The history of the innovation against the evolution of the supply chain: explaining inclusion or exclusion

4.3. The history of the innovation against the evolution of the supply chain: explaining inclusion or exclusion

''As stated above, inclusion or exclusion does not refer to static outcomes as observed in one point in time. We rather think in terms of the capacity of groups of small-scale producers and rural SMEs to remain viable agents in rapidly and continuously changing supply chains.''


 * Berdegué et al. (2005) have argued that the restructuring of agri-food supply chains dominated by modern forms of retail is characterized by the emergence and continuous evolution of procurement systems in terms of: (a) specialized wholesalers, (b) preferred suppliers, (c) centralized procurement, and (d) private grades and standards.


 * As restructuring of markets emerge and continuously triggers changes, the attributes of the product and the conditions of the commercial transaction –or contract - are being redefined.

Illustration of changes in incentives faced by farmers in restructuring markets A new set of standards established by a processor of potato chips may mean that a ‘potato’ is no longer just any potato, but rather a potato of a certain variety, a given size, produced with Integrated Pest Management techniques, and subject to stringent limits on damages or phytosanitary condition. Or, a new Distribution Centre (DC) opened by a major retailer may lead to a new centralized procurement system and a complete redefinition of contract conditions. Hence, from a given date on, suppliers must suddenly be able to deliver at least 1 ton of such potatoes per week, each and every week of the year, in standardized boxes, and labelled with bar codes so that they that can be processed by the new computerized logistics of the state-of-the-art DC. Even less drastic changes, such as the celebration of an exclusive supply relationship between a fast-food chain and one or two specialized wholesalers to supply the vegetables needed for their hamburgers in all of their 75 stores, could imply that an association of small-scale lettuce growers suddenly looses their contract for 6 crates per day which they had carefully developed with 2 of these fast-food stores.

Illustration of changes undertaken by farmers to respond to changes in the incentives they faced

The leading dairy processors in Southern Chile decided in the early 1990s that in order to survive in a liberalized economy they would need drastically to improve the quality of the milk they received from their suppliers. Private standards were put in place for hygiene, fat, protein content, stability of supply, and other factors. Over the next years, small dairy farmers had to (a) organize in local associations, and (b) establish milk collection centres with cooling tanks. Further, each farmer had to (c) invest in new pastures and soil fertility to have enough feed to sustain production through the winter months. Since the processor fixed differentiated prices according to the performance vis-à-vis the new standards, the farmers’ associations also had to (d) implement a record keeping system and (e) monitoring and enforcement procedures in order to pay each member according to his/her compliance with the new rules.

These examples show that the continuous evolution of the dynamic supply chains provides strong incentives to suppliers -including small-scale farmers and rural SMEs- to undertake successive and never-ending changes in the areas of technology, management and inter-firm organization, all of which have significant financial implications.

It is very likely that the innovation, which is at the centre of the case study, has gradually evolved side-by-side with the evolution of the supply chain and in response to the varying conditions as imposed by restructuring markets. Actors such as public institutions, farmers’ organisations, development agencies and/or NGOs can also have played a significant role in the emergence and evolution of the innovation. Hence, in order to understand the ‘why’, ‘how’ and ‘who’ of the innovation, one has to describe the history of the innovation against the backdrop of the evolution of the supply chain.

Construction of innovation timelines (Duthwaite and Ashby, 2005) is very useful to this end. Innovation timelines highlight the main events and the critical stages in the development of the innovation vis-à-vis the evolution of the supply chain. It stresses the changes in the incentives and the role played by each actor in responding to these changes. In our framework, inclusion that is the capacity of small-scale producers and rural SMEs to sustain their participation in a given supply chain and restructured market as it evolves is determined by the ability to undertake the technological, managerial and organizational changes (with their financial implications) required as a consequence of the continuous transformation of supply chains.

In the Chilean example above, only a fraction of the associations formed by small dairy producers was able to survive beyond two or three years. Many of the groups collapsed because their members failed to put in place a system of continuous learning and innovation to respond day in and day out to the ever-changing conditions imposed by the dairy processors who dominate the Chilean market. Sometimes failure derived from the members’ inability to agree on what changes should be implemented, or how costs and benefits should be allocated between the members or between the members as individual farmers and the association as an enterprise in its own right. Other times, the required changes were too complex or too expensive, and the members did not have the financial, managerial or technological capacity to undertake them. Often, the speed of the change process was too fast, and many small farmers could not keep up with what at times became a frantic rhythm of almost Darwinian selection. Unfortunately, as in many other examples, exclusion became the norm, and only a minority managed to remain included as viable small dairy farmers in this dynamic market.

To explain inclusion, it is vital that the case studies document for each critical stage in the innovation timeline:

And whenever possible:
 * 1) This were the changes in the attributes of the product and in the conditions of the commercial transaction, and how were they decided? Did some negotiation take place? Whose stakeholders were involved in it?
 * 2) What were the specific technological, managerial, organizational and financial changes that the small-scale producers and rural SMEs had to implement?
 * 3) What were the critical skills, competences and capacities that allowed the farmers to implement these changes? Why did they manage to sustain their inclusion in the chain while others were excluded?
 * 4) What role did public policy, private business models, collective action by smallholders, and/or intervention by development agencies play in this? Did these drivers of innovation change the set of incentives facing the small-scale farmers? Or did they strengthen the farmers’ capacities in facing these incentives? Did they provide means to improve farmers' risk management capacity, technological dissemination and apprenticeships among farmers, farmers' access to information, farmers' negotiation power, and/or economies of scale?
 * 1) How did small-scale farmers and farmers’ organisations, when applicable, spell out the situation they faced into stakes, objectives, constraints and opportunities?

The following is a hypothetical example of such timeline:

Date	Supply chain event	Innovation event

August 2002	Tomato Sauce Inc. establishes mandatory quality standards for tomatoes supplied to the firm. A major requirement is year-round supply. A main consequence is the need for drip irrigation. 100 small-scale tomato farmers hold meetings asking the firm to delay introduction of the new standards. Eventually, it is agreed to involve the support of “Do Good NGO” which runs a rural finance program that could provide the needed investments. Tomato Sauce Inc. agrees to hire two agronomists to help the farmers and the NGO to set up drip irrigation in 25 farms as a pilot program that could be expanded if successful. January 2003	Tomato Sauce Inc and NGO evaluate three different options for drip irrigation system	“100 Farmers” Association is established; process starts to register it as a formal organization. April 2003	Enforcement system for the new standards defined and implementation schedule agreed upon	Consortium between the association, the firm, and the NGO established, with responsibilities defined for each party June 2003	Drip irrigation installed in first 25 farms	Training program established with 100 farmers, using the 25 initial farms as learning sites. “Do Good NGO” provides 5 year loans to finance up to 85% of initial investment October 2003	First harvest of tomatoes meeting new quality standards	Consortium revises the implementation schedule and agrees to speed it up as most farmers are now demanding to participate in the program