“Jon, if Mars wants cocoa, it will get cocoa – there is no chocolate shortage.”
The above statement from one of the industry’s top commodity thought leaders got the wheels spinning in my head.
It also reminded me of the post I wrote many years ago – Public Sector Procurement Practice and the Principles of External Economies, Clustering and the Global Value Chain. Specifically, the following excerpt:
“According to Humphrey and Schmitz (2002), “value chain research focuses on the nature of the relationships between the various actors involved in the chain, and on their implications for development.” In this regard, they emphasize that governance is an essential element of a value chain in that coordination is required “to take decisions not only on ‘what’ should be, or ‘how’ something should be produced but sometimes also ‘when,’ and ‘how much’ and even at ‘what’ price.” (Note: the same questions that apply to production can also apply to purchasing decisions.)
While coordination may occur through arm’s-length market relations or non-market relationships,” it is the latter that applies best to government procurement practices. In the area of non-market relationships, Humphrey and Schmitz identified “three possible types of governance; a) network implying cooperation between firms of more or less equal power which share their competencies within the chain; b) quasi-hierarchy involving relationships between legally independent firms in which one is subordinate to the other, with a leader in the chain defining the rules to which the rest of the actors have to comply and c) hierarchy when a firm is owned by an external firm.”
The Mangetout Factor
In a lecture I gave at eWorld 2010, my case reference was Tesco’s control of mangetout pea production—which was a big deal at the time. I talked about the Humphrey and Schmitz Governance model, in which the larger player used its considerable weight and influence with local mangetout farmers, which had many wondering if it had crossed the line between fair influence and market control.
Like mangetout, is cocoa really a “controlled” commodity?
The Truth About Orange Juice
I do not dispute that climate and disease play a central role in rising orange juice prices. However, this surely isn’t the first time that these external factors have had an impact.
For example, I remember my father, who was a teenager during the Great Depression, talking about the Dust Bowl and its impact on agriculture. What’s happening in Brazil and other orange-producing regions is not a one-time “where is this coming from” event. In short, is this shortage solely due to an unanticipated “force majeure” event or vertical supply chain mismanagement?
In a recent article by Jas Kalra, PhD MCIPS MAPM, the following excerpt stood out for me: – https://bit.ly/3xrC826
“Anticipating shortages, companies such as Coldpress Juices maintained a safety stock in 2023 and secured contracts with suppliers until December 2024. Arrangements like these create a level of certainty for everyone in the supply chain.”
So, Coldpress is a relatively small company. How did they see it coming to position themselves to lock in prices until December 2024?
Kalra then makes the following observation regarding preventability:
“Recent evidence suggests that downstream businesses (wholesalers and retailers) in the agri-food supply chain invest more in digital and other technology than smaller upstream businesses such as farmers, small- and medium-sized enterprises, co-operatives and smallholders. But supply chain innovation requires progress throughout the network. This means that wholesalers and retailers in particular would need to absorb the initial cost of any investment.”
The above excerpt brings us back to the question of governance and control of the supply chain and the statement that if Mars wants cocoa, it will get cocoa.
If the downstream businesses invest in the upstream businesses’ technological evolution that could prevent future disruptions, what impact will that have on the governance model? Under which Humphrey and Schmitz’s Governance model will said investment be made, and will it make more economic sense than simply letting nature run its course and navigating through the temporary “rough seas” in which the orange juice market currently finds itself?
30
Procurement Insights
Orange Juice, Cocoa, and Vertical Integration
Posted on June 20, 2024
0
“Jon, if Mars wants cocoa, it will get cocoa – there is no chocolate shortage.”
The above statement from one of the industry’s top commodity thought leaders got the wheels spinning in my head.
It also reminded me of the post I wrote many years ago – Public Sector Procurement Practice and the Principles of External Economies, Clustering and the Global Value Chain. Specifically, the following excerpt:
“According to Humphrey and Schmitz (2002), “value chain research focuses on the nature of the relationships between the various actors involved in the chain, and on their implications for development.” In this regard, they emphasize that governance is an essential element of a value chain in that coordination is required “to take decisions not only on ‘what’ should be, or ‘how’ something should be produced but sometimes also ‘when,’ and ‘how much’ and even at ‘what’ price.” (Note: the same questions that apply to production can also apply to purchasing decisions.)
While coordination may occur through arm’s-length market relations or non-market relationships,” it is the latter that applies best to government procurement practices. In the area of non-market relationships, Humphrey and Schmitz identified “three possible types of governance; a) network implying cooperation between firms of more or less equal power which share their competencies within the chain; b) quasi-hierarchy involving relationships between legally independent firms in which one is subordinate to the other, with a leader in the chain defining the rules to which the rest of the actors have to comply and c) hierarchy when a firm is owned by an external firm.”
The Mangetout Factor
In a lecture I gave at eWorld 2010, my case reference was Tesco’s control of mangetout pea production—which was a big deal at the time. I talked about the Humphrey and Schmitz Governance model, in which the larger player used its considerable weight and influence with local mangetout farmers, which had many wondering if it had crossed the line between fair influence and market control.
Like mangetout, is cocoa really a “controlled” commodity?
The Truth About Orange Juice
I do not dispute that climate and disease play a central role in rising orange juice prices. However, this surely isn’t the first time that these external factors have had an impact.
For example, I remember my father, who was a teenager during the Great Depression, talking about the Dust Bowl and its impact on agriculture. What’s happening in Brazil and other orange-producing regions is not a one-time “where is this coming from” event. In short, is this shortage solely due to an unanticipated “force majeure” event or vertical supply chain mismanagement?
In a recent article by Jas Kalra, PhD MCIPS MAPM, the following excerpt stood out for me: – https://bit.ly/3xrC826
“Anticipating shortages, companies such as Coldpress Juices maintained a safety stock in 2023 and secured contracts with suppliers until December 2024. Arrangements like these create a level of certainty for everyone in the supply chain.”
So, Coldpress is a relatively small company. How did they see it coming to position themselves to lock in prices until December 2024?
Kalra then makes the following observation regarding preventability:
“Recent evidence suggests that downstream businesses (wholesalers and retailers) in the agri-food supply chain invest more in digital and other technology than smaller upstream businesses such as farmers, small- and medium-sized enterprises, co-operatives and smallholders. But supply chain innovation requires progress throughout the network. This means that wholesalers and retailers in particular would need to absorb the initial cost of any investment.”
The above excerpt brings us back to the question of governance and control of the supply chain and the statement that if Mars wants cocoa, it will get cocoa.
If the downstream businesses invest in the upstream businesses’ technological evolution that could prevent future disruptions, what impact will that have on the governance model? Under which Humphrey and Schmitz’s Governance model will said investment be made, and will it make more economic sense than simply letting nature run its course and navigating through the temporary “rough seas” in which the orange juice market currently finds itself?
30
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