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Dr. Jabir Ali Associate Professor Centre for Food &Agribusiness Management Indian Institute of Management, Lucknow 226 013
S&M
CON
S&M 3 P LR CON
P=Producer CON=Consumer S&M= Small and Medium Intermediaries LR= Large Intermediaries
Input supply
Producers
Processors
Supply Chain the core business processes in an organization that create and deliver a product or service, from concept through development and manufacturing or conversion, and into a market for consumption Supply Chain Management the methods, systems and leadership that continuously improve integration across all core business processes
Each component of the supply chain is connected to other parts of the supply chain by
o o o the flow of goods and services in one direction, the flow of orders and money in the other direction, and the flow of information in both directions.
Upstream the processes which occur before manufacturing or production into a deliverable product or service, typically processes dedicated to getting raw materials from suppliers Downstream the processes which occur after manufacturing or production, typically those processes dedicated to getting goods and services to customers and consumers
Information Product
Suppliers Customer
Funds
production
Vertical Coordination
Refers to all possible economic arrangements involved in transferring resources between economic stages o Farm production o Processing o Wholesaling o Retailing Ways of achieving vertical coordination: o Open Market: A firm purchases commodity from a producer at a market price determined at the time of purchase. o Contracting: A firm commits to purchase commodity from a producer at a price formula established in advance of the purchase. o Vertical Integration: A single firm controls the flow of commodity across two or more stages of production.
Why VC?
o o o Transaction costs vs. physical cost Efficiency in chain Relationship
Types of Integration
Quasi-vertical integration: o A relationship between buyers and sellers that involves a long-term contractual obligation where both parties invest resources in the relationship o Participants share the costs, risks, profits and losses of the venture o Examples: JV, Franchises and Licenses Tapered vertical integration: o The occurs when a firm is partially integrated backward or forward. o Examples:
a food processing firm integrated backwards could obtain a portion of its raw material supplies from its integrated farms with the remainder procured from auction markets or direct from producers. Similarly, a firm could sell a portion of output forward through its own distribution network, with the remainder sold in the open market
Types of Integration
Full vertical integration:
o This occurs when one firm carries out two or more consecutive stages of the production-distribution chain. o A firm can be integrated forward (downstream) into distribution or retail functions or backwards (upstream) into supply functions
Factors affecting VC
Transaction costs
Uncertainty
Asset specificity
Negotiation costs
o o o o o o
Product Characteristics
Coordination
Perishability Product differentiation Seasonality Quality Variability Safety Branding and Packaging Consumer Choice
Vertical Integration
Uncertainty Reliable Supply Frequency of transaction Relationship specific investment Complexity of transaction
Market-specific Contract
Transaction Cost: Ex ante: the expenditure of time and resources for identifying suitable trading partner, specifying/Identifying product quality, gathering information etc Ex post: monitoring and enforcement costs
Open Market
Least
Higher the asset specificity, the greater is a tendency towards vertically coordinated supply chain
Relationship between asset specificity, transaction costs and method of vertical coordination
k=level of asset specificity M(k)=transaction costs with spot market C(k)= transaction costs with contracting V(k)= transaction costs with vertical integration
The firm prefers vertically coordinated supply chain for transactions involving uncertainty, and use various instruments such as provision of
inputs, services, credit, incentives to make it work.
Sources of uncertainty:
o o o Technological changes Unpredictable change in consumer preferences Random acts of nature