value Otherwise, the farmers decision should depend on the size of a co-op. The values of Q* and n* can be explicitly computed and used to assist individual farmers who try to measure the value of forming and/
26、or joining a co-op.,Models,B2B and B2C Models When are direct sales to customers profitable for the small farmer? Quantity and pricing strategies to optimize farmers profits Because many products are perishable, farmers need to find balances between lower, yet certain profits, and higher profits wit
27、h uncertainties Analytical models can provide operational decisions so that farmers overall expected profits are maximized,Models,B2B and B2C Models Once a co-op is formed, various operational decisions should be made. Both the co-op and wholesalers desire to make decisions that maximize their profi
28、ts, but only coordinated decisions can realize this objective Joint coordination can result in decreased operation costs and reduced uncertainties, which will eventually yield greater satisfaction for participants. This is widely done in industrialized agriculture but is virtually nonexistent in sma
29、ll farm operations, (Hobbs and Young 2000),Models,B2B and B2C Models Example: Supply Contract and Pricing Decisions Assume: Co-op suggests the sales price (p2) for its products to wholesalers Wholesaler decides on an order quantity (D) so as to minimize the total cost Wholesaler faces random demand
30、later from retailers and may need to pay either a holding cost (h) or a shortage penalty (s) The pdf and cdf or the random demand is given by:,and,Models,B2B and B2C Models The profit function for the supply chain is equal to the revenue of the wholesaler minus the wholesalers holding and shortage c
31、osts minus the co-ops production cost,Where is the sales price of the wholesaler,Models,B2B and B2C Models If the wholesaler follows an optimal ordering policy based on the well-known Newsboy problem, then,and the profit function can be rewritten as follows,Models,B2B and B2C Models One of the objec
32、tives is to decide an optimal transaction price between the co-op and the wholesaler so that above function is maximized. After some analysis, we can show that the optimal transaction price satisfies,Models,B2B and B2C Models This results show that the optimal price is decreasing in demand if the pr
33、oduction cost is strictly concave while the price is constant if the production cost is linear. This implies, if a product has a concave production cost, a larger co-op can offer the product at a lower price enticing more wholesalers to the supply chain, and the addition will provide a profit increa
34、se for all existing members. We can conjecture that eventually only well-coordinated large co-ops will survive. Therefore, it is necessary for a co-op to be aggressive in increasing demand, especially at the beginning stage of the supply chain. If production cost is linear then smaller co-ops can co
35、mpete because the optimal transaction price should be the same regardless of the size. Thus, the operation of a co-op should focus on other issues such as quality and customer service rather than becoming large.,Models,Accepting a New Contract Contract between buyer and cooperative defined by price
36、and quantity (p,D) Let p0 be price for local buyer now Assume have current contract (p1,D1) and considering new contract (p2, D2) where nQD1+D2 Accept New Contract if,Models,Amount of Product for Farmer to Supply Suppose that the farmer contributes R products then the revenue isThe optimal delivery
37、quantity for the farmer assuming they are required to deliver a quantity between R1and R2, R1 R2 is thenQ if QR1R1 if R1 Q R1 + -1(1-p1 /p0)Q - -1(1- p1 /p0) if R1 + -1(1- p1 /p0) Q R2 + -1(1- p1 /p0) R2 otherwise,Conclusions,Initial stages of study Need real data Co-ops in Mississippi, California,
38、Illinois, and Missouri Models need to be extended to more realistic scenarios Problems difficult, but interesting due to the uncertainties Important problem from a political and policy standpoint Supply chains are in a highly variable, high risk, low margin, seasonal, niche market environments may relate or be applied to certain “s”,
