Value Chain Coordination Mechanisms in Agribusiness A perspective

Value Chain Coordination Mechanisms in Agribusiness A perspective from research on Global Value Chain studies

CONTENTS 6. Overview Defining VC Coordination Relationship of VC coordination to VC Governance Value chain interdependencies Value chain governance systems Research Sources 7. Appendices 1. 2. 3. 4. 5.

OVERVIEW This presentation explores the value chain coordination mechanisms that are actively being used locally and globally to strengthen value chain coordination. This presentation is in response to a need identified by APF in 2011, where weak value chain coordination mechanisms were identified as a key constraint to improved value chain efficiencies in Uganda. Research for this presentation involved both (i) key expert interviews and (ii) analysis and synthesis of secondary literature. (both provided in the Appendix

VALUE CHAIN COORDINATION. . What it is: . . Coordination has been defined as managing dependencies between activities (Malone and Crowston 1994). From a value chain perspective, it can be defined as the ability to provide direction and enforce instructions to other actors in the value chain.

RELATIONSHIP TO VC GOVERNANCE … VC Governance VC Coordination …exists where some firms in the chain work according to parameters set by others. …ensures that the interactions between actors along a value chain exhibit some reflection of organisation rather than being simply random …is the mechanism of enforcing effective governance within the value chain Appropriately structured, high performing value chains.

RELATIONSHIP TO VC GOVERNANCE … “Governance in value chains is associated with coordination power (the ability to provide and enforce instructions) and market power. ” (Global Value Chains in the agrifood Sector, 2006)

WHY IS VC COORDINATION NEEDED? ? Value Chains implies interdependencies between discrete actors = coordination But also, � Increasing complexity of end market requirements. E. g Tough Supermarket requirements Unique requirements of Organic Buyers Need for differentiation (e. g low fat meat = input at feed and breed stage � Need to mitigate business risk due to performance shortfalls. Failure of value chains can result in empty shelves, factories without raw materials, loss of customer confidence, Irreparable damage to brand reputation. � Etc…

When the interdependent transactions in a value chain are ill coordinated, synergy benefits are lost. ” (Agricultural cooperatives and value chain coordination)

FORMS OF VC COORDINATION Various forms of coordination are identifiable including � vertical: coordination among actors at different points in a marketing chain; � horizontal: coordination among actors (competitors) at a given stage of a marketing chain; or � complementary: coordination among actors providing complementary services to producers at a given stage of a marketing chain.

…INTERDEPENDENCIES… Value chains can be viewed through 3 key interdependency relationships: � 'pooled', � 'sequential' and � 'reciprocal’ …

THE INTERDEPENDENCIES… Pooled interdependency … each actor renders a discrete contribution to the whole and each is supported by the whole. …interdependence because unless each unit performs adequately, the performance of ‘the whole’ is jeopardized. main coordination mechanisms are: � development and implementation of standards for production, distribution and product quality:

THE INTERDEPENDENCIES… Sequential interdependency Here, the output of one part is the input to another part. main coordination mechanism is managerial discretion, i. e. coordination by plan or command. LEAD firms play important coordination role in this interdependency relationship.

THE INTERDEPENDENCIES. . . Reciprocal interdependency … here, the output of each part is an input for every other part, i. e. a change in one part directly affects all other members. A practical example is the Multi Stakeholder Platforms; where mutually agreed changes to one partner can impact the contribution of all the other members. The coordination mechanism is mutual adjustment. There is joint decision making and problem solving to coordinate individual activities. .

Do you recognize these interdependencies in your value chain relationships? Which one?

THE COORDINATION MECHANISMS… Every value chain has a system of coordination which includes formal and informal arrangements between participants. Coordination structures may range from looselycoordinated, market-based trading structures, to intensely coordinated, vertically integrated, production.

THE COORDINATION MECHANISMS…

There are three key variables underpinning the nature of value chain governance structures and coordination mechanisms: 1. The complexity of transactions. 2. The ease of quantifying and communicating product/service requirements. 3. The competence of suppliers. .

The complexity of transactions. More complex transactions require greater interaction among actors in VC’s and thus stronger forms of governance than simple price-based markets. Thus, complex transactions are more likely to be associated with one of the three network governance patterns (modular, relational, or captive) or integrated within a single firm (hierarchy).

2. The codifiability of transactions. Relates to the ability for value chain actors (lead firms) to codify complex information in a manner in which it can be handed off to other VC partners with relative ease. If suppliers have the competence to receive and act upon such codified information, and if the codification schemes are widely known and widely used, then a modular value chain might emerge. If not, then lead firms might either keep the function in-house, leading to more vertical integration (hierarchy) or outsource it to a supplier that they tightly control and monitor (captive governance model) or have a dense, idiosyncratic relationship with suppliers (the relational governance type).

The competence of suppliers. The ability to receive and act upon complex information or instructions from lead firms requires a high degree of competence on the part of suppliers. Only then can the transfer of complex but codified information be achieved (as in modular networks) or intense interaction be worthwhile (as in relational networks). Where competent suppliers do not exist, lead firms either must internalize the function (hierarchy) or outsource it to suppliers that they tightly monitor and control (captive suppliers).

Market coordination mechanism Characteristics Simplest form of Value Chain governance. � Arms length relationships, with minimal information exchange. � Tends to involve non standard products with limited or no differentiation and limited product specifications. � Producers can make products with little input from other vc actors � Coordination mechanism: � The central coordination mechanism is price Coordination level: � Limited explicit coordination

Modular coordination mechanism Characteristics Involves suppliers making products or services to a customers specifications. � Suppliers in these VC’s tend to take full responsibility for process technology and often use generic machinery that spreads the machinery across a wide customer base, keeping switching costs low. � Linkages are thicker than market due to higher level of information flow � Coordination mechanism: � The coordination mechanisms are command, and control by LEAD firm Coordination level: � Higher level of explicit coordination

MARKET TO MODULAR Willing Buyer APONYE Willing Seller

Relational coordination mechanism Characteristics Governance is based on social and informal interaction (community governance) � Relies on a set of shared norms that regulate how transactions are carried out, and sanctions in case of non performance. � Dependencies are regulated through reputation, social and cultural norms, proximity, family ethnic ties etc. � Switching costs are high due to high trust levels underpinning the relationships which would be slow to build elsewhere. � Coordination instruments: � The coordination mechanisms are goal congruence, shared norms and informal rules Coordination level: � Higher level of explicit coordination

Captive coordination mechanism Characteristics � Constitutes small suppliers who are dependent on larger, dominant buyers. � Dependence on dominant lead firm raises switching costs for suppliers, making them ‘captive’. High switching costs for lead firm as well due to product specificity. Coordination instruments: � The coordination mechanisms are contracts Coordination level: � Higher level of explicit coordination

Kinyara Outgrowe rs • LEAD firm has significant buying power • Contracts are used to control production and ensure supply. LEAD firms use the sugar estate model: a processing factory nucleus estate-using wage employees, and surrounding area having independent out growers. • Formally contracted out growers receive in kind credit e. g. in land preparation, seed cane, fertilizer, and transportation. • In return, they sell 100% of cane production to sugar estate

Hierarchy coordination mechanism Characteristics � Governance is characterized by vertical integration- transactions taking place inside a single firm. Coordination instruments: � The coordination mechanisms are command control Coordination level: � High level of explicit coordination

Qn What are the practical approaches we see in Uganda that improve address value chain coordination?

COORDINATION IS EITHER BY: Four situation, the following key actors emerge as important coordinators of value chains: � The LEAD Firm. � The lead firm plays an important role across several governance structures, and is a key actor in vertical coordination. Collective Agency (cooperative) Plays an important role in organisation of small scale actors, and in reducing opportunism. Effectively facilitates both vertical and horizontal coordination. � Facilitator – (Broker, MSP). MSP’s play a critical role in facilitating reciprocal interdependencies. The Broker model by Agrinet, provides significant breakthrough potential for impact and Replicability.

APPENDIX Key experts consulted: Expert Organisation 1 Kennedy Ssejjemba(Ph. D) College of Business & Management Sciences Makerere University. 2 Peter van Erum TRIAS 3 Dr Rita Laker Ojok AT Uganda 4 Erik Derks USAID LEAD 5 Bernard Conilh de Beyasacc SNV 6 Inger Jansen APF 7 Jan Hoesktra Wageningen University

APPENDIX Summary of Literature reviewed: i. A handbook for vale chain research, IRDC; Raphael k & Mike M (2000) ii. Agricultural Cooperatives & Value Chain Coordination; Bijmam J, Roldon M & Andrei C (2010) iii. A review on Supply chain coordination: Coordination Mechanisms, Managing Uncertiainty and Research Directions; Ashinder K, Kanda A & Deshmuk S (2008) iv. Building competitiveness in Africa’s Agriculture, A guide to value chain concepts and applications; the World Bank, Webber M & Labaste P (2010) v. Globalization, Privatization and Vertical Coordination in Food Value Chains in Developing and Transition Countries; Johan F. M & Maertens M (2006) vi. Governance in Global Value Chains; Humphrey J & Shmitz H (2001) vii. Smallholder business models for agribusiness led development; FAO, Siobhan K, (2012)

APPENDIX Summary of Literature reviewed: viii. The Governance of global value chains; Gereffi G, Humphrey J & Sturgeon T (2005) ix. Value Chain Program Design: Promoting Market Based Solutions for MSME and Industry Competitiveness; USAID, Lusby F (2007) x. Trading Up, Building cooperation between farmers and traders in Africa, IIRR, (2008) xi. Institutional Economics Perspectives on African Agricultural Development; Kirsten J, Dorward A Poulton C & Vink N (2009) xii. Global Value Chains in the agrifood sector, UNIDO; Humphrey J & Memedovic O (2006) xiii. Globalization and the small firm, a value chain approach to economic growth and poverty reduction, USAID; Kula O, Downing J & Field M (2006)