The operating environment for food and agriculture companies is becoming increasingly complex as new external influences compound rising commodity prices.
The flaws in the current supply chain structure is leaving the sector ill equipped to respond to this new complexity, according to a report.
It calls for the industry to transform the way supply chains are organized, by adopting longer-term supply agreements and, cooperative relationships with upstream and downstream partners.
The report identifies the dedicated supply chain model as the best next step for food and agriculture companies.
This structure has the potential to revolutionize the industry by making it more productive, innovative, safe and sustainable; all of which will be vital if the sector is to deliver food security to a future global population of 9 billion.
Limitations of the current structure
Traditional pressures on the F&A (food and agriculture) industry (supply and demand dynamics, a burgeoning population and rising agri commodity prices) are being compounded by a new set of external influences.
The direct use of agri commodities for biofuel production and an increased awareness of the energy intensity of food production, for example, have embroiled F&A companies in an ongoing food vs. fuel debate.
Similarly, speculation in agri commodity markets and the regulatory responses this has triggered from governments worldwide, has added to the complexity of the environment in which the sector operates.
These new pressures also serve to exacerbate the flaws in the current supply chain model.
The dominant supply chain model is currently structured in a linear fashion, in which suppliers, processors and retailers form short-term partnerships independent from the influence and interests of other members of the chain.
This model is highly inefficient, restricting F&A companies’ ability to respond to changes in supply and demand dynamics, whilst fleeting partnerships limit productivity and restrict innovation. This system also results in wasteful processes that cause more environmental degradation than is necessary.
Adding value through closer cooperation
Rabobank believes that switching to a new supply chain model has the potential to transform the F&A industry.
In a dedicated supply chain structure, upstream suppliers and processors enter into long-term partnerships with each other and a downstream chain leader. Crucially, information and insights are shared along the chain’s length for the benefit of all members.
Justin Sherrard, Rabobank Global Strategist said "Closer cooperation of this sort will transform the nature of F&A partnerships from transactional ones that are centered around chasing price, to a system focused on creating value".
The advantages of dedicated supply chains over the current system are manifold. Companies embracing this thinking will benefit in the following ways:
Reduced risk
Longer term, more stable agreements reduce exposure to price volatility, whilst shared insights will enable players to better react to market risks
Improved productivity
Better insights into chain requirements improve process efficiency and partners can also work together to finds ways to limit or reuse waste
Access to new markets
Better insights into downstream needs and opportunities can better inform product innovation and help companies to grow footprints in new markets
Enhanced brand and reputation
Companies with ambitious CSR targets can help their partners on other product attributes, such as sustainability
Improved access to capital
In addition to better cash flows and stronger credit ratings, members can access new financing models that provide leverage from chain partners
Adopting the dedicated supply chain model positions F&A companies for longer-term growth, as the sector rises to meet the over-arching challenge to feed the world in coming decades.
Making the change
The report encourages the industry to abandon its preoccupation with short-term price spikes. Rabobank believes that a model based on chasing price is a narrow approach that will restrict the ability of F&A companies to realize their growth objectives in this more complex and demanding environment.
The report calls for prominent F&A brands to show leadership, through creating initiatives that will lead to closer cooperation between their upstream partners.
The report cites several examples of leading F&A companies that are already active in this space, such as Mars' decision to release the cocoa genome sequence into the public domain as part of its broader commitment to sustainably sourcing all cocoa purchases by 2020.
Furthermore, sector leaders undertaking such initiatives must become advocates for dedicated supply chains, by sharing their experiences with the wider industry.
Gilles Boumeester, Rabobank Global Head Food & Agri Coverage commented, "F&A financing institutions also have a role to play in creating an environment that is conducive to adopting this new model. To this end Rabobank is developing new financing solutions that support and encourage companies embracing dedicated supply chain thinking".
