Some companies are winning the competition for the market, while others – lose, nevertheless, in most cases, they have the same starting positions. In some cases, the competitive battles are lost or their stake in the market decreases even for those companies which have had a better starting position. Why does this happen? Why some companies are flexible and taking all possibilities in the market, while others don’t? This is related to a lot of different reasons like good management which allows descent evaluation of future perspectives and modeling of new strategies and tactics because successful companies pay immense attention for an overall efficiency of processes, such companies understand their place in the value chain, feel their changes and adapt. This is noticeable in the physical grain trading market as well. Until now, in this market, lots of credit was given for traders who with the help of fundamental and technical methods of analysis used to predict supply and demand and used to measure price levels. After evaluation, they decided which position short or long to take. Nevertheless, it doesn’t matter how good the prediction is looking through the prism of fundamental or technical analysis, the trade will not be finished without proper execution. That’s why the supply chain is not the least important part of the successive trade because if the priorities and accents are put together correctly, they create a long-term competitive advantage and proper execution. This article will not pay attention to risk management, use of derivatives for hedging and fundamental and technical a methods of analysis, we will pay more attention to the processes of separate parts of the supply chain. The main goal for companies when modeling their supply chains is to achieve the supply chain surplus. The development of supply chain strategy for each sector is individual and different. In this article, I would like to discuss in more detail one of the main components of the agribusiness market – the physical grain trade.
The supply chain and characteristics of the grain market
Before we begin to talk about the supply chain of the grain market, it’s important to understand and identify the supply chain of the total food market. As you can see from the table below, the supply chain is quite simple nevertheless it’s very important, as the grain market is an indispensable part of the food chain, which in the form of various food products appears on the people’s table. The supply chain looks following: farmers grow their production, afterward, they sell their product to intermediaries or directly to processing plants which produce the final product. Intermediaries from their side sell the product to the local or overseas market to the feed or food manufacturers, afterward with the help of other members those raw materials in the form of various products are delivered to consumers. If production is moved from the county of origin, in most cases more intermediaries are involved in order to connect the seller with the buyer and to send the production of the country by sea, land or rail. In this market often between the inner country merchant and the foreign producer or a trading company, a brokerage company or other financial institutions are involved, which serve as a combining link, they process the information and help with the risk management. Further, in the supply chain, there may be smaller intermediaries involved which sell the products from the farmers to processing plants, from which the final product again directly or with the help of intermediaries reaches the retail shelves. This sector is dominated by strong global players, who buy the raw materials from around the world and distribute them to further chain connections or use in their own operations. Merchandisers operating in the local market in most cases provide the farmers with the seeds, fertilizers, agricultural engineering, consultations, and information. It’s important to notice that agribusiness operates with a low margin if compared with other businesses, because you need to have huge stock levels, in some cases store the production for a longer time period, the prices fluctuate a lot, that’s why this business is dependent on prices and efficiency in each link of the supply chain.
Effective supply chain. What is it?
There are two types of supply chains: reactive, when products need to reach the consumer fast, therefore, a lot of attention is paid to being near the customer and fast distribution, and effective, where cost optimization is crucial but the balance needs to be met in order not to lose the client. In this type of chain, effective logistics, storage, and safe materials buying are crucial. Talking particularly about the grain market, it needs to be efficient till the production stage, afterward when coming closer to the consumer, depending on the product type, it becomes more reactive. A very important trend in the grain market is seasonality because contracts need to be conducted before the actual yield is known, therefore it’s difficult to understand if you will be able to procure enough grain, or you will have a surplus, if there will be enough storage space, if there will be an actual need, therefore a lot of attention needs to be paid to risk management (hedging) and planning.
The most recent issues which prevent from supply chain efficiency
Of course, each business is different, but from practice it’s noticeable that the main issues from grain merchant’s perspective which need to be eased or eliminated in order to achieve efficiency are these:
Poor cooperation between sourcing, procurement, logistics, and sales departments. If there is no proper cooperation between those departments, the information stream is destroyed and either it doesn’t reach the destination or reaches not in full volume, therefore grain and they’re sub-products are put in storage for a longer time period, later some of it is harder to sell, all this increases tension between strategic partners, it’s harder to guarantee proper quality parameters and etc. It’s important to move from the power-based approach to a strategic point of view into the supply chain as a whole.
Power-based view to strategic partners. Often companies lack strategic sourcing. When it comes to determining which criteria are important for each supply chain participant, it is still common to evaluate two main criteria: price and availability, which means if today I’m strong, I dictate my terms. Decisions are made without thinking about the strategic objectives of the supply chain, without looking for ways to better achieve them, without deciding which partner’s suit better for those objectives, without thinking how to model processes and execute agreements so that each side would be satisfied.
Unable to correctly identify their place in the value chain, therefore precise supply chain strategies aren’t formed. It’s important to understand what your role is and why you are important in this value chain. If talking about the grain market, you need to achieve efficiency in five supply chain components: buy, store, move, sort and sell.
One supply chain for all products. In order to achieve efficiency, it’s important to create segregated supply chains for different product groups and to use different strategies and tactical actions for each group.
Ineffective logistics network. Logistics in this sector compared with others is efficient, full transport loads are used for transporting goods by sea, rail, and land, and products are stored in simple cheaper warehouses or elevators. Nevertheless, those processes can be optimized with effective planning, mass economy and by choosing the most efficient location and transportation mode.
Ad hoc rather than proactive viewpoint. Of course, there are plenty of situations impossible to identify before they actually happen and you need to react fast in order to ease the consequences. However, long-term business practice shows that ad hoc principle is a more expensive way than precise planning and identifying risk points beforehand, in order to minimize the risk of errors.
Outdated stock management model. Agricultural production is highly affected by seasonality. For this instance, there are cases when stock levels are very high and the product is stored for a longer time. Despite the fact that agribusiness participants hedge their risk, and the margins also depend from choosing the right period to close positions, nevertheless, there are additional risks involved such as grain damaging during the storage period, worsening in quality parameters and financial risk due to too long positions, which can be affected by uncertainties. Of course, effective supply chain and particularly grain trading business correlates with higher stock levels. Nevertheless, in order to achieve higher efficiency within the supply chain, it is necessary to overlook the stock management model, to pay more attention to S&OP processes, analysis and risk management.
No investments in technological solutions. As I have mentioned before, in the physical grain trading market, talking from merchant position, the supply chain is quite simple, there are no too many stock units (SKU’s), there is no constant distribution and production, no promotions, that’s why there is no huge stock level fluctuation, there is no need to plan the production levels, when to expect manufacturing jumps and downfall and etc. Therefore, there is no need for extraordinary technological solutions which would help to predict demand, lower stock levels and increase visibility. However, it’s important to consider technologies which would help with sourcing, procurement, optimization of logistics and connecting different departments into one whole system.
Ask, ask, ask – buy method. I think it’s still the most popular technique when obtaining logistics and other supply chain services. The main drawback of this method is that it doesn’t move alongside your company’s long-term strategy. It’s important to evaluate if the cheaper provider will be able to provide quality, safety, and duration. And vice versa, if you are paying a lower price to a strong player, will this not affect the future of your relationships.
As I have mentioned before, each business case is unique, but basically, all you need to do is to move from thinking ‘that supply chain is just a necessary line of expenditure’ to a strategic supply chain management thinking. In the long run, this will pay you huge dividends: your operation will become more efficient, purer and you will gain a competitive advantage.
Supply Chain Services Bureau can help your company to evaluate your supply chain, together we can make it either more efficient or reactive, which will suit your business model and nowadays` tendencies best.
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