Benchmarking the Nature of Value Chain Relationships in Ontario Agriculture and Determining a Value Chain Related Business Plan for AMI Final Report Prepared for: Agricultural Management Institute Prepared by: Claudia Schmidt Kate Stiefelmeyer George Morris Centre 225-150 Research Lane Guelph, ON N1G 4T2 Martin Gooch Nicole Marenick Value Chain Management Centre Colin Siren Aaron Howes Ashley VanHerten Ipsos Marketing Jeff Wilson Geoff Dover fsSTRATEGY Contact: Martin Gooch Telephone: 519-822-3929 ext 216 [email protected] Date: February 20, 2013 Executive Summary Three overarching purposes lay behind this farmer-focused project. It sought to determine the nature of business relationships existing between Ontario producers, their customers, and the value chain(s) in which they operate. It also sought to determine the factors that have shaped these relationships and what they are enabling the involved businesses to achieve. The third objective was to determine the activities and programs that the Agricultural Management Institute (AMI) could undertake to encourage and enable more Ontario farmers to adopt value chain management practices, and propose a long-term business strategy for AMI. The project commenced with a literature review of value chains and their management in the context of the international agri-food1 industry. Findings from the literature review guided insights sought from quantitative and qualitative interviews conducted among 552 producers and managers of businesses operating along agri-food value chains. Senior representatives from Canadian and international programs, which have been established to encourage and/or assist producers develop closer strategic relationships with other members of the value chain, were interviewed to determine how they operate, their effectiveness, and lessons learned. The literature review identified that value chain management (VCM) describes a strategic business approach where firms situated along a value chain choose to work together with a focus on improving the efficiency of operations within and between firms and their effectiveness in creating value for the end consumer. This enables the involved businesses to become more competitive and profitable than if operating as independent entities. VCM is a reiterating process that takes time, resources, and skills, which become more sophisticated as the involved businesses learn through working together as a strategically aligned unit. There is not one “type” of value chain. Stating whether a business belongs to a supply chain or value chain and what this means from a business perspective is a simplistic, misguided means of attempting to describe how and why businesses behave in a certain manner. With every business seeking to create value by selling a product for a higher price than it costs to produce, every business belongs to a “chain” of suppliers and customers. It is how a business behaves in relation to its customers and suppliers that determine its commercial opportunities and challenges to which it is exposed; it is not the name given to the chain in which it operates. Value chains operating in the international agri-food industry fall into structures that reflect a continuum spanning from traditional, open (spot) market approaches, to businesses being so closely aligned that they may jointly invest in infrastructure and resources (Dunne, 2003; Spekman et al., 1998). For the purposes of this paper, the four types of value chains that inhabit this continuum are referred to as fragmented, cooperative, coordinated, and collaborative. 1 The term “agri-food” encompasses agriculture, food, bio-products and bio-fuels. 1 Increased profitability strongly motivates producers and agri-food businesses to establish closer relationships. Both the qualitative and quantitative research found that businesses operating along the entire agri-food value chain have increased their market opportunities and competitiveness through establishing closer strategic relationships with suppliers and customers. Producers and other business managers stated that this has enabled them to increase their profitability beyond what would otherwise have been possible. The learning that comes from working as a strategic unit rather than in isolation has also enabled them to develop new skills and capabilities, leading to their identifying further opportunities. A direct correlation was found to exist between having benefited financially and the establishment of coordinated or collaborative relationships. In short, the stronger the business relationships, the more benefits the involved businesses derive from their involvement. As identified in the literature review, the nature of value chain relationships that exist between farmers, their suppliers, and customers take many different forms. In the qualitative survey, the majority of the 52 producers and processors/distributors interviewed described their relationships as coordinated. It is important to note that, because they were interviewed due to their experience of working closely with producers and agri-businesses, these arrangements do not necessarily reflect the wider industry. Most intriguing was how they compared their relationships and the determinants of success with the wider industry. Retailers indicated that business relationships vary across all four of the descriptions provided, with collaborative relationships being the least common. Foodservice businesses were most likely to describe their business dealings with farmers as cooperative. Top performing farmers differ from the majority of their peers in a number of ways. The sector in which they operate is one of the least important differentiators. Marketing knowledge or experience, along with attitude, are considerable more important. Many farmers are said to not understand the product or service needs of their customers, with the average ranking being low for both product (5.4) and service (5.5) out of 10. Many farmers are also said to lack the skills required to fulfill their customers’ needs. Overall, farmers who supply vegetables, fruit, and “other” have stronger relationships with their customers than those involved in producing beef, poultry, and lamb. Interestingly, foodservice operators who have established a relationship with farmers tend to view their relationships with livestock producers as being stronger than those established with horticultural producers. This is due to the seasonality of vegetable and fruit production; and that there is greater opportunity to add value by customizing a protein offering to suit specific foodservice customers, versus produce. The latter can only be achieved through establishing quite sophisticated and long-term relationships; hence the participants are more committed. The quantitative study of 500 Ontario producers supported many of these findings. It showed that the customers with whom producers most commonly believe they have strong value chain relationships are processes and distributors, followed by retailers. Retailers are the least likely customers with whom farmers share a formal contract. The customers with whom the most farmers wish to establish closer value chain relationships are beef processors. Why more 2 farmers have not established closer business relationships is most commonly due to a lack of marketing skills. Government regulations are also stated as commonly being a barrier to farmers’ establishing closer relationships with other members of the value chain. The primary benefits, in terms of skills learned by farmers who have established closer relationships with customers and suppliers, are improved marketing skills and the ability to produce better, higher quality products. These come from possessing a great understanding of market demands. The figure presented below contrasts the extent to which each of the four types of businesses relationships (fragmented, cooperative, coordinated, collaborative) were found to exist in specific sectors of Ontario’s agri-food industry. A key reason why fewer examples of closely aligned value chains exist in sectors where the route to market is longer than fresh fruit or vegetables is that fewer interactions tend to occur between producers, their customers, and the final consumer. It is also more difficult for producers operating in longer more protracted value chains to readily identify with the end product(s) being consumed or how they can influence downstream operations. Producers who interact regularly with retailers are likely to feel more connected and therefore motivated to establish a constructive relationship with their customers, and learn about how they benefit from positively influencing consumer choice than producers who leave their crops at an elevator. External factors, including government regulations and legislation, were found to impact the businesses’ relationships that exist in any sector. The literature review and primary research suggest that this is primarily due to the influence that regulations and legislation have on shaping industry structure and the attitude (culture) of those involved. Highly Able Fruits (Foodservice) Fruits (Retail) bility aches Vegetables (Foodservice) erstanding and aue Chain” appro PPoorrkk aannddV eLLaagmmeOtbbail bs((FeRleoeesodt (adsRisle)etraviilc)e) dal nV Grain and Corn u“ el of pply Beef va Leto Chicken Relatively Dairy Unable Fragmented Cooperative Coordinated Collaborative 3 The research found that few Ontario stakeholders have a solid grasp of the term ”value chain,” or the potential impact ”value chain management” can have on their competitiveness and profitability. Few farmers and down-stream businesses use the VCM resources that are available; even among those who are aware of what is available and what is being used by their peers. Not possessing a clear understanding about the topic of VCM and associated benefits lessens individuals’ motivation to access resources. Rather than accessing publicly available resources, retailers and food service managers feel that they had educated their suppliers as their business interests developed. The best suppliers were the ones who were willing to learn and able to fulfill their requirements. Customers (processors, retailers, foodservice distributors, etc.) will not invest resources into forming a relationship with producers who are unwilling or unable to learn and change behaviour. The lack of producers who are willing and/or able to establish close strategic relationships with other members of the value chain was commonly cited as THE primary factor hampering the development of stronger, more competitive, and more profitable business practices across Ontario’s agri-food industry. It must be stated, however, that it is not only producers that are hampering the development of closer business relationships across Ontario’s agri-food industry. Producers, distributors, and retailers were among those who cited meat processors and millers as businesses who are most reluctant to establish closer business relationships. The lack of closer value chain relationships is therefore a systemic issue. It is not the fault of one group. When asked what is required to facilitate the development of closer value chain relationships, it was suggested by respondents from along the chain, that a need exists for:  Networking events to connect players through the value chain,  Business facilitation/mentoring,  Management skills (i.e., business planning, financial management), and  Specific skills, especially related to marketing and communications. Additional training requirements included dispute resolution, technology, and traceability. An international environmental scan of value chain initiatives found that there was a surge of publically supported value chain activity/programs in the mid-2000s. Much of the funding for domestic value chain programs has since waned. Greater emphasis has been placed on investing in international value chain initiatives. This has led to some domestic initiatives no longer being operational (i.e., Manitoba’s Value Chain Initiative). An apparent reason for the deterioration in public support for value chain programs is due to governments’ expecting that once the commercial benefit of adopting VCM approaches had been proven, such business models would develop organically across entire industries. This assumption does not take account of deep-rooted cultural and attitudinal factors that discourage many businesses and sectors from embracing VCM techniques, particularly in an often adversarial industry such as agri-food. The assumption also fails to take account of the influence that policies and regulations have on encouraging (or not) businesses and sectors to embrace VCM approaches. In Canada, considerably less public funds have been invested in value chain programs than elsewhere. Investments have also been considerably less strategic. For example, the UK Food 4 Chain Centre (FCC) operated over five years with a total budget of £5.3m, consisting of £3.8m in grants and circa £1.5m in resources provided to the Institute of Grocery Distributors (IGD), by the Department of the Environment, Food and Rural Affairs (DEFRA). Rather than focus on providing high level VCM awareness training to the industry at large, it focused on providing specific businesses with practical tools, such as business scorecards, master classes, and training in Statistical Process Control, Six Sigma etc. Case studies that flowed from demonstration projects were made available to the public at large. Subsequent UK programs, such as Waste Resource Action Plan (WRAP), built upon the momentum initially established by FCC. The main difference between value chain oriented initiatives of Mainland Europe versus the UK, Australia, etc., is that they are more technical and include a scientific component. In Ontario, the Value Chain Management Centre (VCMC) is the only initiative established to specifically enable the development of agri-food value chains, and regularly interacts with businesses operating along the entire agri-food value chain. Initiatives such as the National Value Chain Roundtables are not concerned with establishing value chain relationships between individual businesses. The VCMC, however, does not possess the resources required to encourage and enable the majority of Ontario farmers to establish closer strategic relationships with other members of the value chain(s) in which they operate; and vice versa. As presented below, this is the gap in resources and delivery mechanisms that AMI could address, through funding a carefully planned strategy, targeted at facilitating changes in the attitude and behaviour of those producers not already engaged in effective value chain relationships. PPrroodduucceerrss Seeking to partner Shippers / Willing to Marketers Retailers Input partner, if Suppliers msoutfivfiactieendt alyn d coCspneurenostkedoicunmtcg wee trriosts h Distributors enabled Foodservice Resistant to Processors Operators partnering Product Pathway – Route to Market Value Chain Management Centre fsStrategy Excellence in Manufacturing Canada (EMC) GFTC Customers seeking to connect with producers 5 The program should not work through industry organizations or government departments. Its primary focus would be to encourage individuals involved in commercial farming to adopt innovative management techniques not directly associated with crop or livestock production. It would work directly with industry to establish an objective, market-oriented relationship between producers and commercial businesses operating along the value chain. The program’s activities would fall into two broad categories: “Communication” and “Implementation”. The program’s objectives, the projects and initiatives funded, and the sectors targeted by the program would be reviewed annually by an Advisory Committee comprised of senior representatives from commercial businesses operating along value chains supplying retail and foodservice. The overarching message conveyed by the program should be that “regardless of the sector in which they operate, producers and their customers have benefited from having established strategically aligned business relationships and adopting a value chain approach to how they manage their business.” A project should only be undertaken if the proponents are able to demonstrate that it will materially add to the present knowledge surrounding how and why a sector or subsector of Ontario’s agri-food industry can benefit from establishing closer strategic business relationships along the value chain. Proponents must also show how the results would be used to engender purposeful changes in producers’ attitudes and behaviour. Reports, case studies, and presentations that result from the program would have a consistent format and theme, ensuring that results and insights could be readily translated to the widest possible audience. Establishing a common reporting format would also ensure that the program’s impact could be monitored and measured more effectively than otherwise possible. Due to mistaken assumptions and personal biases that were found to be associated with the term “value chain,” particularly among producers, we recommend that the program’s name does not include the words “value” or “chain.” Instead, the program should be positioned as assisting producers to increase their profitability through encouraging them to establish innovative commercial relationships with customers and suppliers. Based on the insights gathered into value chain initiatives occurring worldwide, a suitable title for the program might be “Agricultural and Agri-Food Partnerships.” A program of this type is expected to result in widespread change, leading to a more innovative, competitive and profitable agri-food sector than presently exists. Such a program could also assist OMAFRA and AAFC to ensure that the policies, programs, and regulations that they developed were conducive to establishing a more internationally competitive and profitable agri-food industry. 6 Table of Contents Executive Summary ................................................................................................................................ 1 1 Introduction ................................................................................................................................... 9 1.1 Objectives ............................................................................................................................... 9 1.2 Research Methodology ........................................................................................................... 9 2 Ontario Agriculture from a Value Chain Perspective .................................................................. 14 2.1 Defining “Value Chain Management” .................................................................................. 14 2.2 Structure ............................................................................................................................... 14 2.2.1 Benefits Associated with Chain Structure ..................................................................... 17 3 Value Chain Initiatives Existing in Ontario ................................................................................... 19 3.1 Businesses with Whom Producers Have Established Closer Relationships ......................... 25 3.2 Factors Determining the Nature of Producer/Customer Relationships ............................... 27 3.2.1 Relationship Satisfaction ............................................................................................... 27 3.3 Factors Influencing the Sustainability of Value Chain Relationships .................................... 32 3.3.1 Requirements of Effective VCM .................................................................................... 32 3.3.2 Examples of Best Practice in Ontario ............................................................................ 33 3.4 Incentives for Farmers to Join Closely Aligned Value Chains ............................................... 35 3.5 Ability to learn ...................................................................................................................... 37 3.6 Motivation to Establish Closer Relationships ....................................................................... 38 4 Barriers to Establishing Closer Value Chain Relationships .......................................................... 41 4.1 Attitudes ............................................................................................................................... 43 4.2 Incidence of Value Chain Participants, By Management Style ............................................. 44 4.3 Structure ............................................................................................................................... 45 4.4 Skills ...................................................................................................................................... 46 4.5 Environmental Factors .......................................................................................................... 47 4.6 Overcoming Barriers ............................................................................................................. 48 5 Current Resources ....................................................................................................................... 50 5.1 Comparative Analysis of Ontario Resources ........................................................................ 54 6 AMI Strategy and Business Plan .................................................................................................. 56 6.1 Description of Opportunity ................................................................................................... 56 6.2 Strategic Intent ..................................................................................................................... 58 6.3 Target Sectors ....................................................................................................................... 61 6.4 Product and Service .............................................................................................................. 63 6.5 Program Title and Clients ..................................................................................................... 64 6.6 Activities Supported by Each Pillar of the Proposed Program ............................................. 65 6.7 Governance ........................................................................................................................... 68 6.8 Year One Activities ................................................................................................................ 68 7 References ................................................................................................................................... 70 8 List of Appendices ........................................................................................................................ 79 7 List of Figures Figure 1-1: Business Interests, by Respondent Group ......................................................................... 12 Figure 2-1: Characteristics and Benefits Associated with Each Value Chain Structure ....................... 17 Figure 3-1: Incidence of Producers Who Describe Themselves as Belonging to a Value Chain .......... 19 Figure 3-2: Main Farm Type, Gross Farm Sales, and Level of Education ............................................. 20 Figure 3-3: Crops and Livestock Considered Sold through Value Chain Relationships and Importance to 2011 Gross Farm Revenue ............................................................................................................... 21 Figure 3-4: Strength of Business Relationships .................................................................................... 22 Figure 3-5: Description of Business Relationships, by Value Chain Role ............................................. 24 Figure 3-6: Types of Relationships Established with Other Businesses ............................................... 26 Figure 3-7: Businesses Named and Value Chain Partners ................................................................... 27 Figure 3-8: How well do farmers generally understand customers’ needs in terms of product and service (1-10 scale)? ............................................................................................................................. 28 Figure 3-9: Relationships Overall vs. Best Relationships, by Sector .................................................... 30 Figure 3-10: Producer Satisfaction with Working Relationships with Value Chain Members ............. 32 Figure 3-11: Value Chain Characteristics – Mean Scores ..................................................................... 35 Figure 3-12: Benefits from Working within Constructive Relationships, by Value Chain Role and Overall Average .................................................................................................................................... 36 Figure 3-13: Skills and Knowledge Learned Through Establishing Business Relationships ................. 37 Figure 3-14: Motivation to Establish Closer Business Relationships ................................................... 38 Figure 3-15: To What Extent Have You Achieved Your Goals and Objectives for Participating in an Agri-food Value Chain? ........................................................................................................................ 39 Figure 3-16: Which of Your Objectives or Goals Are Not Being Achieved? ......................................... 39 Figure 3-17: Key Areas of Improvement to Achieve Goals .................................................................. 40 Figure 4-1: Barriers or Threats to Achieving Their Goals ..................................................................... 42 Figure 4-2: What Factors Have Limited the Development of Close Business Relationships between Farmers and Their Customers? ............................................................................................................ 43 Figure 4-3: Producers Participating in Value Chains, Segmented By Management Style ................... 45 Figure 4-4: How Farmers Who Have Good Relationships Differ from the Wider Industry ................. 49 Figure 5-1: Producers’ Familiarity with Value Chains Related Resources ........................................... 50 Figure 5-2: Awareness of Resources .................................................................................................... 51 Figure 5-3: Resources Used .................................................................................................................. 51 Figure 6-1: Environmental Scan of Current Initiatives and Gap Associated With Agriculture ............ 57 Figure 6-2: Modified Bennett’s Hierarchy ........................................................................................... 61 Figure 6-3: Comparative Incidence of Value Chain Structures, By Sector and Market ....................... 62 Figure 6-4: Proposed Programs and Initiatives .................................................................................... 64 List of Tables Table 1-1: Target Sample of Producers, by Sector ............................................................................... 11 Table 2-1: Overview of Chain Structures ............................................................................................. 16 Table 4-1: Barriers Overcome in Developing Value Chain Relationships ............................................ 48 Table 5-1: Resources Used, by Value Chain Role ................................................................................. 52 Table 5-2: Resources that are Required, Suggestions by Value Chain Role ........................................ 53 Table 6-1: Potential Purpose and Desired Outcomes of Each Element, by Sub-sector ....................... 66 Table 6-2: Proposed Year One Activities .............................................................................................. 68 8 1 Introduction Farms and other agri-food businesses do not operate in isolation. They each have suppliers from whom they source a product or service. They then seek to add value to that product or service prior to its sale to a customer or a final consumer at a price that exceeds its cost of production. A series of businesses that together derive value from supplying products and services to target consumers can therefore be thought of as a value chain. The need for producers to work strategically with their suppliers and customers to create a competitive advantage in a rapidly changing business environment, by having greater influence upon the overall process of growing, processing, and marketing agri-food products, has been researched and written about extensively (Boehlje, 1999; EFFP, 2004; Fearne, 1998). Achieving a value chain management (VCM) approach to business relies on producers strategically involving themselves in operations not directly related to the production of commodities (Fulton et al., 2003; Kilpatrick et al., 1999), but rather directly related to the needs of customers and/or consumers. 1.1 Objectives The project’s objectives are to determine the most effective activities and programs that AMI can undertake to encourage and enable more Ontario farmers to adopt VCM practices and develop a long-term business strategy for their organization. 1.2 Research Methodology The objectives have been achieved through five phases. Because the scope of this project is large, this report presents the top-line research findings as they relate to the project’s objectives. The complete analysis is included as Appendices. Phase 1: Background Research a. Literature Review The review establishes a baseline of current knowledge relating to value chain initiatives and factors characterizing participants who are most likely to be involved in their participation. These findings and assumptions are tested and refined through the remaining phases. The full literature review forms Appendix A. b. Environmental Scan An inventory of existing programs/initiatives in Ontario, Canada and worldwide was also conducted. Through secondary and primary research, the research team identified information about each program, including:  Organization Name/Contacts  Prior and current activities  Mandate  Future activities 9