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Current Status and Future Perspective of Supply Chain Management of Organic Food in Asia

Bordin Rassameethes
Faculty of Business Administration,
Kasetsart University, Thailand
fbusbdr@ku.ac.th
 
ABSTRACT

In  recent  years,  numerous  contributions  have  been  delivered  regarding the  supply  chain management (SCM) of organic foods vis-à-vis the agricultural sector. This paper aims to present the current status and perspective of the supply chain of organic foods in Asia. Investigating the industry begins at the farm where the produce is created and ends at the consumer’s table.  The linking process from the producers of organic agricultural products to the major supermarkets is presented. The three models are bidding, selected suppliers, and contract farming. It will briefly describe the existing procurement network and business environment of these supermarkets. Also, it will present the results of the investigation using data from the interviews and observations of large and multinational supermarkets in Thailand.  The latter segment will provide the development of information technologies and the potential to improve the existing supply chain. Finally, the findings will suggest the management approaches needed to engage the suppliers and the organizations in the effective implementation process to achieve the world-class supply chain position.

Keywords: Organic products, Organic agriculture, Organic foods, Supply chain

INTRODUCTION

The term "organic foods" refers to the methods used to produce the foods rather than the characteristics of the food themselves. The most common concept of "organically grown" food was articulated in 1972 by Robert Rodale, editor of Organic Gardening and Farming magazine, at a public hearing: Food grown without pesticides; grown without artificial fertilizers; grown in soil whose humus content is increased by the addition of organic matter, grown in soil whose mineral content is increased by the application of natural mineral fertilizers; has not been treated with preservatives, hormones, antibiotics, etc. (Rodale, 1972). A well-known organization International Federation of Organic Agriculture Movement IFOAM (2008) defined Organic agriculture as a production system that sustains the health of soils, ecosystems, and people. It relies on ecological processes, biodiversity, and cycles adapted to local conditions, rather than the use of inputs with adverse effects. Organic agriculture combines tradition, innovation, and science to benefit the shared environment and promote fair relationships and to enhance a good quality of life for all involved.

The demand for global organic foods is growing rapidly.  According to the International Trade Center, a monitoring group linked to the United Nations, the organic farming industry is growing as much as 20% per year.  The total organic area in Asia is nearly 3.71 million hectares  of agricultural land as shown in Fig. 1. This constitutes almost 10% of the world’s organic agricultural land and 5.5 million hectares for wild collection, beekeeping, aquaculture, forest, grazed non-agricultural land. The leading countries of organic area from Asia were China (1.9 million hectares) and India (1.1 million hectares) as shown in Fig. 2. Also, China and India belong to the top 10 countries with the highest increase of organic agricultural land 2010-2011 (in hectares) as shown in Fig. 3. Asian countries lead the most number of organic producers in the year 2011, more than three quarters of the producers were located from Asia (34%)  as shown in Fig. 4 ( Willer & Lernoud, 2013). India belongs to the 10 countries with the largest numbers of organic producers 2011 and it was ranked first as shown in Fig. 5.
 
 
Fig. 1.  Organic agricultural land and other organic areas in 2011 
Source: FiBL & IFOAM 2013

 

 
Fig. 2. The ten countries with the largest organic agricultural land in 2011 
Source: FiBL & IFOAM 2013

 

 
Fig. 3. The ten countries with the highest increase of organic agricultural land in 2011 (in hectares) 
Source: FiBL & IFOAM 2013
 
 
 
Fig. 4. Organic producers by region in 2011 
Source: FiBL & IFOAM 2013

 

 
Fig. 5. Ten countries with the largest numbers of organic producers in 2011 
Source: FiBL & IFOAM 2013
 
Organic wild collection areas play a major role in India and China. Production of final processed products is growing, although a majority of production is still fresh produce and field crops with low value-added processing, such as dry or processed raw ingredients. Aquaculture (shrimp and fish) on the other hand, is emerging in China, Indonesia, Vietnam, Thailand, Malaysia and Myanmar. Textiles are another important trend. Sector growth is now also driven by imports, and local markets have taken off in many of the big cities in the South and Eastern part of the region besides Japan, South Korea, Taiwan and Singapore. Kuala Lumpur, Manila, Bangkok, Beijing, Shanghai, Jakarta, Delhi, Bangalore and other cities are increasing internal consumption of organic products. Nine organic regulations are in place. In seven countries, work on national standards and regulations is in progress (FIBL, IFOAM, ITC, 2009).
 
Along with numerous rewards, natural farming and organic harvesting of produce in Asian countries have many merits. It could help earnings throughout countryside areas and minimize migration in the direction of overpopulated cities, since it is usually additional work extensively as compared to traditional farming and its goods have a tendency to procure increased prices. Wherever the arable area is usually hard to find, current organic farming approaches can certainly increase the products substantially. Farmers can certainly profit from speedily expanding requirement for organic food throughout Asia and other locations. Also, organic farming does not use harmful pesticides or is pesticide free and is particularly good for the children and their families. Just lately, Asian consumers are already wary about several food poisoning cases along with traditional food, and some have got to consider organic food, that happen to be assumed to become better since they comprise no or even fewer pesticide residues. In foremost industrialized countries where domestic organic production is deficient to meetdemand, there may be a strong requirement for imported organic goods. Conveying for export of organic foods to these kinds of market segments may well provide the very least industrialized Asian countries along with much-needed foreign currency exchange. Lastly, organic farming assists save productive natural resources such as garden soil, aquifers, watercourses and biological diversity. It could promote alleviating global warming through carbon appropriation.
 
Furthermore, Pura Organic Foods Limited (2010) summed up the reasons in choosing for organic food as quoted by an organic consumer organization as follows:  (1) It’s healthy. Organic food tends to contain higher levels of vitamin C, cancer-fighting antioxidants, and essential minerals such as calcium, magnesium, iron and chromium; (2) No nasty additives. Organic food doesn’t contain food additives that can cause health problems such as heart disease, osteoporosis, migraines and hyperactivity; (3) It avoids pesticides. More than 400 chemical pesticides are routinely used in conventional farming and residues are often present in non-organic food; (4) No genetic modification. Under organic standards, genetically modified (GM) crops and ingredients are not allowed; (5) There is not a reliance on drugs. Organic farming standards prohibit the routine use of antibiotics and growth hormones in farm animals; (6) There are no hidden costs. As taxpayers, we pay for chemicals to be removed from our drinking water – including the pesticide runoff from conventional farms; (7) There are high standards. Organic food comes from trusted sources that are inspected to ensure compliance with organic standards; (8) Organic methods provide for animals. Animal welfare is taken very seriously under organic standards; (9) It’s good for wildlife and the environment. The UK government has said that organic farming is better for wildlife, causes lower pollution from sprays, produces less carbon dioxide – the main global warming gas -and less dangerous wastes; and (10) It’s flavorful. Many people prefer organic food because they say it tastes better.
 
Nevertheless, Asian countries confront several challenges to the advancement regarding organic production. This organic current market remains the portion in the entire food industry, that has a current market shared ranging between two and several percentages higher practically in most developed countries and less developed countries. Organic farming, currently being knowledge intensive, will take well-functioning methods connected with investigation, instruction as well as extension that will raise production as well as keep down the costs. The particular involvement connected with farmer concerns is important when most of these methods are powerful. 
Assigning precise demand information through the organic food supply chain, starting from consumers back to farmers, presents additional challenges. Organic farmers face a progressively composite and higher market. In order to prosper, they must grow the accurate crops at the exact time and deliver at the right place. Nonetheless, even with entree to information almost what consumer’s need, organic farmers must struggle with the main tasks in finding markets, discussing terms, and bringing the product while concurrently preserving superiority and reliability. Temporarily, producers of organic food face difficulties related to safeguarding acceptable amounts of ingredients at reasonable prices, verifying that they are organic, and preventing contamination during processing. Retailers of organic food face issues of their own in maintaining consistency and quality in their supply, preventing cross-contamination, and guaranteeing authenticity and traceability (Dimitri and Richman 2000). 
 
Supply chain is composite bodies that assist numerous roles. They are institutional arrangements that link producers, processors, marketers and distributors. Supply chains are forms of industrial organization which allow buyers and sellers who are separated by time and space to progressively add and accumulate value as products pass form one member of the chain to the next (Hughes, 1994, Fearne, 1996, Handfield and Nichols, 1999) Applying the concept of supply chain in agricultural produce provides a lot of benefits among stakeholders. Iyer & Bergen (199) mentioned that agri -supply chains are also economic systems which distribute benefits and which apportion risks among participants. Thus, supply chains enforce internal mechanisms and develop chain wide incentives for assuring the timely performance of production and delivery commitments. 
 
“Supply chain thinking encourages a system-wide view of the chain – focusing as much on  the  linkages  between  technologically  separable  segments  as  on  the management  of  processes within those segments (King and Venturini, 2005).” Thus, an agricultural supply  chain  encompasses  all  the  input  supply,  production,  post-harvest,  storage, processing, marketing and distribution, food service and consumption functions along the “farm-to-fork”  continuum  for  a  given  product  (be  it  consumed  fresh,  processed  and/or from  a  food  service  provider),  including  the  external  enabling  environment (Jaffee et al., 2008)
 
The supply chain modeling depends on the current needs of the agricultural sectors. Like for instance, the supply chain modeling of organic agricultural products in the Thai multinational supermarket, applied the bidding model, selected suppliers model and contact farmers model.

METHODOLOGY

To understand the supply chain modeling of organic agricultural products in the Thai multinational supermarket, this study conducted an interview with the producers of the organic agricultural products in several locations. The interviews of the producers included vegetable plantations in Samudsakorn and Chiang Mai provinces.  There are eight middlemen who were interviewed for this study namely the Thai market in Northern Bangkok, Four-cornered Market in Bangkok, and six major markets in Chiang Mai province.  We also interviewed executives of three major supermarkets in Bangkok who distributed organic agricultural products. 

The producers of the organic agricultural products were asked about the production problems, the knowledge of how to grow the organic agricultural products and why quantity and quality of the production are not stable.  The middlemen were asked about the procurement processes of getting the organic products into their supply chain systems and how to distribute them to the market or the end consumers.  The major supermarkets were inquiring information about the procurement process, the logistics, and the internal and external systems which can guarantee that each supermarket has enough organic fruits and vegetables to supply to their customers. 
FINDINGS
Bidding model
 
The supermarkets are taking a concept of bidding that has been practiced in multi industries.  The supermarkets select several groups of farmers who grow organic fruits and vegetables then listed them in the bidding group. These farmers must adapt the hygienic requirements that were set by the supermarkets. The asking price of the crop is submitted to the supermarket (Fig. 6).  
 
If the bid is accepted, the price is locked in.  The bidding process usually is not interactive for the fruits but more interactive for the vegetables.  The suppliers usually submit the bidding before harvest time.  The participating farmers that accept this price will deliver the products to the supermarket distribution centers at the requested time or let the transportation companies pick the products on their plantations. Fig. 6 shows the bidding model.
 
 
Fig. 6. The selected suppliers’ model.

Selected suppliers model

A growing number of supermarkets are trying to reduce the searching costs of organic fruits and vegetables by dealing with pre-approved suppliers.  The supermarkets select suppliers who can supply the organic products such as fruits and vegetables to them all the time.  These selected suppliers, who also acted as the middlemen, are important for distribution from farms to supermarket because most organic agricultural products’ plantations are often small in size and production.

The selected suppliers have a responsibility to gather the products from various locations and guarantee the quality and the growing process of the fruits and vegetables that are delivered to the supermarket.  This approach is expected to substantially reduce the procurement cost, control the quality of organic agricultural products, and improve the efficiency of the supply chain by consolidating their purchasing power with selected suppliers who usually offer lower prices for higher volumes
 
The supermarket owners usually only order a single product from each supplier in order to spread the orders and create networks of suppliers in their procurement system. These suppliers must be able to supply the products to the supermarkets for the entire year.  Note that this is also about minimizing the uncertainty in the supply side.  This way, the supermarkets only have to deal with a small number of suppliers instead of having to deal with many farmers and small middlemen, resulting in lowering the searching costs. The selected suppliers’ model can ensure the quality and the consistent price of fruits and vegetables being delivered to the end consumers (Fig. 7). 
 
 
 
Fig.  7.  The Selected suppliers’ model.
 
Contract farming model

Contract farming is nothing new to the agricultural industry.  However, the contract farming model is usually a common practice in the food processing companies such as Frito-Lays that gives the potatoes to farmers in the Northern part of Thailand and guarantees to buy back the product at the agreed price.  

The contract farming model of the supermarkets is similar to the contract farming in the agricultural industry.  It also promises to take care of the farmers who produce the organic agricultural products to the supermarkets and promise to take care of the output from the farm.  However, it is more difficult to find the farmers who would be on the contract farming with the supermarkets because growing the organic agricultural products requires more work and attention than ordinary production.  The problems that these farmers who grow pesticide safe fruits and vegetables are facing include low outputs, unstable in the quality and quantity of production, high production cost, and the price of the pesticide is as low as same as the general products being sold in the market. Fig. 8 shows the Contract farming model.
 
 
 
Fig. 8.  The Contract farming model.
 
The potential of information technologies to improve the existing supply chain

Buhr (2000) suggests that there are at least three key issues that will drive the development, implementation and improvement of the information technology in the economics of agriculture.  These three key issues are the development of new information technology, the potential to trace previously no identifiable food attributes from conception to consumer and the changes in the market structure and firm organization of participants in the supply chain.

Bank and Bristow (1999) argue that the information technology alone may not help sustain the future success of agro-food supply chain.  The challenge facing the agro-food sector today is that the food quality and the complexity array of supply chains make producers to put more emphasis on quality.
 
Boston (2002) indicates that the organic farming industry that used to be small is now expanding.  It is not easy to control processes at the farms and the quality of the products.  As the industry grows, the suppliers of pesticide safe products are finding it harder to ensure the quality of their products and must create quality control and the information system that can link suppliers with the main customers such as the supermarkets.
 
It is true that information technology plays an important part in order to improve the existing supply chain of organic agricultural products.  Information technology will allow the information about the availability of organic products such as fruits and vegetables that are available at the given time to flow to the supermarkets’ computer database.  This information will help the supermarkets to be able to have an opportunity to set up a promotion or selling strategy.  For example, the supermarkets can pack organic agricultural products like vegetables that were available at that time together along with tofu, ground pork, and glass noodles as prepackaged products and sell them as a tofu soup prepackaged product.
 
The information technology will allow the Thai supermarkets to do many interesting things, like finding out which organic agricultural products are the most sought after, and which fruits or vegetables customers are buying.  Leveraging information regarding the consumers buying pattern can enable the supermarkets to close the loop with their stores in different locations, customers, suppliers, and the farmers.

CONCLUSION

Three models of the linking processes from the producers of organic agricultural products to the major supermarkets in Thailand have been discussed.  These models are bidding, selected suppliers, and contract farming.  The three models would be more functional if there is the involvement of information technology to link the information from farmers, middlemen, and the supermarkets.

It is clear that Information technology will help the supermarkets to control inventory and achieve better timely delivery.  Automatic reordering can be established to maintain organic fruits and vegetables on hand.  The suppliers will be able to get information regarding the increases or decreases in demand due to seasonal or market changes.  This will make it possible for farmers to plan ahead and the supermarkets to be able to fill in the right products with the right amount at the right supermarket locations due to the minimum supply of the organic products. Finally, the management approaches still needed to engage the farmers, suppliers, and the supermarkets in the effective implementation process to achieve world-class supply chain position.

REFERENCES

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