2009

Value Chain Linkages

in Agribusiness Supply
Chains in South Africa

EDAMBA SUMMER SCHOOL

2009
JULY 23-29
SOREZE FRANCE

Saungweme Percy W
University of Stellenbosch Business School
25/7/2009
Paper One Outline

SECTION ONE
Background

SECTION TWO
Importance/ Justification

SECTION THREE
Problem Statement

SECTION FOUR
Objectives

SECTION FIVE
Definitions

SECTION SIX
Limitations

SECTION SEVEN
Supply Chain Management
A Historic Pespective

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Introduction and Background

This paper seeks to introduce the research on agribusiness supply chain linkages to the
reader. In particular the paper will address the background to the research, the research
problem, the research objective and research questions, the delimitation, key definitions
and limitations of this research. This introductory paper will highlight the knowledge gap
in agribusiness literature and will justify why it is important to carry out an empirical
research in the area of agribusiness collaboration along supply chains in South Africa.
Finally the paper will end by giving an overview of the layout of the research report.

Background to the Research Problem

The agricultural economy is an important sector in the South African economy. In the
words of Louw et al (2007) an agricultural economy consists of “ all economic activities
from farming inputs, farming and value adding’’. This definition divides agriculture into
two main parts, the on the farm activities –generally refereed to as farming and the off the
farm activities generally refereed to as agribusiness.

The following table, Table 1, shows the contribution of South Africa’s agricultural economy
to the overall South African economy.

Agricultural Aspect Contribution to Economy

Primary Agriculture 4.5 % of GDP
Agro Food 9 % of GDP
Exports from large commercial farms R16 billion
% of SA’s total exports emanating from Large 10%
commercial farms
Number of Commercial farms 50 000
Number employed in Commercial Farms 1 million
% of total formal employment in SA emanating 11%

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from Commercial farms
Number of Small scale farmers 240 000
Number occasionally employed in small scale farms 500 000
Source Own Based on Statistics from NDA, 2006, South African Agricultural Strategic
Plan, 2001

The above table, Table 1, shows that over the years, agriculture has had a profound effect
to the South African economy. Adding to the picture painted above, the Strategic Plan for
South African Agriculture (2001) points out that the productive and social activities of
rural towns and service centres in South Africa are centred on agricultural initiatives. The
Strategic Plan for South African Agriculture further claims that more than half of the
provinces and about 40 % of the country’s total population are primarily dependent on
agriculture and related industries.

Despite continued growth in agriculture and agricultural related activities, the agricultural
economy continues to face challenges that seek to wipe out gains that have been made over
time. Agribusinesses today, find themselves operating in what Esterhuizen (2006) calls a
new economy. According to Esterhuizen (2006) the new economy is a networked
environment where a well informed consumer demands products from a world economy
that seeks to break the barriers to trade and geographic location. In this economy
organisations are linked together in a web of interrelated supply chains that seek to meet
the consumers’ expectations. Organisations no longer compete against each other instead
supply chains become the competitive forces that drive markets.

In addition to the market forces, the new economy is also characterised by the existence of
regulatory and complimentary forces such as consumers watch dogs, governments and
environmentalist that seek to shape and imposes constraints on the supply chains that
participate in agricultural markets, Trienekens & Omta (2002). Further society puts
pressure on agricultural organisations to ensure that animal friendly and safe production

4
and less pollution is achieved during production, Trienekens & Omta (2002), Esterhuizen
(2006).

Technological developments and increased international competition have changed the

production, trade and distribution of food products beyond recognition. Demand is no
longer confirmed to local or regional supply. The food industry is now swiftly becoming an
interconnected system with a large variety of complex relationships. This is changing the
way food is brought to the market for example some products can now be available in retail
outlets as fresh produce through out the year as they can be shipped from halfway around
the world at competitive prices, .

The above developments are usually accompanied by national and international

regulations and legislation in the area of food quality and safety, which impose significant
challenges to agribusinesses today. Citing the work of Doyer (2002), Esterhuizen (2006:4)
further explains that in agribusinesses, “the emphasis is shifting from a pyramid structure
to a horizontal one, where strategic alliances, co-operation, supply chain agreements and
specialisation are facilitated.” Thus as Esterhuizen (2006) explains, agribusinesses
operating in the new economy have to spend less time on the farm and more time
developing business service strategies that aim at enhancing their competitiveness.

This observation calls for agribusiness strategists to focus not only on traditional
economical and technological interests but also on value addition. Effective strategies in the
21st century are described as those that focus on value addition and revenue generation
while they are customer driven, Doyer (2002).

South Africa, one of the largest countries on the African continent with an estimated
population of 48million people, plays an important role in the global agribusiness arena.
South Africa covers 1.2 million square kilometres of land with seven diverse climatic
regions ranging from Mediterranean climate right through to the semi-desert climate.
From the total land surface attributable to South Africa, only 13 % is arable. Further to this,

5
out of the arable land only 2.86% (representing 22% of the arable land) is highly potential
arable land, Statistics SA (2008), NDA, 2006.

The challenges identified above are also apparent to the South Africa agribusiness sector.
In addition to the challenges faced by other global players in agribusiness, South Africa’s
historical legacy continues to affect its overall competitiveness in the global agribusiness
market.

Since 1994 several factors have impacted on the South African agribusiness systems. The
most profound has been the political change and constitutional dispensation, Du Toit
(2005). In the past two decades, the South African social and economic environments
changed significantly following the abolition of apartheid. The democratic government of
1994 initiated fundamental reforms aimed at creating a more open and market-oriented
economy. Following the democratic elections of 1994 and the subsequent lifting of
international economic sanctions against South Africa, the new government opened the
way for broad liberalising reforms.

In addition to the above, agriculture policy and practice in South Africa has undergone
significant transformation in the past two decades. Following the recommendations of the
Kassier committee of 1992, the Marketing of Agriculture Products Act of 1996 set out
changes that affected the competitiveness and growth potential of South Africa’s
agribusinesses. The act liberalised the market, which meant agribusinesses had to position
themselves as business driven competitors in a less controlled, free market global trading
environment, Van Rooyen, Esterhuizen & Doyer (2001). The overall results of reforms to
date have been positive, with a stronger and stable macro economy, better integration into
the global trading system, OECD (2006).

As a global player, South Africa continues to seek ways and means of improving the
competitiveness of organisations that participate on the global agribusiness market place.
In fact the South African government views agriculture as a vehicle for improving its

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developmental goal of reducing poverty by 2014 through the ASGI-SA initiatives and
empowering the previously marginalised communities due to the apartheid legacy.

In 2001, the strategic plan for South African agriculture was released. The strategic plan’s
vision was clearly stated as follows:

To generate equitable access and participation in a globally competitive, profitable

and sustainable agricultural sector contributing to a better life for all.

The above vision provided a beacon upon which all stakeholders in agriculture and related
industries were to be guided in developing sound strategies to meet the vision. One of the
strategies identified by the strategic plan revolved around supply chain performance. The
Strategic Plans for South African Agriculture (2001:14) concluded “it has become
important to form partnerships and long-standing trust relationships between different
role-players in the supply chain and to promote supply chain interaction to allow
opportunities to add value.” Thus there is tremendous pressure on agribusiness
organisations to develop an agricultural economy that will address the local needs and
compete effectively on the global market.

In South Africa, in each of the seven climatic regions, producers of agricultural products,
manufactures and suppliers of agribusiness commodities can be found. In this agricultural
economy, there are many other organisations that provide services such as logistics,
equipment production, extension services, research and development, marketing and
strategy to mention but a few, each of these players form part of a multi billion rand
agricultural economy that constitute networked supply chains. These networked
agribusiness supply chains that seek to effectively and efficiently produce and deliver
products of value , in a highly competitive environment locally and abroad, van Rooyen
(2000) OECD(2006).

The implication of the above observations entails that South African agribusiness entities
have to develop a systematic way of dealing with the changes and impact associated with

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the new competitive regime in agribusiness initiatives. Esterhuizen (2006:1) says
“agribusinesses need not only compete in their domestic markets, but also compete in
foreign markets and develop strategies to induce new customers in the new markets to buy
their products”

This realisation necessitates the deliberate attempt to develop an agribusiness industry

that is poised to meet the global competitive environment. It is therefore important
particularly in developing economies like South Africa to develop theory based on sound
empirical principles that will guide business practitioners and policy makers on how to
improve the operations of their agribusiness supply chains if they are to compete on the
global market place.

This study seeks to address the deficiency in literature on the area of supply chain
management. A supply chain is viewed as a resource to an organisation in agribusiness. An
organisation’s ability to manage its supply chain better than its competitor’s results in a
competitive advantage. In these linkages, agribusinesses tend to collaborate with other
organisations in order to ensure that they meet their customer expectations. This is in line
with the argument poised by Drucker (1996), who argues that no one company anywhere
in the world is big enough or strong enough to do everything on its own. Thus in the global
arena and in South Africa in particular, agribusinesses collaborate with other organisations
along supply chain to enhance their competitiveness in South Africa and abroad. This is
clearly seen in any agribusiness arrangements as agribusiness supply chains that operate
as systems that link different players in a value system that are characterised by perceived
optimisation between two links.

Further to the above , the presence of more than two links in a supply chain raises the
prospect that although actors at any link may be optimising, they may in fact at the same
time be arriving at solutions that are sub optimal for the chain as a whole.

In trying to address challenges associated with agribusiness supply a chain, research work
has been conducted both on the international and local scale. Researchers such as Choi

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(2001) provide some rich insight to benefits that an organisation derives from linkages
with suppliers and customers. Sartorius and Kirsten (2004) research focused on whether
small scale producers could compete with medium to large scale producers in an
agricultural supply chain with respect to supply of raw materials. Morris and Barnes
(2004) focused on the operational dynamics of how to build cooperative linkages between
organisations. Nagurney (2006) sets out the theoretic foundation for the formalisation,
analysis and solutions of supply chain problems from a network economics perspective.

On the other hand, South African researchers have also added their weight to the
international research in agribusiness competitiveness, strategy and development. The
following table, Table 2, shows completed research on agribusiness in South Africa in the
past decade:

Completed Research in Agribusiness in South Africa 1998-2008

Year Level Researcher Research
An institutional approach to
2006 PhD Karaan ASM agribusiness in development : South
African case study
2006 MscAgric Jordaan DDuPS A critical analysis of the South African
mohair marketing system in the global
agribusiness environment
2006 PhD Esterhuizen D An evaluation of the competitiveness of
the South African agribusiness sector
2006 DCom Sartorius K Linking small scale farmers to
agribusiness: the economics of
contracting
2002 PhD Doyer OT An inquiry into evolving supply chain
governance structures in South African
agribusiness
2000 MAgric Turner CR Improving the economic
competitiveness of South African
Agribusiness firms: the role of ISO 9000
quality assurance standards
1998 Research Ortmann GF Improving the economic
paper competitiveness of agricultural and
non- agribusiness firms in a changing
qualificati economic environment: quality, process
on management and information
technology

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Source Own from data provided in the Nexus Data Base, ProQuest Database &
EBCHOST Data Base as at 30 December 2008

The above table, Table 2, a summary of research work conducted locally in agribusiness ,
indicates that there is limited if no work at all relating to collaboration in supply chains
management in agribusiness in South Africa. While this is true, there is a continued
realisation that linkages in supply chains optimise the whole supply chain. Rungtusanathan
et al (2003) explains that in a bid to improve the performance of their organisations’ value
systems, more and more organisations are developing explicit linkages with suppliers and
with customers. Other scholars concur that integration along supply chains creates
strategic advantage, e.g. Krajewski et al (2005) Lee et al (2007) and Choi et al (2001). One
such strategic advantage is described by Lee et al (2007) who points out that real time
information exchange with suppliers in the upstream and with customers in the
downstream creates opportunities for optimisation to take place.

While the question of what benefits can be derived from supply chain linkages and
collaboration within supply chains and customers has been addressed by a number of
researchers, the equally important question relating to the nature of linkages along multi
linked agribusiness supply chains has to be addressed. This research initiative will
contribute to economic theory through a study of the nature of collaboration in
agribusiness supply chains in South Africa.

Justification / Importance

Agribusinesses provide basic products to feed and clothe the people of South Africa. In
addition, the agribusiness sector contributes about 15% of the South African Gross
Domestic Product and provides employment for about 1, 2 million workers and a livelihood
for about 6 million people. Thus in South Africa, agribusinesses are considered an
important component to government developmental and poverty reduction policies.

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While the above is true, the overall competitiveness of agribusiness in South Africa has
been found to be marginal, van Rooyen et al (2000). This is because of several factors
which include amongst others intense competition from a growing global agribusiness
sector, changes in the consumer demands and changes in the regulatory environment. A
combination of the above factors and others has prompted agribusiness organisations to
develop strategies that will ensure that they meet stakeholder expectations. Amongst these
strategies, agribusiness organisations have set up collaborative arrangements in order to
become more effective and efficient in managing supply chain arrangements.

This is in line with the proposal postulated by Esterhuizen (2006) citing Ali (1992) that
organisations must “realise that in order to survive, and continue to penetrate markets,
companies must compete aggressively and in an economically sustainable manner, as
opposed to merely coping.”

The growth in collaborative relationship and the realisation that supply chain management
is now a fundamental aspect of the organisation’s overall strategy call for research and
theory to be developed in these critical management areas. As indicated above there is
deficiency in research in the area of collaboration and supply chain.

Economic theory has not adequately addressed collaboration in agribusiness multi-linked

supply chains. One way of addressing this shortcoming is by engaging in a study that looks
at specific case studies that span across different agribusiness organisations in South
Africa. Such an analysis will help develop theory on collaboration in supply chains
arrangements in agribusinesses in South Africa while at the same time helping policy
makers and agribusiness practitioners develop effective strategies to manage supply chain
arrangements and collaborative arrangements.

An interesting phenomenon to this study is that it combines two related concepts in order
to develop theory, namely collaboration and supply chain management. These two
management concepts have been heralded as solutions to the challenges that face
businesses in competing effectively in global markets in the 21st century, Drucker (1996),

11
Lee et al (2007), and Rungtusanathan (2003). An investigation into the nature of
agribusiness collaboration in multi linked agribusiness supply chains will expand economic
theory that will unravel knowledge on how to improve the overall competitiveness of
multi-linked agribusiness supply chains in South Africa.

Statement of the Problem

Agribusiness supply systems consist of multi links. The presence of more than two links
raises the prospect that although actors at any two links may be optimizing, they may in
fact at the same time be arriving at solutions that are sub-optimal for the chain as a whole.
There is need for additional research on the nature of linkages in agribusiness supply
chains in South Africa. This research initiative will contribute to economic theory through a
thorough analysis of a number of links within supply chains in agribusiness systems with
the intention of developing a framework to improve collaboration in agribusiness supply
chains in South Africa.

Research Objectives

The primary objective can be stated as:

To determine the nature of linkages in agribusiness supply chain with the objective of
developing a theoretic framework on how collaboration can enhance the competitiveness
of multiple linked agribusiness supply chains in South Africa

In order to achieve the above objective, the following research questions will be answered
by this research

Research Questions

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The following eight research questions have been identified as being core to this
research:

1. How prevalent is collaboration in agribusiness supply chains

2. What is the nature of collaboration in agribusiness supply chain
3. How do the particular circumstances of South Africa influence collaboration
4. Where do agribusiness market participants talk across (skip) links in supply chains
5. Where do more than two agents representing more than two links in the supply
chain get together/collaborate?
6. Why the above two (4) and (5) supply chains scenarios happen
7. Are there links where supply chain linkages do not interact/ talk to each other? Why
not?
8. Do chains focused on the export market lend themselves more to collaboration than
those focused on the domestic market?

Definitions of Key Terms & Concept

Supply chain - a network of organisations that are involved, through upstream and
downstream linkages, in different processes and activities that produce value in the form of
products and services in the hands of the ultimate customer, Christopher (1998:18)

Supply chain management- is a management philosophy aimed at integrating a network

(or a web) of upstream linkages (sources of supply), internal linkages inside the
organisation and downstream linkages (distribution and ultimate customers) in
performing specific processes and activities that will ultimately create and optimise value
for the customer in the form of products and services which are specifically aimed at
satisfying customer demands, Hugo, Badenhorst-Weiss & van Rooyen (2002:29)

Collaboration – the deliberate association, joining, coming together of two or more players
along a supply chain with the intention of optimising the operation of a supply chain. The
collaboration can be done with firms directly along a supply path or with firms that provide

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ancillary services to the supply chain. In the context of this research, the term collaborative
relationship refers to alliances, joint ventures, business networks and other formal and
informal relationships in which organisations coordinate activities to achieve their goals.
(Palakshappa & Gordon, 2006: 389)

Agribusiness - this relates to the off the farm activities along the agro-food and fibre
supply chains. It is also known as the food and fibre industry. Agribusiness describes the
chain of industries directly and indirectly involved in the production, transformation and
provision of food, fibre, chemicals and pharmaceutical substrates. (www.up.ac.za)

Delimitation of the Study

This research will be based on the five case studies that will be used to collect primary data
in collaborative relationships along supply chains in agribusinesses in South Africa.

In addition to the above, the research clearly distinguished between the off the farm and
the on the farm activities. Agribusiness was defined as being off the farm activities hence
the linkages discussed focus primarily on the off the farm activities

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 “A company is its chain of continually evolving capabilities –that is, its own capabilities plus
the capabilities of everyone it does business with”
Charles Fine (1998) – Clock Speed.

Supply Chain Management: A Historic Perspective

Introduction

There is no doubt that the 21st century competitive environment has changed significantly
as compared to the competitive environment of the 20th century. For instance Trade among
countries has rapidly increased in the last century and countries have become much more
interdependent on one another. As countries become interdependent, business
organisations that used to compete amongst themselves also follow similar trends. Thus
the competitive landscape has changed as a result of factors, such as the emergence of a
more open world economy and technological advances, especially in transportation and
communication, Waller (2006) in Emmert & Crocker (2006).These fundamental changes
occurring in the competitive environment are presenting insurmountable challenges to
today’s managers, as they demand strategists to become more innovative through finding
ways of achieving competitiveness. These changes amongst others influence business
decisions in the short, medium and long term, Esterhuizen & van Rooyen (2003:379).

In a bid to meet these challenges, both academics and practitioners have developed a
number of management tools aimed at helping organisations to efficiently and effectively
meet their mandates. One such strategic manoeuvre that can be identified is the growth of
firms entering into integrated networks of supply chains that are geared towards meeting
target market expectations, Nagurney (2006).

15
In recent years, the idea of a supply chain is one of the most important concepts to emerge
in management research and practice. The above discussion arguments the observation
made by Lummus & Vokurka (1990) who noted that organisations can no longer compete
in isolation of their suppliers and other entities in the supply chain. The above observation
has led to an unprecedented growth of practitioner-orientated publications and a similar
development in academic activity, Nagurney (2006), Francis & Simons (2008). Supply
chain management has increasingly become an important way to enhance competitive
strengths and it is argued that present day competition is between integrated supply chains
rather than individual organizations, Vaaland & Heide (2007).

The burgeoning academic and professional interest in Supply Chain Management (SCM)
can be traced to a variety of underlying reasons, including the pressures on organizations
to outsource non-core activities; globalization; a growing appreciation of the dynamics of
‘lean supply’ Japanese sourcing practices; the growth of the use of information technology
for collaborative logistics planning; and, more recently, the global growth around e-
commerce, Francis & Simons (2008).

Towards the close of the 20th century, researchers Eckert & Swartz (1998)noted the
following:

… practicing managers and academic researchers have realized that a more

integrated approach to conducting business is necessary to avoid the traditionally
myopic approach, which maximized individual activity performance at the expense of
total system performance. Viewing and managing, in a coordinated manner, the total
set of activities involved in the delivery of goods or services to the market place as a
supply chain has emerged as a useful management concept.

There is a lot of debate as to the origins of the modern day concept of supply chain
management. Cartlidge (2004) suggests that the concept first developed in Japan in the
early 1950s. Some writers claim that the supply chain management phenomenon is a “new”
or “relatively new phenomenon”, for example Lamming (1996) credits Houlihan with the

16
introduction of the concept in 1984, while others such as Warner (2002) claim that the
central philosophy of supply chain management was introduced by Forrester who is said to
have put the basic concept forward as early as in 1961, Hugo et al (2004), Johnson & Pyke
(2000), Edwards (2003).

In order to gain insight into the SCM phenomenon, the following section reviews literature
on SCM from its historical background to the present day state of affairs. This section will
give an overview of the supply chain concept and will introduce the strategic perspective
that this research initiative will follow. In this context, theoretic, empirical, scholarly
articles and other significant contributory work to SCM will be discussed. The section first
draws attention to the broad concept of supply chain management and then narrows down
to its use in agribusiness strategy.

The Origins of Supply Chain Management

Over the years, industrialists have aimed at providing their products at the cheapest
possible cost to their customers. This objective has resulted in many studies being
conducted across different industries and practices. One would argue that each industrial
phase aimed at bringing a new dimension to the whole supply chain phenomenon.
However, before analysing in depth the phenomenon of supply chain management, it
would be prudent to first define the concept of supply chain.

Transaction Costs Economics & Supply Chain Management Development

Ronald Coase created the transaction cost approach to the theory of the firm in 1937.
Transaction cost economics assumes that firms are profit maximising and that profit
maximisation involves cost minimisation. Following the transaction cost theory, Vannoni
(2002:3) explains that firms evaluate the relative costs of alternative governance
structures (spot market transactions, short term contracting, long term contracting or

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vertical integration) for managing their transaction or trading arrangements. This means
that a firm by virtue of being a profit maximising entity will select the best structure to
meet its profit maximisation objective.
Transaction costs refer to the costs associated with trading or the exchange process itself.
These are indirect costs associated with transactions such as the costs of acquiring and
handling information about the quality of inputs, the relevant prices, supplier reputation
and so on, Vannoni (2002).
In order to become more competitive in highly uncertain and volatile environments, firms
will embark on cost minimisation initiatives. Ziggers and Trienekens (1999:272) clarify
this firm’s behaviour when they say:
When transactions recur frequently and require high transaction specific investments
and opportunist behaviour is likely and therefore transaction costs will rise, then
vertical integration might be more efficient.
The above framework was further clarified by Williamson (1971) who introduced two
important assumptions to the transaction cost economics. These are the bounded
rationality (adapted from Simon 1961) and opportunism. These assumptions are
unchanging contextual factors to the organisational structure. What this means is that the
assumptions introduced do not vary themselves hence they cannot be used to explain
variation in organisational structure or nature of the firm.
Bounded rationality refers to the fact that human beings have limited cognitive abilities. In
handling decisions, managers cannot precisely work out the outcome of their current
decisions in the future regardless of the amount of information they have at their disposal.
This is further complicated by the fact that when managers make decisions, they must take
into consideration how their rivalries in the competitive arena will react. Thus, if it is not
possible to foresee each future contingency, all contracts turn out to be in some way
incomplete, Vannoni (2002:3).
Opportunism on the other hand refers to the possibility that people are not always honest
and truthful in their intentions. In many a case, human beings tend to take advantage of
unseen circumstances that give them an opportunity to exploit others. In the words of
Williamson (1971) some people are assumed to work in self-interest and with guile.

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Vannoni (2002) explains that in circumstances where a firm is able to choose among a
number of firms, opportunism does not pose a challenge in decision-making.
The most important contribution of the transaction cost theory comes from its three
variables, namely, frequency, uncertainty and assert specificity that are used to
characterise transactions.
The firm’s transactions are said to be either frequent or rare. Where a transaction is
deemed to be frequent, the firm is likely to internalise it or may enter into a collaborative
arrangement in order to reduce the overall cost of the transaction as damages from
opportunism are deemed higher, Williamson (1979) and Vannoni (2002).
Uncertainty relates to the difficulty with which a firm foresees the eventuality associated
with a transaction. In any contractual arrangement, a firm may be in better position if its
contractual arrangements are such that the terms of the contract do not dictate that terms
of the contract be re-negotiated at a future date. On the contrary transactions that involve a
commitment over some time have uncertainty associated with them. A firm can never be
sure that its partners (or itself) will for example not go out of business in future. At the
same time for purposes of planning a firm may want to take up a long-term contractual
arrangement. Lastly uncertainty poses a challenge in terms of opportunism: that is to what
extent a partner will continue being honest and not try to change the contractual
agreement in future. These two aspects are individualised in transaction cost economics as
being environmental uncertainty associated with unpredictability of future plans and
behavioural uncertainty linked to the behaviour of the contracting party.
The question to ask however is whether collaboration along a supply chain will reduce
uncertainty. If this is the case, managers need to consider whether the savings in the
transaction cost from collaborative arrangements are not outweighed by costs associated
with collaboration along supply chain arrangements
The third and final variable of the transaction cost economics relate to asset specificity.
Williamson (1971) argues that in situations that involve asserts that are only valuable in
the context of a specific transaction, supply chain relationship will reduce transaction costs.

Basic Philosophy of Supply Chain

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The basic philosophy surrounding the phenomenon of supply chain hinges on the
relationship between a firm and its suppliers and customers. Edwards (2003) aptly
describes this as follows:

In a supply chain, a company links to its suppliers upstream and to its distributors downstream in
order to serve its customers. Usually, materials flow forward while information and money flow
backward in the chain. The goal of supply chain management is to provide maximum customer
service at the lowest possible costs.

Edwards (2003)’s line of reasoning is further illustrated in generalised supply chain model
as postulated by Georgevitch (2005) in the following diagram:

Generalized Supply Chain Model

Relationship Management
Information, product, service, financial and knowledge flows

Material Flow
Supplier Network Information Flow

Integrated Enterprise

Distribution Network

End Consumers
Market
Materials

Procurement
Distribution

Manufacturing

Capacity, information, core competencies, capital, and human resource constraints

Source : Georgevitch (2005)

The above diagram illustrates a supply chain as constituting a combination of firms

integrated into an interrelated web of operatives, with each firm contributing an integral
component to the whole. The firm, its suppliers (and the suppliers of its suppliers),
distribution network and customers interrelate through sharing capacity, information
relating to products and services, core competences both technical and managerial, capital

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and human constraints. The objective of this deliberate arrangement, is to fully optimise
the whole spectrum of activities so as meet the expectation of the final consumer of the
product. This development is a step further from the historical sub optimising view where
firms aimed at improving their own activities without considering the operatives and
practices of other entities.

To further unpack the supply chain concept, a brief description of how markets operated
in the last half century is given below.

The Period 1950s to 1960s & Supply Chain

The period 1950s was a post World War 2 period that was characterised by high levels of
demand for products caused by post war effects. Businesses therefore aimed at producing
as much as they could and push the products into markets. However towards the end of the
1950s and into the 1960s, demand sagged as markets became saturated It soon became
obvious that products were not selling as easily as they had been. The answer was to
concentrate on selling. The 1950s and 1960s is known as the sales era and the guiding
philosophy of business of the time is today called the sales orientation.

In research work, starting in the 1950s, or even earlier, operational researchers developed
analytic tools that primarily focused on how to improve the efficiency of an individual
organisation in a typical supply chain arrangement without taking into consideration the
performance of the entire supply chain. Thus it was thought that if each entity were to be
efficient then the sum of the efficiencies of these entities would result in the entire supply
chain performance being efficient. In other words, each component of the supply chain
aimed at reaching its highest level of efficiency with a view that all other components were
doing the same. Edward (2003) argues that this myopic approach let to a local optimisation
at the expense of suboptimisation of the entire supply chain.

Interestingly, from way back then in the 1950s, researchers such as Forrester(1958,1961),
Arntzen, Brown, Harrison & Trafton (1995) challenged the view of local optimisation and

21
promoted the optimisation of the entire supply chain they advocated that production
arrangements (supply chains) were to be managed an integrated and coordinated system.

Forrester (1961), in case studies of industrial dynamics models, observed that demand
variability increases as demand travels upstream in a production system. This phenomenon
known as the bull whip effect was further investigated by several researchers including
Bhaskaran (1998), van Donselaar, van den Nieuwenhof & Visschers (2000), Towill & McCullen
(1999), Closs, Roath, Goldsby, Eckert & Swartz (1998) and Evans, Naim and Towill (1993),
their conclusion was the same as Forrester (1961) that there was need for coordination of
information amongst supply chain players. Information sharing would increase the efficiency of
the whole supply chain arrangement.

While research work in this era indicated the integrated view of a web of enterprises, not much
attention was given to the development of an all inclusive supply chain management
arrangement. Entities continued to operate as individuals and in most cases the concept of
supply chain management was limited to distributing goods to the local end users.
International markets were limited in scope and extent. This was further worsened by
legislative arrangements in most countries that limited business growth in the west and the
broad impact of the cold war of the 1960s.

The Period 1970s & Supply Chain

The principles now enshrined in supply chain literature, can however be indentified from the
1970s in full. The operational frameworks governing business strategies began to exhibit some
kind of supply chain linkages.

In the 1970s, management philosophy promoted the concept of customer loyalty. It was
common thinking that in order to return patronage, businesses had to focus on quality
management. During this era, there was tremendous growth in marketing efforts in order to
supply products into markets. Business strategists from the beginning of capitalism assumed

22
that the key requirement of business success was a product (business)|product of high
technical quality. The assumption was that if a firm produced a product that worked well and
was durable (quality product), then the firm would not have difficulty in selling them at a
profit. Kotler (2007) refers to this period as the production orientation phase

Levit (1969,1974) and others at Harvard argued that the sales orientation had things
backward. They claimed that instead of producing products and then trying to sell them to the
customer, businesses should start with the customer, find out what they wanted, and then
produce it for them. According to Levit (1969,1974), the customer is the driving force behind
all strategic business decisions ( in this case in all supply chain arrangements).

The idea of supply chain management became more popular with the passing of deregulation
legislation in most countries. Typically, in the United States of America in the late 1970s and
early 1980s, the American government passed a number of deregulatory legislative, that
promoted a new era in transportation of commodities.

Blanchard (2007) explains that the Airline Deregulation Act of 1978, the Motor Act of 1980and
the Staggers Rail Act of 1980 effectively deregulated three core transportation sectors in
America, which opened the whole nature of transportation of goods and the relationships
between shipper and carrier.

Prior to deregulation, the rates for transportation charges within states and between states
were set up by the Interstate Commerce Commission. As the economies in North America
evolved in the 1970's and 1980's, transportation deregulation changed the competitive
landscape of business. Carriers were free to charge their customers (Shippers) a competitive
rate for their shipments.

Warehousing companies that typically acted as surplus inventory storage locations, married
up with transportation companies to offer customers full-service solution capabilities. This
formed the beginning of the 3rd party logistics business and paved the way for outsourcing
logistical activities.

23
Following the academic debates and discourses of scholars such as Levit and others cited
above, the 1970s were a turning point in business perception of the customer through the
marketing orientation concept.

It can be argued that in the decades since the introduction of the marketing concept, its
introduction has been reformulated and repackaged under numerous names including
customer orientation, marketing philosophy, customer intimacy, customer focus, customer
driven, and market focused.

The Period 1980s & Supply Chain

The period 1980s came after the backdrop of deregulations in most major economies. The
developments in the transport front helped in expanding supply chains across the world.
World markets became more accessible as firms exploited the developments in deregulation
and transportation.

Producers of products had gone over the era of pushing products into the market. With the
increase in the number of players, competition had to be addressed from a variety and price
perspective. Clearly the 1980s were a period where markets began to demand a variety from
suppliers and where consumerism became apparent as customers demanded more from
service providers at lower prices. Technology because a key driver in market efficient and in
reducing costs.

Essentially in pursuing global markets, the focus in supply chain management became the
growth in managing supply and demand. This era saw management of supply chain being
focused on functional collaboration (ERP-hysteria). While this was the case, the operations of
supply chains were fragmented and unpredictable.

Interestingly this period also saw the growth in the realisation that productivity could be
increased significantly by managing relationships, information and material flow across
enterprise borders.

24
The Period 1990s to the Early 21st Century & Supply Chain

In the 1990s, there were significant environmental changes that impacted on the way
businesses were operated globally. Amongst others, Jespersen & Skjott-Larsen (2005:9)
identifies four such environmental challenges that have induced corporate, integration and
the development of the supply chain phenomenon as follows:

• Turbulent and dynamic markets, where the customers’ requirements change rapidly
and unforeseeably
• Strongly segmented markets, where various customers have varying requirements
for products and services.
• Increased customer demand for “experiences” and not merely physical products.
• Global competition, which forces companies to become faster, better and cheaper

As discussed previously, consumerism that had picked up in the 1980s soon became a fade as
product life cycles changes very rapidly in markets. During this period, it became apparent
that competitive dynamics had changed from competition between firms to competition
between supply chains, Jespersen & Skjott-Larsen (2005). . Customers became more
challenging with their demands . They demanded products that went beyond the core product .
Most suppliers of products had to refocus their product development and market offering to
supply more variety and developing more products very rapidly as customers demanded new
products over relatively shorter periods from conception This meant that the performance of
the individual firm related directly to the strengths and weaknesses of the firm’s
collaborative partners in the supply chain.

In response to the changing nature of the competitive environment, firms have become
integrated into networks and supply chains that aim to effectively and efficiently meet the
expectations of stakeholders. According to MacNeil (1980) and Drucker (1996), it is
impossible for any firm to operate as a discrete entity.

25
Maloni & Benton (1997) argue that while it is virtually impossible for a business
organisation to operate as a discrete entity, the conventional business practices were more
discrete than relational in nature. In the past businesses strategies were mostly confined to
a single entity as compared to being collaborative as advanced by the supply chain
phenomenon. This meant that an entity would develop its own strategies without taking
into consideration the strategies of firms either downstream or firms in the upstream along
its value system.

The concept of supply chain management, sought (seeks) to move business entities away
from discrete operational frameworks, by breaking down traditional inter-firm barriers,
into a supply chain arrangement characterised by collaborative arrangements. This is
clearly reasoned by Waller (2006) who says:

Manufacturers need to think upstream about supply and be driven by the end
customers. Retailers need to satisfy their customers but need to think supply chain to
achieve this.”

In view of the developments surrounding supply chain management, technology became the
driver of supply chain initiatives. With the growth in the use of the internet globally and the
significant developments in transport systems , the world soon became a global village.

What soon became apparent in global markets was the development of service oriented supply
chain initiatives. The period post 1990 is described as a period where there was service
explosion in any supply chain initiative. Networks that were characterised by dynamism, agility
and adaptability became the order of the day. Supply chain management became an important
strategic imperative that spelt between success and failure.

The period post 1990, has seen the growth into supply chain to the current levels were
technology has become an intergral component. The entire supply chain therefore became an

26
enterprise that has to be driven by service explosion. Indeed supply chains of the 21st century
can be described as being dynamic, agile and reconfigurable, Georgevitch (2005)

Having discussed the general changes in the competitive environment in business practice
today, it is perhaps appropriate to introduce the traditional agribusiness market system
with an objective of highlighting its challenges in competing in the global market place
today.

Summary of Developments from 1970s to the Early 21st Century

The following table derieved from the works of Georgevitch (2005) summarises some of the
development from the 1970s to date on supply chain management.

Period Markets Characteristics Supply Chain Comment

1970s • Businesses focused on the • Vertically integrated
concept of customer loyalty enterprises The essence of SCM
• The issues of quality is king • Primarily domestic understood. This
• Product engineering is • Highly regulated first phase is
competitive advantage • Not managed beyond the characterized
as
extended enterprise
an inventory 'push'
• Rigid, stable, slow but
era that focused
predictable
primarily on
• Managed by function
physical
distribution of
finished goods.

1980s • Market demands variety • Deregulation Realization that

27
 • Cost is king – technology • Learning to manage global productivity could
drives manufacturing supply and demand be increased
efficiencies • Beginning of horizontal significantly by
• Global markets developing management craze managing
• Managed through functional
relationships,
collaboration (ERP hysteria)
information and
• Fragmented and
material flow
unpredictable
across enterprise
borders
1990s • Throw away consumerism – • Technologically enabled Computers change
to product life measured at blink • Services explosion the way business is
presen speed • The network is the done, Internet
t • Cost is still king, but enterprise revolutionized the
manufacturing has nothing left • Dynamic, agile and information
to give reconfigurable
pathway and the
• Global competition • Supply Chain as a strategic
distribution
• Global markets imperative
system of the
business, e-
commerce has
changed the
definition of
business itself.

Supply Chain Management Defined

The origin argument extends further to the exact meaning of the concept of supply chain
management itself. The following table, Table 2.1, highlights some of the variations in
definitions of the modern writers and scholars on the concept of supply chain
management:

28
TABLE 2.1. Supply Chain Management Common Terms
Writer(s) / Scholar(s) Term Used to Describe Supply Chain
Management
Farmer & Ploos van Amstel (1991) Supply pipeline management
Simchi-Levi et al (2000) Logistics management
Andrews & Hahn (1998) Supply networks & supply webs
Maloni & Benton (1997) Supply chain partnership management
Kaplinsky & Morris (2000) Value Chain

Wallerstein (1983), Wallerstein & Commodity Chain

Hopkins (1986)
Bair (2005) World Systems
Gereffi & Korzeniewicz (1994) Global Commodity Chains
Source Own from various published works.

As argued by Hugo et al (2004) there is no dichotomy in the perceptions of authors

postulated above. The crux of the matter is that supply chain management is a management
philosophy that was born out of the developments in the last decade of the 20th century.
True to the developments that climaxed into the concept of supply chain management, the
basic principles underlying the concept are a result of developments dating back as early as
the 1960s, Hugo et al (2004).

Clearly, the notion passed by Edward (2003) and others can be traced back to Forrester
(1958,1961) a prominent industrial dynamic researcher, whose studies described the
interactions and flows of a production-distribution system. Thus in any supply chain, an
organisation would link to its suppliers upstream and to its distributors downstream in

29
order to serve its customers fully at the lowest possible cost, Edward (2003), Forrester
(1961).

It is therefore not surprising that there would exist in literature many definitions of the
concept of supply chain management, making it difficult to come up with a universally
acceptable definition To give an example, the following table, Table 2.2, gives a list of the
different views and terms used interchangeably to describe the concept of supply chain
management through its evolution.

Table 2.2. Terms Used to Describe Supply Chain Management

ain Concentration Names Used & Time Period Flow Type & the Main
Parts Involved
Sheds/ Trucks Warehousing & Physical flows ‘- focus
(storage & Transport 1950s was on moving goods to
transportation the market
facilities)
Physical networks and Physical distribution Physical flow - focus was
inventory reduction management 1960s on moving goods to the
market
Centralised inventory Material Physical flow- buy make
Management & 1970s and move were the focal
Physical Distribution points.

Eliminate inventory Logistics Physical movement and

Management 1980s information movement
upstream and
downstream- emphasis
placed on buying,
Continuous Supply Chain Physical movement and

30
replenishment Management 1990s information movement
upstream and
downstream- emphasis
placed on buying,
Zero lead time & total Demand Pipeline Physical movement and
visibility Management 2000s information movement
upstream and
downstream- emphasis
placed on buying,
making, moving and
selling
Source: Adapted from Emmert & Crocker (2006:12)

From the above analysis, it is clear that there exists a challenge as to what constitute supply
chain management. A critical point to note is that the above, associated concepts and terms
represent key management areas that constitute some specialised provinces within the
supply chain realm. Thus as argued by Emmert & Crocker (2006), there is need to maintain
a holistic view that supply chain management is meant to afford and contribute.

The following definition, by Hugo, Badenhorst-Weiss & van Rooyen (2002:29) which is
described by Hugo et al (2004:5) as “ a synthesis of the current theory and practice’’, gives
a holistic view of the concept supply chain management and will be the base definition of
the concept as used in this research.

Supply chain management is a management philosophy aimed at integrating a

network (or a web) of upstream linkages (sources of supply), internal linkages inside
the organisation and downstream linkages (distribution and ultimate customers) in
performing specific processes and activities that will ultimately create and optimise
value for the customer in the form of products and services which are specifically

31
 aimed at satisfying customer demands, Hugo, Badenhorst-Weiss & van Rooyen
(2002:29)

Supply chain management has grown over the years to its current levels of complexity
characterised by collaboration. It has become clear that no one organisation can go it alone.
As put across by Waller (2006) as cited by Emmert & Crocker (2006: xvi):

The supply chain lies no longer with an individual company; we have global networks
cutting across countries and organisations. The only way to achieve this is to get
players working to a common agenda – the collaboration agenda. We have been
taught to compete: nobody has taught us to work together. The need and awareness is
there but still nobody has taught how to do it.

Key Elements of the Supply Chain

A careful analysis of literature on supply chain reveals that there are basically six components
to a supply chain. These are discussed below:

Production

In the history of supply chain management, the first component to be developed was the
production element. We have discussed in this paper how organisations first adopted the
production view in their strategies. Originally, organisations would produce products and then
push them through a distribution system to their customers with little or no interaction with
customers. Today, the production system primarily focuses on what customers and markets
demand. Through deliberately developed feeder information systems from market research
and customer interaction the production component of the supply chain focuses on four
aspects of production.

Firstly products must be developed and commercialised. According to Lambert (2008),

product development and commercialisation provide the structure for the development and

32
bringing to markets products jointly with customers and suppliers. This function must be
carefully developed so as to enable all parties involves to seamlessly allow for the introduction
of new products into markets.

Secondly, having developed and commercialised a product, there is need for resource
management. A firm has its own internal resources in the form of plant and equipment that
can be utilised to meet customer orders. In resource management, an organisation will focus
on determining which resources internally will be deployed to meet the customers
requirements, for example the organisation will have to determine which specific factory or
plant should be used to produce a particular order.

In circumstances where internal resources are not capable of meeting market demands, the
organisation’s resource component will apply outsourcing to capable suppliers. Outsourced
suppliers essentially become part of the entire supply chain of the organisation, hence the need
to effectively manage suppliers of suppliers in a supply chain arrangement.

Tied to resource management is capacity management. Despite having the essential

resources and strategic partners to outsource to, there is need for capacity management in
supply chains. Capacity management primarily focuses on work schedules, equipment
planning, acquisition and maintenance to mention but a few. Carefully managing capacity both
internally and externally ensures that the total amount of units demanded can be produced to
meet market expectations.

The fourth aspect of production management focuses on manufacturing flow management.

Lambert (2008) explains that manufacturing flow management relate to the supply chain
management process that focus on activities necessary to obtain, implement and manage
manufacturing flexibility in the supply chain and to move products into, through and out of the
plants.

The fifth aspect of the production component focuses on order management. There is need
for customer orders to be managed effectively and efficiently. This function will ensure that

33
there are no price distortions in the market . A poorly managed customer order system may
also affect capacity and resource management of an organisation resulting in failure to met
demands in the market or production of good that are of unacceptable quality.

Lastly production management also looks at quality control issues in a supply chain. Quality
control ensures that the rightful products of the required standard are produced for the
rightful market. A quality product is one that is fit for purpose. This means that quality
mechanisms must be put in place through out the entire production and distribution
components to a supply chain.

Supply

The supply element to supply chain management focuses on the management of suppliers into
the supply chain arrangement. Suppliers come in a variety of forms. The previous section on
production identified suppliers who provide additional capacity. There are other suppliers who
provide other commodities to the supply chain arrangement, for example those that provide
raw material, transportation and logistics services and other professional services as
accounting, legal and contracts management.

Lambert (2008:11) explains that the supplier relationship process provides the structure for
how relationships with suppliers will be developed and maintained by a company. Lambert
(2008) argues that the supplier relationship management approach is a mirror image of
customer relationship management.

There is need therefore to assess all suppliers’ core or strategic competencies with a view of
identifying capable suppliers who fit well into the entire supply chain arrangement. Critical to
this function is the need to make appropriate sourcing decisions. Proper mechanism for
supplier selection must be put in place to ensure that identified and selected suppliers of either
goods or services are in line with the strategic vision of the supply chain arrangement in place.

34
To argument this function there is need for relationship management with all parties involved.
While contracts can be entered into with service providers and other suppliers of essential
services, these do not guarantee an efficient mechanism for the functioning of the supply chain
arrangement. Relationship management has been identified as being essential in creating a
flawless supply chain arrangement, Lambert (2008)

Inventory
Inventory management is another important component of supply chain management. This
function focuses on how much inventory should be kept by each component of the supply
chain. In order to achieve this, supply chain management analyses fluctuations in demand and
comes up with optimal stock levels for each component. This in turn results in the
establishment of inventory ordering policies. As pointed above, inventory management
oversights may results in shortages or too much supplies which in turn may affect the price of
products and may also cause uncertainties in the market.

Location
The locational elements of supply chain focuses on the strategic placement of production
plants, distribution and stocking facilities. Supply chain leadership undertake decisions to
locate the areas where they will produce and warehouse their production and distribution
facilities. Generally it has become acceptable that lightweight industries should be may be
located near end users while heavy industries may be located near raw material source. In
addition to these considerations supply chain managers make evaluations on issues such as
taxes and tariffs and the accessibility of transport.

Transportation

In order to ensure that the supply chain enterprise is able to meet customer expectation, the
products produced must reach the consumer. This calls for the establishment of strategic

35
transportation partnerships to drive the logistics not only of the finished product but of all
components from raw materials to personnel that have to be moved from one area to another.

Information

The discussion above has generally shown the need for player in the supply chain enterprise to
share information. Information therefore provides the much needed linkage. There is however
a critical need for the participants in the supply chain to obtain, link and leverage the
information otherwise the availability of information without it being directed and used by the
rightful participant in the supply chain enterprise will not generate any value. The supply chain
members have benefited immensely with the growth in information communication
technologies. Computers can now be linked in networks using the internet to facilitate the
speedy dissemination and sharing of information amongst participants. The development of
information dissemination facilities has allowed for the streamlining, consolidation and the
warehousing of information to allow better decision making for the benefit of the entire supply
chain.

Attributes of Supply Chains

The above discussion has highlight the elements of supply chains. Researchers such as
Geirgevitch (2005) identify four key attributes of a supply chain as summarised below:
• The capacity of a supply chain can not exceed the capacity of its weakest list. It is
therefore imperative that as partners are being selected, their indivisual capacities and
conforming to other member partners be fully understood and taken into consideration
as this could affect the overall performance of the supply chain.

• A break in the chain will result in the non functioning of the entire chain. Members of a
supply chain must ensure that they do not break the operations of the supply chain
through their individual inefficiencies as this may result in the total collapse of the
entire supply chain.

36
 • There is need for all links in the supply chain to work towards a common vision and
goals. In essence all links must move in a synchronised manner

• Lastly all links in a supply chain have an interdependency. Each link plays a crucial role
in the final product that is consumed by the client.

Driving Forces in the Development of Supply Chains

There has been a global interest in the development of supply chain relationships.
These trends help in adding to the understanding of the supply chain concept. The
following section, advances reasons cited in literature that have promoted the development
of supply chains globally. The section discussed why supply chains have become popular
particularly at the turn of the 21st century.

The Need for Supply Chains

Organisations have over the time developed strategies aimed at meeting their
organisational goals and at satisfying their customers needs effectively and efficiently,
Fawcett & Magnan (2002). In strategy development, managers have realised that no one
organisation has all resources, capabilities and competencies to achieve competitive
success in today’s highly volatile and global competitive era. This realisation has led many
organisations to look beyond their organisational boundaries in order to incorporate
suppliers and customers in supply chain arrangements that create exceptional values,
Christopher (1999) and Fawcett & Magnan (2002).

Lambart (2008: 02) citing the works of Drucker (1998) and Christopher (1998), argues:

One of the most significant paradigm shifts of modern business management is that
individual businesses no longer compete as solely autonomous entities, but rather
within supply chains. In this emerging competitive environment, the ultimate success

37
 of business will depend on management’s ability to integrate the company’s intricate
network of business relationships

Lambart (2008)’s re affirmation of the observations by other scholars like Drucker (1998) and
Christoper (1998) suggest that there is no doubt as to the need for supply chains in the 21st
century business scenarios. Several developments highlight the need for companies to manage
supply chain integrative and cohesively. This later part of this paper will discuss in further
detail the drives of supply chain management phenomenon

• These increased demand for better and faster customer service

• Globalization of business and competition,

• Availability of information technology to facilitate information exchange.

• Adaptive forms of Relationship Management

The growth of these factors has helped organisation realise the need to manage their supply
chains holistically to achieve strategic advantages ,Arntzen, Brown, Harrison & Trafton, (1995),
Lee & Billington, 1995 ,Camm (1997)

The above realisation became manifest in the last decade of the 20th century. The following
section discusses some of the major environmental changes that impacted on how
businesses designed their competitive strategies.

The Traditional Agribusiness Market System

The general tendency in the development of agriculture and agribusiness policies around
the world has seen the focus of policy makers in increasing agricultural productivity, price
and income stabilisation and the development of a sustainable growth and efficient
oriented agricultural systems, Ziggers & Trienekens (1999).

38
Over the years the above policy targets have been met particularly in developed economies
through enhanced productivity, efficient use of modern technologies, specialisation and
concentration. Today’s agribusiness markets can be defined as mature markets, Ziggers &
Trienekens (1999)
The result of all these efforts has been two some in nature. Firstly there are some markets
that have been saturated with products that markets cannot fully absorb, while secondly
other markets have had a critical shortage of similar products. Food and agribusiness firms
in general continue to face global market places challenges characterised by rapid changes,
new technologies and worldwide actors. The end result of all these market challenges is
that the market has become more dynamic, complex and mature, Ziggers & Trienekens
(1999).
The product life cycle concept, proposes that firms operating in a mature market basically
compete in a buyer’s market. In a buyer’s market, economic theory proposes that firms
compete on differentiation strategies. The supply chain management strategic option can
be viewed as one such differential strategy that agribusinesses can employ in dealing with
mature markets.

Challenges to the Traditional Agribusiness Market System

It is necessary to discuss some of the challenges to the traditional market system that have
resulted in the growth of supply chain management as a vehicle to effective
competitiveness.

Reduction of Risk

Collaborative relationships provide managers with a better means of reducing risk and
vulnerability in a volatile and uncertain environment. For example within the agribusiness
scenario, agribusinesses that have well defined supply chain arrangements be it in local or
international situations, have secured market opportunities as compared to those that do
not have such arrangements in place. Ziggers & Trienekens (1999) explain that internal
control and coordination in supply chain arrangements is often associated with the

39
assurance of supplies. This observation is particularly true in circumstances where there
are shortages. Supply chain arrangements tend to reduce uncertainty and enhance
planning efforts by managers, Buzzel (1983).

Enhanced Ability to Innovate and to Differentiate

Porter (1985) and Ouden et al (1996) argues that collaboration along supply chains may
help an organisation gain timely access to market information that can be used to adjust
production or output to meet changing market conditions. In addition supply chain
arrangements may result in an organisation obtaining specialised inputs which may be
used to develop a better product and or a differentiated product.

More Efficient Exchange of Information

Ouden et al (1996) and Porter (1985) further believe that collaboration along supply chain
may result in less information being required by a firm resulting in reduced transaction
costs. However the benefits derived from integration must be weighed against the costs of
missing out on external opportunities that a firm could have exploited should it not have
been in a contractual arrangement, Ziggers & Trienekens (1999).

Improved Market Position

In addition to the above, collaboration in supply chain arrangements is seen as a vehicle

towards market development and exploitation, Varadarajan and Curringham (1995).
Organisations that integrate to form a strong supply chain arrangement tend to create
entry and mobility barriers to potential new entrants especially in circumstances where
significant capital requirements are needed, Ouden et al (1996). Such scenarios tend to
improve the market position of the organisations that are integrated in a supply chain
arrangement.

40
Having discussed some of the major reasons that are advanced towards supply chain
development, it is appropriate at this juncture to discuss the concept of Network level
strategies upon which the concept of supply chain management is embedded.

The Changing Nature of South African Agribusiness Environment

The supply chains in agribusinesses are changing worldwide. Researchers have for some
time recognised that agro-food systems are becoming globalised, and have assumed that
this has followed the same course as globalisation in other economic sectors. However, this
view has been reconsidered as more analysis is conducted in agribusiness food systems.
There are basically four main developments that have affected the development of
agribusiness chains.

Firstly, Morgan et al (2006), citing the work of Goodman and Watts (1994), argue that the
development of the food system has followed a unique course due to some specific
characteristics of food production, notably food’s close association with nature and the
close association between food consumption and culture. They argue Morgan et al
(2006:8):

The globalisation of the food system is uniquely constrained by nature and culture:
food production requires the transformation of natural entities into edible form, while
the act of eating itself is a profoundly cultural exercise. With diets and eating habits
varying in line with broader cultural formations. These two key aspects necessarily tie
food chains to given spatial formations. In other words, food chains never fully escape
ecology and culture. Thus in order to understand the development of agri-food sector
it is necessary to consider how forces promoting globalisation interact with natures
and cultures that are spatially ‘fixed’ in some way.”

41
Secondly, food retailing is changing rapidly. More consumers are arguably not eating
meals prepared at home any more. There has been phenomenal growth in fast food outlets
the world over, especially in developed economies. More people prefer to eat food away
from home. This phenomenon has been enhanced by the growth in the number of working
women. Thus the traditional food system is changing to cater for the new market that has
developed with new standards of living that are centred on convenience.

Thirdly, in the food from home chain, there has been a rise in the market power of
supermarkets along the agro food value chain. Supermarkets provide an interface between
producers and consumers. In recent years the power of supermarkets in the distribution
of agro food products has become phenomenal. The global food retail market is estimated
at $3.5 trillion and it is expected to increase to $6.35 trillion by 2020 (Research and
Markets, 2006 www.findatricles.com accessed 15/05/2007). Supermarkets control this
market significantly.

In South Africa, the greater market power of supermarkets is also evident. While no formal
study to quantify the extent of the power of supermarkets in agro food chains exists, Vink
& Sandrey (2007) point to the power of supermarkets through their ability to impact on
the price setting mechanism and their ability to control producers’ access to the market.

In addition, there has been significant growth in own brands/in store brands, which
compete with more established traditional processors’ brands. In the United Kingdom for
example, Marsden et al. (2006) report that more than 50% of all supermarket food goods
sold came from own brands. In South Africa almost all the major supermarkets have
developed their own in-house brands to compete alongside the traditional brands in most
of the ago food products.

Fourthly, the importance of the emergence of alternative ‘worlds of food’ cannot be

underestimated, Morgan et al (2006). There has been a great increase in the importance
attached to the food safety and cultural components associated with food products.
Increasingly consumers are aware of the need for food safety and implications to their
healthy that is associated with the different types of food consumed.

42
Religion and cultural ties have also had an impact on the way agribusinesses meet their
consumers’ expectations. In the meat industry in South Africa for example, agribusiness
organisations that supplying meat products generally have to be Halaal certified as South
Africa has a significant number of Muslim customers.

The above developments are affecting the South African agro food chains. Supermarket
chains like Woolworth now emphasize organic foods and have rigorous supplier selection
mechanisms for their food products. To illustrate, the Director of Products at Woolworth
had this to say on the launch of Woolworth’s organic cotton products in January 2005
(Woolworth www.organic.co.za):

''Our on-going organic strategy is integral to the business as a whole and is one of the
ways in which we continue to meet the changing needs of our market. We believe we
have a responsibility not only towards our customers, who have embraced our
philosophy towards organics and have welcomed our initiatives in foods, but towards
the world at large, to promote the use of environmentally sound production processes
and sustainable farming techniques.''

The above scenarios illustrate some of the major challenges that face and differentiate the
food value chain from other commodities markets, also in South Africa. In order to meet the
challenges discussed above, South African agro food players have applied both base level
strategies (OECD 2006) and complementary strategies (Woolworth example cited above).
Agricultural economists in South Africa have done a lot of work on measuring the
competitiveness of the South African agribusiness sector (Esterhuizen, 2006) however
work on complementary strategies has been minimal. There is need for additional research
on complementary strategies in agribusinesses in South Africa. This research seeks to
address the deficiency in research work on agro food systems by focusing on supply chain
management and collaborative strategy in agro food chains in South Africa.

43
The above discussion highlighted the major changes that affect agro systems today. The
world food systems are changing. The South Africa environment seems to be following
trends already being seen in developed economies. The agribusiness value chain has
exhibited different characteristics as compared to the traditional value chains of most
commodities on the global market.

This has affected the marketing and competitiveness of agribusiness enterprises world
over. This poses challenges to South African agribusinesses, which show great potential to
compete effectively both in domestic and international markets.

Managers and other strategists who direct the operations of firms in the agro food system
have collaboration as a strategic option to pursue. Many studies have concluded that firms
cannot depend entirely on their own in order to grow for example Bernard (1938) and
Simon (1957) and many other modern researchers recognized that firms on their own
cannot create all the resources and capabilities necessary to prosper and grow. They
postulated that collaborative relationships can be regarded as the viable way of combining
resources in order to exploit new business opportunities and enhance growth potential for
firms. Evidence has already been alluded to in the previous section, which shows that
agribusinesses can collaborate along their value chain systems with positive results for all
collaborating firms. .

The Network Level Strategies & the Value Chain

The following section discusses the concept of network level strategies and their impact on
supply chain relationships.

The Need for Network Level Strategies

The above description of the nature of relationships in agribusiness enterprises highlighted

the traditional view of firms. Traditionally firms were viewed as a discrete and

44
independent entity. In pursuit of strategic choices, firms sought to reinforce independence,
De Wit & Meyer (2001). This view has been fast disappearing particularly in the 21st
century as firm focus on network based strategies. The contemporary view is that firms are
embedded in network or web of interdependent relationships and as such firms need a
strategic approach to the management of such relationships.
The following diagram, extracted from De Wit & Meyer (2001) illustrates the nature of
relationships that modern day firms engage into in their day to day competitive
environment.

Fig 2. Firm’s Web of Relationships in Supply Chain Environments (De Wit & Meyer)

In order to meet stakeholder expectations and to achieve their strategic intent, firms must
pursue a dynamic mix of both competitive and cooperative strategies. As depicted in the
diagram above, De Wit & Meyer (2001) argue that firms need network strategies to
manage relationships with three different types of players around their supply chain
environments as follows:

Upstream with suppliers and downstream with customers

Horizontally with competitors and complementors

45

with other key players in the economic, political/regulatory, technological
and socio-cultural environments

Challenges from Firm Growth’s through Vertical Integration along Supply

Chain

In the past and to a greater extent in the present day history of firms, most organisations
pursue the option of vertical integration along their supply chain to achieve growth.
However growth through vertical integration has had some challenges both from a
theoretic perspective and from a practical and regulatory view.
Firstly integration and managing different business units became very complex in very
large firms. This meant that firms had to stream line their operations to focus on core
business or a define line of business. Through such strategic moves, business entities
“located” themselves along supply chains, Mintzberg (1999). Mintzberg (1999) further
argues that business entities that are well located along supply chain, should also develop
competencies on how to manage supply chain relationships and exert best leverage over its
network strategy.
Secondly, for businesses to effectively compete, Grant (2005) argues that the firm must
develop distinctive capabilities. Distinctive capabilities , describe an organization’s ‘ability
to integrate, build and reconfigure internal and external competences to address rapidly
changing environments, Grant (2005).This is difficult to achieve especially in very large
entities rendering growth through vertical intergration somewhat challenging.
Thirdly, Grant (2005) argues that firms tend to lack flexibility if forced to source
components, products or services internally or from subsidiaries. This challenge is well
defined in firms that are vertically integrated. In today’s competitive environment, global
sourcing has become the order of the bringing with it some form of flexibility to firms in
terms of procurement or even selling raw material and finished goods respectively.
The fourth point against vertical integration stems from government policies. There has
been a global move against monopolies and oligopolies. Government policies in most
countries challenge monopolies as they argue that it is bad for competition. In South Africa

46
for example the Competition Commission has been set with a mandate to ensure fair
competitive practices in all spheres of business in South Africa.
Lastly, optimal operating scales differ at each stage of the product life cycle. This further
challenges firms to develop relationships with others. The impact of the different levels of
operational scales may affect any business entity along a supply chain. It could result in
shortage of raw material or excess supply hence the need for other firms to take part in a
firm’s supply chain activities.
Nature of Supply Chain Relationships

The following diagram depicts the nature of supply chain relationships that firms can be
involved in with other firms located along their supply chain.

47
Objectives of Inter-Organizational Cooperation

The above challenges that affect the agribusiness environment

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