Managing Sourcing Farm Produce from Different Farmers - Assignment Example

Question a Wholesalers are able to extract 60% of the retail price of the goods because they are powerful suppliers of farm produce to restaurants and retail stores. Firstly, they are the only players in the field who aggregate farm produce from both mid-scale and large scale farmers. We are told they could manage scale and scope of product orders (Jang & Liu 2009). This ability to manage sourcing farm produce from different farmers ensured that they had variety of products at one place such that they could satisfy the diverse needs of their buyers. We are told: …one of the first main challenges for Chef Parsons was finding local sources that could supply enough ingredients to meet the demands of the restaurant (Jang & Liu, 2009, p.16). Furthermore we are also told that wholesalers could provide lengthier terms for payment which buyers are more likely to take against the shorter payment periods favored by small scale farmers. In the same light we can view farmers as being weak suppliers thus condemning them to a small fraction of the retail price. Firstly, they feared using information technology (IT) to support business transactions such as managing customer and inventory data. Secondly, farmers lacked a direct channel through which they could communicate directly to buyers. Thirdly, they had no solution to the rising interest and wage demands while competing against cheap food imports. When we analyze the scenario with respect to threat of substitutes we again see the farmer being more disadvantaged. Even though local produce was considered superior, imports had made food prices to be overall low in Canada thus constraining the ability of farmers to raise their prices. The increased demand for low-cost food had made demand to be more elastic because customers had more alternatives. Wholesalers on the other hand were not affected by this because they had gained the trust of retailers from years of relationship-building plus they had the supply chains necessary to serve the scale and scope demanded (Jang & Liu 2009). The emergence of disruptive technology in the form of hydroponics, vertical farming and genetic engineering techniques developed ways to decrease food production costs and minimize the need for farmland in cultivating crops. This coupled with the technology applied at the distribution level lowered the barrier to entry into farming and in effect lessened the ability of farmers to demand high prices for their produce. Also we notice that farming involved common technology and little brand franchise which increased the ease to enter into that industry (QuickMBA n.d.). Conversely, wholesalers were strengthened by the technology available at the distribution level to lower their costs and increase their bargaining power. We are also informed that years of relationship-building were required for trust to be built between the large restaurant chains with their suppliers. Such relationships are a barrier to entry into the wholesale business. From the context of rivalry, we can see that farming was faced with intense rivalry manifested through: high fixed costs (increasing interest and wage demands), highly perishable products (producer needs to sell goods as soon as possible), low level of product differentiation, high exit barriers and a diversity of rivals (small-scale, mid-scale and large scale farmers) (Pearce & Robinson 2007). The wholesalers capitalized on this intense rivalry in farming to increase their margins on the retail price at the expense of farmers. Seeing that rivalry was intense for the farmers, high perishability of their produce and lack of direct access to the end consumer, wholesalers in effect became powerful buyers. They had strong bargaining power because of their huge buyer volume and also because they could opt for substitutes in the form of imports and genetically engineered foods. Wholesalers were therefore able to obtain goods from farmers at the lowest possible cost. Unfortunately, the lack of alternative direct links to the local farmers and the need for diversity necessitated the large-scale restaurant chains to rely heavily on wholesalers to meet their product needs. Thus wholesalers were able to increase their margins on the retail price. Question b With the farmers skeptical of the potential of IT and the internet to increase their margins the wholesalers have continued to grow in strength and therefore steadily increase their profits relative to the farmers. According to Varian (2003): ... [Internet and] IT allows for fine-grained observation and analysis of consumer behavior. This allows for various kinds of marketing strategies that were previously extremely difficult to carry out, at least on a large scale. For example, a seller can offer prices and goods that are differentiated by individual behavior and/or characteristics (5). This effectively means that the internet increases supplier power for wholesalers because they are able to mass customize their products to the different mid- and large-scale retail chains they are supplying to. Furthermore internet has reduced fixed costs which has the effect of lowering the efficient scale of operation for many industries e.g. in Jang & Liu (2009) we are told that sophisticated online ordering systems had created more efficient communication throughout the supply chain, allowing for systematic and timely distribution. This reduces one of the huge costs incurred by wholesaler, i.e. inventory cost which eventually leads to increased margins on the price. We cannot forget also that the internet has improved supplier-customer intimacy through improved efficiency in communication. This intimacy could be substantial enough to increase switching costs and cause customer lock-in especially for the case of large-scale restaurant chains that must maintain consistency and quality. Varian (2003) says two distinct economic effects get involved here. First there will be price discrimination through reducing the spread of willingness to pay and then this will lead to increasing barriers to entry. Consequently, we will have fewer but powerful wholesalers who can bargain for better margins. The internet also favors globalization, here implying growth of a few strong global players with superior supply chains that enable sourcing of products from any part of the world and similarly distribution to anywhere in the globe. Rivalry will thus be decreased since only the strong will be able to survive. Wholesalers are the more likely to adopt this strategy than farmers which is why we expect their margins to continue to grow in comparison to that for farmers. Question c Firstly, the wholesaler provides the end customer with a wider choice / variety of farm produce that the farmers can possibly offer. This is because wholesalers can stock their stores with a wide spectrum of products from organic, to genetically-engineered, to local, to imports. Secondly, wholesalers can furnish the end customer with information regarding the farming methods used, the origin and carbon footprint of the products. This is vital because today’s consumer utilizes such information to guide his/her choice. Wholesalers are therefore able to influence consumer opinion on certain products through such literature. Thirdly, through use of efficient technology and effective distribution networks wholesalers are capable of lowering overall food prices. This is further fostered by the provision of cheap imports as substitutes to local produce. Also, wholesalers are able to ensure that end consumers have access to seasonal agricultural products because of their wide sourcing networks. Finally, through packaging and branding wholesalers can make it easier for end consumers to identify with certain products. References Jang, A & Liu, R 2009, For the Love of Good Food: The Platetrace Project (A), Ivey Management Services, Ontario, Canada. Pearce, J. A & Robinson, R. J 2007, Strategic Management: Formulation Implementation and Control, 10th ed., McGraw-Hill, Irwin. Varian, H 2003, Economics of IT, viewed 11 May 2010, QuickMBA n.d., ‘Porter’s 5 forces’, Strategic Management, viewed 11 May 2010, Read More