consumer driven innovations and adoptions in the food supply chain jean kinsey, professor, applied...
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Consumer Driven Innovations and Adoptions in the Food Supply Chain
Jean Kinsey, Professor, Applied Economics Department; Co-Director, The Food Industry Center, University of Minnesota, USA
ERS, TFIC, Farm Foundation ConferenceGlobal Markets for High-Value Food Workshop
Washington DCFebruary 14, 2003
Consumer Driven Innovations Startwith Consumer Purchases
Information about what consumers are buying drives decisions back up the supply chain The source in retail food = bar code The sources in food service = purchases + chef’s
best guess + a few bar codes. The sources are also public pressure from
consumer/citizens who care deeply about other people, animals and the environment.
Consumer Driven Innovations Startwith Consumer Purchases
It has reversed the flow of decisions in the supply chain => a new paradigm.
Old idea: today we sell what is available in
the supply chain.
New idea: today we sell what our consumers have indicated they will buy.
Global Exchange of Goods and Services - New Paradigm The New Food Economy is
not about money or trade negotiations
it is about information, information technology &
personal networks
Themes :
Consumer driven demand/supply loops
Consumers seek “value” – accommodated by discount retailers Horizontal consolidation at all points
Intricate and shifting networks of firms around the world Human contacts count more than ever
Themes :
Trading nations diminish relative to private firms in procuring food.
More food, more variation locally, less variation
globally
Public policy focusing on food for health care, food safety, and food security.
Themes:
Consumer driven demand/supply loops
Consumers seek “value” – accommodated by consolidated discount retailers
Whole- saler Self-
-
distrib.
First LineHandler
Retail Food
MANU-FACT-URER
FoodService
FoodService
48%
Consumer
-&
Farmers
Seed/Feed
Science Labs
RetailStore52%
Ingredient/Flavor
Companies
Supply chain
Demand chain
Citizen
Whole-salerSystemDistrib.
Food Industry
Information Technology Demands COORDINATION/COMPATABILITY
Retailer orderspull product
POS Data
Privatealliances
Internet Interface-UCCNet?
Food Manufac-turers/
Processors
Wholesalers/Self Distributors
Wal-Mart Royal AholdCarrefour Kroger ---------------------------------------------------------- Brought to you by:
information technology economies of scale expert logistics
4 Top International Grocers
The Food Institute, 2002
Rapid growth in supermarket (retail) power Rise in modern retailers (supermarkets,
hypermarkets, convenience stores and department stores) accounts for 60% of consumer good sales in 4 major cities in China.
Direct Foreign Investment by Multinational firms dominate the growth
Chang, WSJ, 11/26/02
Supply Chains in China
Supply Chains in China
Chinese supermarkets: (Joint Ventures since mid 1990s. Must have local partner until 2004)
Carrefour 31 stores Wal*Mart 22 stores Mako (SV Holdings – Dutch) Metro (Germany)
Buy directly from international companies 5% of goods come from within China
Nestle S.A. (Switzerland) Kraft Foods Inc. (USA) ConAgra Inc. (USA) PepsiCo Inc. (USA) Unilever plc (UK,Netherlands) ADM Co. (USA) Cargill (USA)
7 Top International Food Processors
Prepared Foods, 171:12, 2002
Consolidation at the beginning of the Food Chain Too
Cargill
Monsanto
Novartis
Scripps Merck
CIBA SeedsSandoz
Dow
Supply Chains in Food from Farm to Fork: Supply chain => supply push of products
Linear systems
Demand chain => demand pull with information, coordination and agreements with global sources Circular flow of information and inventory
replacement
Product Distribution Networks – Webs of arrangements
Theme:
Intricate and shifting networks of firms around the world – electronic and human facilitators
Handle Waste,
Environment
Manage, Train Labor
Adopt TechnologyTransmit InformationAbout Demand, Analyze Data
Science, Research, Development
Finance, Credit
Oversee Market & Economic Welfare
Grow Crops, Raise Animals
Transport, Delivery
Add Value (Process, Package, Cook)
Aggregate, Store
Monitor Quality,Safety
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Monitor Quality,Safety
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Monitor Quality,Safety
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Demand Driven Food Production networks
Presents a fundamentally new way
to conduct business, form organizations, and value assets
Changing Web Patterns
Makes changes harder to track Raw product source – global, seasonal Prices – negotiated, secret
Control points and profit margins shift from: hard assets to market intelligence Sellers to buyers (retailers) Producers to analyzers
New Food Networks
A move from an economy based on a firm’s production of goods to an economy based on the use of knowledge about markets.
Markets replace firm’s (or nations) as a unit of analysis
Theme:
Trading nations diminish relative to private firms in procuring food
New Food Networks & Markets Markets are local but firms that supply
them can be anywhere.
How do global suppliers learn about local buyers preferences? 1. Shared data -- e-commerce 2. Human networks
The (Human) Networked Trade
Business and Social Networks Facilitates information about trading
opportunities Enforces Contracts Builds Trust
Rauch, 2001
The (Human) Network Importance of immigrants to trade
with home country: As immigrants increase by 10% exports
increase 13 -47% (network effect)
As immigrants increase 10% imports increased 33-83% (taste and network effect)
Rauch, 2001
Networked Trade
Enforces Contracts – Build Trust Japanese word: keiretsu
Know the characteristics of those who would be helpful & loyal
Enforces rules by internal punishment Increases direct foreign investment
Rauch, 2001
Networked Trade Buyers and sellers match in characteristics
space – need “thicker” information to “match” partners
Transnational networks can overcome informal trade barriers – enhance exports
Domestic networks can create trade barriers by collusion to restrict foreign firms – inhibit imports
Rauch 2001
Global Supply Chains: Producer DrivenAnd Buyer Driven
Producer driven for capital and technology intensive industries: automobiles, aircraft, semiconductors
Profit greatest for those with scale & technology(manufacturers)
Rauch, 2001
Global Supply Chains: Buyer Driven
Buyer driven for labor intensive, consumer goods industries: garments, footwear, toys, electronics – FOOD? Profits greatest for those with design and marketing expertise ( retailers).
Rauch, 2001
New Food Economy? The market we know and love is being “de-democratized”
by networks – human and electronic
Both depend on specific knowledge for specific products and markets
Efficiency models are not enough and maybe not right for globally differentiated products and market networks
Global Supply Chains: Buyer – Seller Driven?
Driven by the part of the supply chain/network that is in the best position to capture the most value from the chain.
Where is that in food and agriculture?Increasingly at the retail end.
Globalization of Supply Chains
•Will more formal (computerized) information networks increase or decrease the usefulness of business and social (human) networks?
•Yes – if e-commerce networks become dominant and parties trust the information to represent the behavior of trading partners.
•No – if products increasingly differentiated and “human” interpretation of preferences and markets needed - and more immigration builds human networks and more DFI across borders.
New Supply Networks for Food Slowly adopting information technology to track
and manage inventory. Still trying to catch up to Wal-Mart’s logistics. Losers: Regional wholesalers, small
farmers, small processors Winners: Consumers – lower prices,
variety, convenience, diversity, safety, quality Multinational food companies (Nestle’) use Supermarkets
to gain access to remote areas.
Public Policy Focus Turns to Food for Health, Safety, & Security New terms:
Paradox of Prosperity – too much food Diseases of Prosperity – diabetes, heart
diseases, hypertension
New meaning to food security Bio-security / Bio terrorism
Food Variety and Abundance The new nutrition - too many calories
USA 2002:65% of adults overweight30.5% obese (BMI over 25)25% children overweight or obese
Doubled in a decade
Food Abundance and Health Care Diabetes – linked to overweight and obesity
In 2002 17% of Americans has diabetes linked to diet60% pf children have at least one risk factor for heat disease
10% of Health Care Costs go to treat diabetes
This is a health care crises in slow motion
Globally: “Globesity”
Adults: 7% obese
Children: 53% undernourishedBut in Chile, Australia, Malaysia,
Chinese cities, 17 – 20 % obese.
IFIC 3/29/2001
Indulgence / Abundance
Countries with at least 10 Percent of the Adult Population Obese
10.0 10.8 11.2 11.4 11.5 12.914.6
18.7 18.7 19.4 20.0
30.5
0.05.0
10.015.020.025.030.035.0
Source: OECD Health Statistics (2000)
Globalization and Public Policy Economic integration of private companies with
national and international trade policies and standards
Homogenization of the foods across nations, more variety of food within a nation
Nation states have less control over policy and items traded
Globalization and Public Policy Retail domination giving consumers lower
prices – so far.
Demise of small farmers and undercapitalized firms
Foods for health, food safety, food (bio) security is international business