Newsletter No. 43 - Items 1 & 2
What are the benefits of building a Value Chain? To answer this question, we first need to understand the differences in a Supply Chain, a Horizontal Chain and a Value Chain.
What is a Supply Chain?
A supply Chain is where each element of the process to the end consumer is defining their section of the process as the product.
For example the technology companies, such as machinery, chemicals and seed suppliers, supply the arable farmer. The arable farmer buys for the best price and sells for the best price but his efficiency is dependent on those technology companies that supply him.
The grain buyer might be a grain trader, it may be a livestock farmer or it may be a commercial feed mill. They buy at the best price and sell at the best price. They all work independently of each other.
The technology companies supporting the livestock producers are vets, pharmaceutical companies, premix companies, feed manufacturers, equipment manufacturers and so on.
Livestock producers can be specialist breeders, rearers, finishers or they may do the whole process. They sell to the processor.
Each section is a supplier to the next, each taking their own profits but all operating totally independently of the other with no communication, no coordination or collaboration or feedback. Each simply buying at the best price and selling at the best price to optimise their profits.
What is a Horizontal Chain?
A Horizontal Chain is a group of Producers working together to consolidate supply. So why is this NOT a Value Chain?
The missing link is Quality Control.
What is a Value Chain?
A Value Chain is where there is collaboration between all processes in the supply chain to ensure that there is no leakage of value through poor performance of one link in that chain.
A Value Chain is an alliance of enterprises collaborating vertically to achieve a more rewarding position in the market. Collaboration builds value and reduces costs. Customer needs drive the value chain, as each customer demands certain standards.
Companies in a value chain are legally independent operations, but become interdependent because they have common goals and work collaboratively to achieve those goals. They work together over the long term, discussing issues and troubleshooting problems together. It is more than just long-term contracting.
Each member of a value chain is a buyer from the previous step and a supplier to the next step.
Each company can be independent of the other, but each company is interdependent on the other. Each member adds value at the end of the chain by contributing to customer satisfaction.
Changes in agriculture over the past few decades have meant that Vertical Integration in agriculture is essential for economic success. A further reason is the increasing requirement for full traceability. Building a "Value Chain" is a method of achieving a Vertically Integrated operation incorporating many separate businesses working together with a common goal through collaboration and interdependence whilst retaining independence. That common goal optimises the value for all in the chain.
A Value Chain is full vertical integration that improves quality, increases efficiency, enables differentiated products and improves profitability.