With the rapid development of competitive modern retail markets over the last 10 years, some suppliers to supermarkets have attempted to cut down marketing chains by involving farmers directly in supply chains. However, this strategy failed because farmers breached contract agreements. A breach of contract is a great loss to a supermarket supplier in terms of the investment made, technical assistance given, as well as its affect on the supplier's reputation. Contract breaching generally happens because the supplier cannot always offer the highest price to farmers. One partnership system which has operated since 2003 and successfully brings farmers into direct negotiation with the main modern retailer (such as Carrefour) was a partnership between Bimandiri (a specialized supplier to modern markets) and an off-season mango farmer's group, KUBM (Kelompok Usaha Bersama Mandiri/Self-help Collective Business Group) in Pemalang, Central Java.
The innovation in the mango supply chain
Farmers in Pemalang have adopted off season mango flowering since 1995. Even with technology innovation for off season mango, which enjoys premium prices at the consumer's level, mango farmers in Pemalang still resorted to the traditional marketing system, the tebasan system, in which they do not reap the benefit of price premiums. Such a selling system, benefits only the buyer, collector (tengkulak) or wholesaler, who have better knowledge or market information and capital. Under such system the farmers are price takers - they realize their weak position but they have no other alternative.
An institutional innovation, a 'transparent margin system', was introduced by Bimandiri, a dedicated wholesaler to supermarkets. The system is basically a partnership between Bimandiri and mango farmers. It is based on transparency and mutual trust. All parties involved in this system are aware of the margin they earn. Bimandiri gets a fee of 5 per cent from the total sale of mangoes. In return, they provide a service to the farmers including the provision of a guarantee on the quality and quantity of the product and all liability that may occur. The services includes the introduction and testing of new varieties, provision of agricultural inputs in terms of soft loans, quality control, accounting, and contract negotiation with buyers. The terms and operation of the partnership also indirectly affects other mango farmers via features such as an openness of information on technology, price and marketing opportunities for farmers in rural areas.
The transparent margin system generates continual institutional change in the Pemalang area. Firstly, farmers who used to sell their products individually changed to selling in groups. Secondly, the informal market for mango after harvest (open market based negotiation) changed to become a formal market (contract). Evidence shows that the farmers following formal markets tend to develop their farming faster than informal ones. Through the partnership system, the KUBM group has been able to expand its planting area, from 36 hectares (4,680 trees) to 45 hectares (5,800 trees) within only one year. In generating an innovation, there are two processes at work: the main process (core process) and a process that makes the innovation happen (enabling process). The concepts behind core process are idea generation, product innovation, processes of innovation and acquisition technique, while enabling processes are leadership, systems and tools and other resources (Chiesa et al., 1996). The output of these processes is competitiveness. This was done by Bimandiri in order to beat its competitors. Bimandiri carried out a benchmarking with KUBM farmer group.
Farmers' inclusion and exclusion
Factors that encourage farmers in the KUBM group to adopt the innovations are the capability and willingness to change in response to the demand of modern markets. The group's capability in making the change depends on the skill, competence, and capacity of each farmers in the group.
Bimandiri's motivation to collaborate with KUBM mainly stems from the fact that the group possesses the basic capability to adopt the innovation. The basic capability which Bimandiri first looks for from farmers is the skill of generating the off season mango. The members of KUBM were pioneers in the off season mango technology. Bimandiri also likes to collaborate with farmers that are capable of expanding their harvest volume. Members of KUBM are owner-operator farmers who are also managing other farmer's mango farms; hence they have capability to expand their supply volume when needed. Another character that Bimandiri is looking for from farmer is a strong commitment and responsibility. Syngenta Company, a major inputs supplier in the country recommended KUBM as a trustworthy group.
The transparent margin system has encouraged farmers to establish a co-operative formation through five management steps: learning, steering, forming, implementing and developing. The farmers that are adaptable to change will survive, while those who are not will be excluded.
In order to succeed in the innovation process, every stakeholder involved must be able to manage points of critical change. Stakeholders involved in the transparent margin partnership system inhabit three levels. Level 1 stakeholders are directly involved in the change process: farmers, the KUBM group, management of KUBM, Bimandiri and Carrefour. Level 2 stakeholders are indirectly involved in the change process: local market actors, central market actors, and field extension agents. Level 3 stakeholders are not involved at all in the change process, for example local government, field extension officers, Sygenta and other private parties.
The actors at Level 1 mobilized, responded and made necessary changes. They actively played roles in the innovation process, particularly farmers of the KUBM group, management of KUBM, and Bimandiri (Carrefour did not take part in the innovation process). The KUBM group supports the management of KUBM by continuing innovation and supplying product continuously to the management. Responsibility and commitment of the KUBM management was an important enabling factor in overcoming financial problems encountered by the farmers. However, the actors at Levels 2 and 3 did not contribute solutions to the problems encountered in the innovation process. Level 2 made a change, but only on quality handling. At Level 3, stakeholders responded appropriately to changes at Levels 1 and 2 but did not make any change themselves. In this case, local government did not play role in both inclusion and exclusion processes.
For farmers and KUBM management, administration of farm inputs, labour cost, technology, product specification, distribution, marketing, financial assistance, subsidies, organization, and regulation/policy have been handled by Bimandiri in its roles as the dedicated supermarket wholesaler. In addition, Bimandiri has enabled farmers to carry out direct negotiation with Carrefour.
Interestingly, the analysis shows that inclusive farmers perceived subsidies as relatively unimportant; and so did Bimandiri. This indicates that farmers never felt direct benefit from the government's subsidies. In fact, some farmers often observed that subsidies and the aid programme disturbed the farmers' ability to organize themselves as a group. Bimandiri and Carrefour perceive that government's subsidy is not required as long as farmers are committed to the agreement in the partnership because the agreement will prevent high transaction costs. Socio-cultural factors are not considered as problems since farmers, KUBM management, Bimandiri and Carrefour completely comprehend each others' characters and role in facilitating the exchanges.
From the included farmer's point of view, the role of Bimandiri and Carrefour was to provide advice as well as information and (a set) price, in effect the role was providing marketing strategy and market prediction. Basically, Bimandiri had assisted farmers in selling their product to modern markets. It also indicates that strong trust has been developed in the partnership; farmers could deliver mangoes to Carrefour without hesitation and agree to the price determined by the retailer. The specialized wholesale provider is very important for farmers because Bimandiri provides advance funds (before the retailer pays), technical assistance, information and market knowledge. This is consistent with Mc Fadzean et al.(2005) who stated that the entrepreneur is not only looking for financial gain but also other kind of gains. Bimandiri and Carrefour are considered pioneers in systems that enable farmers to capture market opportunities. The relationship among stakeholders in the partnership has been growing since farmers have demonstrated a higher commitment to deliver mangoes to Carrefour through KUBM. The management system in the partnership was perceived as easy to understand and of benefit to all parties involved. This condition could be sustained if an open and transparent communication among actors involved is maintained.
Good management was the second most important factor in the partnership's success because good management results in efficient planning, organizing and monitoring. In terms of marketing policy, Bimandiri provided and guaranteed farmers a production channel to the market. This situation has brought farmers to the face of competitive markets. However, farmers must commit themselves to producing the best quality mangoes. Farmers comply with the requirements of the partnership because of the high price incentives for quality, and quick payment. The system is becoming very important to farmers escaping from the capital loan trap of local traders. In terms of product quality, Bimandiri has primarily functioned as a guarantor of quality standards and quantity fulfilment.
Impact of the innovation
In general, the partnership has given farmers the following benefits: increased income, market guarantee for the product, higher than traditional markets price, faster payment and better access to market information. A change in physical flow occurred where the marketing chain was shortened, and the product consigned was changed. Through the KUBM group farmers can now enter into partnership with Carrefour. A change in information flow occurred: information about prices, market opportunities, quantity, quality, consignment schedules, and the agreement between the group and Carrefour are now available and transparent to all parties. Additional information flow such as information about market opportunities provided by Carrefour was perhaps meant to maintain punctuality of consignment delivery from the suppliers.
A change in flow of knowledge occurred in which innovation and know-how (resulting from quality supervision by Bimandiri who was responsible for guaranteeing the quality, quantity and continuity which enabled the farmers to have direct access to the Carrefour Distribution Centre) became available.
A change in capital flow occurred in which Bimandiri provided reserve funds to the group (with a 5 per cent management fee). This situation proves that capital aid from the government was not the main factor for a group's success. The most important thing was member's commitment to manage this aid prudently.
This contract system may position the KUBM as an agent for Carrefour and also an agent for the farmers, whereas Carrefour acted as the principal. The principal could not observe the behaviour of its agent, and it was with the help of Bimandiri that the partnership could come about. Bimandiri indirectly caused a change in know-how and capital. The network venture increased the company's social capital through increases in access to information, its assistance technique, and financing support (Burt, 2002).
Through Bimandiri KUBM farmers were given access to the modern market, and the farmers had a higher bargaining position in price negotiation with Carrefour. Additionally, there was improvement in organization and management of KUBM, resulting in further trust from Carrefour, consistent with network theory, i.e., collaboration is based not only on profit motivation, but also on power and trust (Uzzi, 1997).
Institutional analysis of the governance of supply chain divides the actors in three roles, namely, legislative governance, executive governance and judicial governance (Kaplinsky, 2000). Prior to innovation, these were all executed by the dealer in the traditional market. After the innovation the three roles were no longer centred on the dealer, but were spread and implemented, among other things, by Bimandiri as judicial governance, Carrefour as legislative governance, and KUBM as executive governance.
Supply chain champion
Bimandiri is a model of the supply chain champion, a venture where priority in business operation is given not to a short-term highest profit level, but to market development capability, long-run profit and growth. Bimandiri has positioned itself as an entrepreneur which advocates innovation, not as a trader. Suppliers like Bimandiri are needed by Carrefour as reliable partners in following changes in very dynamic markets (McGrath, 1996).
Entrepreneurs always engage in one or several activities such as: organizing and making use of the right resources to produce and market new products or services; co-ordinating contract arrangements between their partners and partner's suppliers; arranging the right organizational structure and culture to develop and manufacture new products or services; responding to market deficiency with additive resources in the absence of a market and provide contact between buyer and seller at different locations. It appears that Bimandiri fulfils almost all of the above categories which makes it a supply chain champion.
From the point of view stakeholders' risk taking, the KUBM farmers avoided risk by surrendering mangoes to KUBM management. The KUBM management may be categorized as a self-insured type of risk taking agent, because the KUBM management kept reserve funds when mango prices declined, but withdrew funds when mango prices were favourable. Bimandiri shared the risk, because it received 5 per cent management fee without going into production itself, another characteristic of supply chain champion. On the other hand, Carrefour mitigated risk by expecting quality and punctual product continuity. With regard to the transparency dilemma, in this case, there was a tendency for KUBM to engage in poaching risk, because the resources it got benefited only the KUBM farmers or the KUBM management.
Potential replication of innovation
The business partnership model implemented by Bimandiri and KUBM is the best practice in anticipating changes in procurement decentralization policy carried out by the modern retail market. The transparent margin system is a form of co-innovation formed as the result of the KUBM and Bimandiri strategic alliance in the mango supply chain. The continuity of this KUBM-Bimandiri partnership is determined by strong commitment and trust of the parties, institutional marketing transformation, innovation learning, and built-in risk management in the partnership in question, and the role of the village production organization which is based on the marketing value of marketed product.
To replicate the success of the transparent margin system, the Government could take the following steps:
- Search for champions from the entrepreneurs in the supply chain of agricultural commodities to modern retail markets. The champion should be an entrepreneur, like Bimandiri, which possesses corporate entrepreneurship necessary to develop a co-innovation creation system with its partner. In identifying champions, the Government may collaborate with research institutions and universities.
- Provide an incentive to champions to replicate institutional marketing transformation. The incentive could be ease of access to funding facilities in accordance with the characteristics of the system of modern market trade, like factoring, investment development funding and working capital funding
- Facilitate the formation of multi-stakeholder organizations in particular those that carrying out monitoring and advocacy of partnership processes in the modern retail market business system.
Conclusion and policy recommendation
The transparent margin partnership system is a co-innovation of a marketing institution. It gives farmers, direct access to the supermarket via support from Bimandiri, the value chain champion in the form of quality assurance, continuity of supply, technical assistance, and provision of bridging capital to farmers. There are no product ownership changes (no exchanges) within the marketing institution. Exchanges are only made between the farmer group KUBM and Carrefour, the modern retailer. Bimandiri receives a commission of 5 per cent from the sales made in the partnership.
The transparent margin system, an institutional evolution, has created dynamic changes at the producer's level. The system has encouraged farmers who previously worked individually to work in a group, thus and transforming the farmers' relationship with the market, from spot market based to contract-based negotiation.
The motivation of the specialized supermarket wholesaler to develop the partnership system is a better ability to respond to the demands of a dynamic market which can be achieved only by organized farmers who guarantee product quality and continuity.
Factors that support farmer's inclusion in the institutional innovation of transparent margin system are farmer's ability, willingness, and trust in adapting to a change in rules of the game created by dynamic markets, and an incentive system that supports individual as well as group business development.
Farmers gain from the transparent margin system by higher incomes, receiving the highest value added in the chain, and gaining a market guarantee and a guarantee of a higher price (for better quality). Additionally, the system also gives the farmer a faster payment after harvest and provides access to market information.
Sustainability of the transparent margin partnership system is dependent on a strong commitment and trust of all agents involved, institutional transformation, an innovation learning process, risk management built into the system, and rural production organization. The government can play role as a catalyst for replicating the process of institutional innovation by giving incentive support to the supply chain champion and other supporting agents, according to the need of dynamic market development.
Referring to the success of Bimandiri, the supply chain champion, in providing market access to small producers of mango who are members of the KUBM farmer group to Carrefour without any subsidy or support from the government, it is suggested that the government should not intervene in the working partnership. However, policies to systematically promote and support the partnership system might be devised. These include:
- Give an incentive (such as a tax deduction, technical support, etc.) to an agribusiness company, supermarket supplier or food industry which would like to take a leadership role to become the supply chain champion that creates a partnership with small farmers with a transparent margin system.
- Provide training for rural production organizations in several technical areas such as Good Agriculture Practice (GAP), food safety certificate (HACCP) and management.
- Facilitate provision of financial system that includes factoring, investment and working capital, which supports actors in a dynamic market.
- Provide incentives to facilitate the development of a public-private partnership in the area of research and development for agribusiness supply chain integration.
(References available upon request)