Aug 26, 2013 | Branding, Change, Demand chains, Marketing
Lean thinking, evolving from the Toyota Production System is changing manufacturing world, but agriculture has a long way to go.
Just as building cars used to be a production oriented operation until Toyota turned it on its head, so too is agriculture production led. Grow it, then try and find a market.
Well the world has changed, and demand is as big a pull factor in the world of agricultural produce as it is in cars, so the challenge is to leverage it. Just grow it and they will not necessarily come.
This does not mean that you have to find a way to manipulate the genes of an apple tree to give peak production in 2 or 3 years instead of seven, remove the impact of the seasons, or grow product out of its natural environment, which we can do for some products in greenhouses, but it does mean that change is urgent.
There are some things we can do much better that will help:
- Collect inventory data, and make it transparent and available. Agricultural inventory is not just what is ready for sale, but what is in the ground and likely available in the future days, weeks, months and years. Understanding the dynamics of agricultural inventory is even more important than manufacturing inventory because the cycle times are often so long, and the shelf life is limited, in some cases to days.
- Remove price as the purchase determinant. Sellers of produce have lost sight of the value that fresh produce delivers, and have lost any semblance of control of the chain, and the opportunity to brand. As a result, price is the overriding determinant of a sale, it is a race to the bottom, a race that does not have a happy ending for anyone. Having lost the initiative, it will not be easy to get it back, and any progress will take years, but it is a crucial challenge.
- Energise marketing. Easy to say, but extraordinarily hard to do. The agricultural “marketing” bodies that exist via levies have demonstrably failed in the marketing part of their charter. All that is left is for producers to take back some responsibility for marketing, and start to build their own branding and business models. Logically this can happen at the fringes, in the corners, rather than in the mainstream. The emergence of Farmers Markets is to my mind an precursor of this activity.
- Create new business models to accommodate the points above. Existing structures have led to the current poor situation, so it is unreasonable to expect them to be able to change into something radically different. These new business models have great challenges, great opportunities, and the cost of failure will significantly impact on our food security, and cultural roots.
Without the evolution of an agricultural version of a lean value/demand chain, the volume and value of our agricultural output will decline over the long term. Increasingly we are becoming uncompetitive in global markets, we currently import more than half our packaged food and groceries, our capability base built up over generations is leaving, and once gone, will not return.
We appear to be at some sort of inflexion point, getting it wrong over the next decade will leave our grandchildren poorer than we have been, reversing 250 years of improvement.
Aug 20, 2013 | Collaboration, Demand chains, Marketing, retail, Strategy
This is a far longer post than normal, motivated by some very sensible feedback from the previous post. Bear with me.
The “tools” that add value to management of any supply chain, playing a role in the transformation into a demand chain are relatively simple to list, but extremely difficult to implement.
I have seen, and worked with many over the years, largely based in agriculture, but the lessons are widely applicable.
The difficulty of implementation is why there are so few successful agricultural demand chains, but those that are in place, at least the ones I am aware of, deliver enormous long term value.
In addition, the classification of something as a “tool” usually creates debate, as it can also be an “outcome” of a successful initiative.
For example, is the “Shakedowns” brand of baby carrots from Bolthouse Farms in the US a marketing tool, or an outcome of a successful marketing and demand chain initiative? Truth is, that it is both, but the debate can become excited.
Following are what I see as the six key components that are the characteristic foundations of successful initiatives, but having them in place is not a panacea, as like any tool, the use remains in the hands of people of varying skill, motivation, and outlook.
- Appropriate scale, and the supporting processes to manage that scale. The scale and supporting processes needed to be successful in the local growers market are very different to those necessary to be successful in Woolworths, Tesco, or a major food service distributor. It is not just a matter of size, it is largely a matter of alignment. At one extreme we have growers market customers, who value product provenance to the point of wanting to communicate with the grower personally, and to know all about a particular piece of produce, and price is not all that relevant, so long as it delivers value. At the other end by contrast, a supermarket customer is way more focused on price, availability and convenience. To be successful with a supermarket chain, you need:
- Working capital reserves, as the margins are thin and payment terms long.
- Data capability. Supermarkets are run by data, and category management, and not having the capability is as good as going to a shootout with a penknife.
- Low cost. A necessity if you are to survive the pressure on operating margin, and marketing investment necessary to combat increasing penetration of housebranded substitutes.
- Operational scale to be able to service a chain nationally, or at least throughout a state.
None of these factors matter a whit in the local farmers market.
- Chain Transparency. Transparency drives accountability, surfaces market and improvement opportunities to every point in the chain. Of increasing importance, transparency also delivers product provenance. This is critical in a farmers market, and branding initiative, and rapidly becoming a marketing tool in supermarkets, but more importantly, is a critical component of controlling a chain. Without transparency, you cannot have control beyond your immediate domain, and thanks to the net there are now fine tools available to suit every situation, the standard setter being an Australian home grown product offered by GFA .
- Collaborative structures and processes. Arbitrage margins are made possible in a supply chain by a combination of lack of transparency and a culture resulting from the old way of “information is power”. This dying a difficult death, but dying it is as the communication tools now available provide the opportunity to collaborate as never before, and as a result the nature of organizations is evolving rapidly. A great example is the wool supply chain, 2 years from sheeps back to a consumer article, a production process that involves at least 7 product transformations which are typically highly competitive, and involve inventory, risk, and time, all of which add substantial cost. A collaborative structure that creates a forum of all the chain players can cut that time, risk, and cash tied up by a factor of 2/3. The poster boy in Australia is Woolconnect, a collaboration all the way through the chain that delivers product from farm to the consumer in 4 months. This did not come about easily, or quickly, but as a result of the vision and determination of a few people over 15 years.
- Contract capable. Customers need certainty, they need to be able to rely on undertakings given, and part of that is a single contract capable party with whom you do business. In simpler times, a handshake was sufficient, and as relationships evolve, it sometimes evolves back to that level, but for the most part, certainty involves a contract. Weather that is with an individual, Pty Ltd company, a co-operative or public company is not relevant, it is simply an agreement with consequences.
- Business model. Success requires the combination of a sustainable commercial business model with an attractive value proposition to the end user, and all points in the value chain. The “business model” represents the combination of all the points where costs and revenues are generated through the chain, mixed with where and how “value” is created. “Value” is the key component in a business model, often missed with traditional thinking. The business model also incorporates a capability to balance supply and demand transparently through the whole chain, not just at any individual point in the chain. Amazon creates value not only by selling books cheaply, but by having an inventory hundreds of times bigger than any bookstore, and offering a crowd sourced rating system. What they cannot offer is the personal and often emotional experience some have with browsing in a good bookstore. The supply chain models and resulting business models are very different quantitatively, and they create value in a different manner. I suspect there are enough bibliophiles for bookshops to survive and prosper against Amazon, but they will no longer be in every shopping location as we have been used to, and will not be a shop-front for recent releases and best sellers, but will be something entirely different.
- Marketing. There are as many definitions of marketing as there are consultants and academics. Mostly they talk about the “4 P’s” the mediums for communication, the need to focus, but my take is both simpler, and more strategic. To me, marketing is all about the definition, building, leveraging and protection of competitive advantage. The way enterprises go about this task is almost infinitely varied, and over the last few years has become increasingly fragmented and confused. However, really good marketing always has a simple, clear articulation of a value proposition that motivates action.
You got this far, well done.
Perhaps it should be an e-book, as there is plenty more to say.
Jun 6, 2013 | Branding, Demand chains, Innovation, Marketing, Small business
Coles limited engagement in an “anti factory farming” campaign is indicative of the strategic and marketing tightrope the food industry in this country is walking.
On the one hand we have an effective duopoly of FMCG retailing exercising their power to increase their returns to shareholders, and service their customers by both maximising margin and minimising costs. A core part of this strategy is to absorb the proprietary brand margin by aggressively allocating shelf space to housebrand products that are just globally sourced copies of the proprietary Australian products.
On the other hand we have an Australian dollar that has effectively given a 50% price subsidy to the international competitors to the Australian supply chain, at a time when all other domestically sourced input and overhead costs from labour, power, various rates and taxes, freight, and risk costs have all increased substantially. Double whammy!
An added complication is often that the (usually young) buyers in the retailers take the “fast moving” part of the FMCG literally, and fail to recognise the time and investment often required to reflect even a minor change in their product specifications through the supply chain. The consumer end may be fast moving, but when it takes 7 years to mature a fruit tree, and many generations of animals to reflect spec change in the end product, it can be anything but fast moving.
Now Coles have, quite legitimately, moved to build a sort of “animal provenance” into their produce supply chains, as a competitive positioning strategy against Woolworths, increasing the costs of their suppliers, as well as requiring added investment by suppliers for which they need a reasonable chance of a competitive return. This is at the same time they have reduced consumer prices substantially (consumers have been very grateful) in some markets like milk. Whilst Coles, and Woolworths who followed them, may have sacrificed a bit of margin, the supply chain has borne the brunt of it, despite some spin to the contrary.
The small guy has little chance of succeeding against these odds unless he is very smart, and does not have all his eggs in the chain basket, as just competing on the grounds dictated by the chains is a no-win choice.
There are however, strategies that can be deployed to succeed, but they require a re-engineering of the supply chain into a new beast, a Demand Chain that is driven by consumer demand, not supply, and is managed through a chain “community” where information is shared, and is agnostic in some way of the power of the big chains.
Having been a bit gloomy so far, it is however encouraging that the big two retailers are now differentiating themselves competitively, as consumer niches that can be accessed by agile and innovative suppliers. will evolve.
PS. Just after posting, it was announced that Simplot had put its Bathurst and Devenport plants into a wind-down for closure, and McCains had cancelled potato contracts with three big growers. if we needed more evidence of the parlous state of food processing, it just arrived.
May 2, 2012 | Category, Demand chains, Operations, retail
The word sustainable holds connotations of farming practices, and environmental sensitivity, all true, but only half the story.
A sustainable chain must also be commercially sustainable, and one without the other is by definition, unsustainable.
The characteristic that drive both are similar, transparency, and connections through the chain, both facilitated by the collaboration tools of the web. The outcome is increased productivity of the whole value chain.
The price deflation being experienced in the value chains supplying Australian retailers are testing the limits of Australian suppliers, and those that are surviving are dedicated to the implementation of chains that are commercially sustainable, and increasingly environmentally sustainable as consumers interest in product provenance increases.
Quietly, out of a home office, GFAP, a small chain consultancy that supplies a customised web based tool that manages value chains, to this point largely around horticulture, is flourishing. Very few pieces of produce arrive at Woolworths or Coles without being touched in some way by this system, but few have ever heard of it.
Sep 19, 2011 | Demand chains, Operations, Strategy
People routinely forecast optimistically, they under-forecast costs, and over-forecast outcomes. We have all seen it happen repeatedly in businesses and the public sector, most of us have seen it on personal level.
Demand planning is the core of effective operational optimisation, and differs from simply sales forecasting, in that it looks at the drivers of demand, rather than drivers of sales, often a big difference, and it is free of the bogy of just assuming the past will be repeated, even if massaged by some fancy algorithm.
Demand planning has been enhanced by the developments in what are in effect benchmarking of similar situations, collectively called Reference Class Forecasting by its Nobel prize winning proponents, Daniel Kahneman and Amos Tversky.
Demand planning is hard to do well, but most useful things are.
Aug 8, 2011 | Customers, Demand chains, Marketing, Small business
On Friday I made a very modest contribution to the proceedings of the Organic and Green trade show in Sydney. A bunch of committed, passionate people, working their collective butts off to build businesses that deliver on the organic promise to consumers.
The numbers however are daunting.
The Australian grocery trade is north of $106 Billion, the organic market, counting everything, (perhaps twice) with the most optimistic assumptions is $500 mill, including all the cosmetics, soaps, candles, recyclable bags, et al, many not included in the grocery figures, and probably constitutes 50% of the total. In other words, perhaps 1 in every 5,000 dollars spent in Australia on food is spent on organic food. How do you win in that arena?
Answer, one person at a time building a tribe, connecting them, giving them a reason to connect with others, supporting the ways they can connect, and working 20 years to be an overnight success.
Organic products are at what I believe to be a unique point in time, the confluence of two great social impacts.
The first is the tools to connect being given to us by the web 2.0.
The second is the sudden realisation that food matters more than as just fuel, that there is a powerful social and familial force present when you prepare and share good food, on top of the obvious benefits of the impact of healthy food on the individuals health.
Had you told me 3 years ago that a TV reality show would contribute to a major change in behavior, I would have told you to stop smoking illegal stuff, but perhaps the change was lurking, and Masterchef just provided the catalyst.
