Analysis and Design of an IT-Based Supply Chain Management for Agriculture Products Distribution in Indonesia

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1 Analysis and Design of an IT-Based Supply Chain Management for Agriculture Products Distribution in Indonesia Henny Y. Zubir 1, Harry Prihanto 2, Dwi Handoko 2, Budi Sulistyo 3, Toshizumi Ohta 4 1 Dept. of Informatics Engineering, Institute Technology Bandung (ITB), Indonesia henny@informatika.org 2 Agency for the Assessment and Application of Technology (BPPT), Indonesia harry@ohta.cs.uec.ac.jp, dwih@inn.bppt.go.id, 3 Dept. of Industrial Engineering, STT Telkom, Indonesia bdo@stttelkom.ac.id 4 Dept. of Computer Science, Univ. of Electro Communications, Japan ohta@ohta.cs.uec.ac.jp Abstract The production and distribution of agriculture products in Indonesia largely possess a number of weaknesses and inefficiencies. A model of SCM network for agriculture products distribution in Indonesia, with the objectives of supporting production planning, optimizing distribution system, and providing better information resources, is introduced. The model is developed based on surveys on existing distribution systems in Indonesia and case studies performed on several developed countries. This paper describes an analysis and design of IT-based system for implementing such model. Keywords: Supply Chain Management, IT, Agriculture Products Distribution Introduction The production and distribution of agriculture products in Indonesia largely possess a number of weaknesses and inefficiencies such as unplanned and poorlymanaged production, as well as lengthy distribution chain. These problems arise, among others, out of such inherent conditions in the agriculture community in Indonesia as poorly-educated farmers and lack of information resources. An efficient production and distribution system is essential to improve the agriculture system in Indonesia and to reduce the products price. Supply Chain Management (SCM), which manages the entire chain of business processes from production to distribution, is deemed necessary in order to increase the competitive advantage of the country s agriculture products. In addition, to improve farmers skill on agriculture and its supporting technologies, a sustainable and easilyaccessible information resource on the production and distribution of agriculture is also essential. In this project, an IT-based SCM for agriculture products distribution in Indonesia is developed. It is envisioned that this system will promote a well-planned production, more efficient distribution, and better information resources for agriculture products in Indonesia. This paper describes the analysis and design of such system based on the model of SCM network that has been developed earlier. Analysis In this study, analysis was carried out on the existing conditions of agriculture products distribution in Indonesia. In addition, case study was also conducted on the experiences of several developed countries on the deployment of IT in their agriculture system. Agriculture Products Distribution in Indonesia In general, the distribution system of agriculture products in Indonesia involves several parties as below: a. Suppliers of supporting products, who provide products such as seeds, fertilizers, pesticides, machinery, and any other supporting goods and tools for farming; b. Farmers/producers, who directly involve in crops plantation; c. Collectors who collect products from farmers and delivers the products to market or wholesalers. They have considerable influences on the production and distribution of agriculture products in Indonesia since they play an important role in the distribution chain; Zubir, H.Y.; Prihanto, H.; Handoko, D.; Sulistyo, B. and Ohta, T. 197

2 d. Food Processing Industries which process fresh agriculture products into various kinds of processed food; e. Wholesalers, sell mass-based agriculture products, usually in wholesale markets, to retailers or, in some cases, directly to consumers; f. Retailers, sell products in lesser quantity directly to consumers; g. Consumers, the end of the distribution chain who consume the products. The common flows of product distribution and information system is described on Figure 1. The figure describes the transaction processes showing the flow of information from right to left and flow of products from left to right. The outside elements, which consist of the government, the community or society, and independent bodies, influence the system indirectly through such variables as policies, products demand, price, and technological aspect. It is identified that there are three categories of distribution mechanisms for agriculture products in Indonesia: common, government-ruled and order-based distribution system. Common distribution is an ordinary distribution system in which products are delivered through the typical chain from farmers to collectors, wholesalers, retailers, and consumers, respectively. This sequence is the most common type of distribution system in Indonesia. The governmentruled distribution system is an exceptional case in which the government directly involves in the production and distribution of certain products, such as sugar, rice, and crops. The government usually regulates the plantation schedule, the quantity of planted products, the distribution area, as well as the price. The order-based distribution is usually made through cooperation among food processing industry and farmers in which farmers directly sell their products to the industry. The existing agriculture system in Indonesia is considerably complex. There are several problems associated with the current systems, among them are: (a) unplanned production, with regard to such factors as quantity, schedule, and product variety; (b) hard to find supporting products; (c) lack of information and communication facilities; (d) poorly managed Figure 1 Distribution Flows of Agriculture Products in Indonesia distribution system such as distribution route and transportation means; (e) unstable prices; (f) low technology utilization; (g) poorly educated farmers; (h) unfavorable government rules and regulations. Case Study Japan Case. In Japan, agricultural product distribution has been diversified since In 1993, the Vegiful System was introduced for greeneries and fruits market to provide information processing for market administration and inter-market information sharing. The system was not directly involved in price determination, yet leave the market determines the price. Information Technology (IT) was first introduced to wholesale market in In Fukuoka, IT was implemented for optimizing distribution of greenery and fruit products between producers and wholesalers, while in Sendai the implementation was on the chain of fishery products distribution between wholesalers and retailers. The system that manages the entire chain from producers to wholesalers and retailers was implemented in Akita for fishery products. As a whole, the use of IT for agriculture products distribution is to optimize distribution costs without cutting distribution chain and to support information sharing and electronic transaction system. Private sectors also boost up IT implementation in agriculture by introducing e- marketplaces to support transactions at various points of distribution chain and providing added-value services. The United States and Europe Cases. The agriculture products distribution system in the United States and 198 Zubir, H.Y.; Prihanto, H.; Handoko, D.; Sulistyo, B. and Ohta, T.

3 Europe are already established. Application of IT in the distribution system is to support e-commerce transactions and as a source of information. Based on their contents, e-commerce transactions can be classified into three: production supports which serve Collector Retailer Consumer PPL (Farmer Advisor) Farmer Figure 2 Distribution Flow of the SCM Network transactions on such items as land, agriculture chemicals, veterinary suppliers, machinery, feed, and fertilizers; services which provide such services as online logistical, transportation, storage, banking, loan, insurance, and legal; and products for cattle, fish and fish products, rice, farm, and fresh flowers transactions. As information resources, IT applications provide information on things related to, among others: market, weather, specialist advice, management tools, and provide links to regulatory bodies. There are three models of e-commerce sites: e- marketplaces which are neutral to both buyers and sellers, e-distribution sites which serve sellers by removing and replacing existing distribution chain and e-procurement sites which serve buyers by aggregating online buyers and using volume to force prices down. Model of SCM Network The SCM network model consists of the SCM virtual organization as well as information and distribution flows existing on the network. The SCM virtual organization will comprise of all entities involved in any chain of the processes from production to distribution. The information flows identify information exchange among network entities, while the distribution flows indicate the flows of products. The SCM Network As mentioned previously, unlike those of developed countries, agriculture system in Indonesia is mostly performed in traditional ways. Farmers are typically poorly educated and, hence, do not have sufficient knowledge on scheduling and managing crops cultivation, dealing with collectors, and accessing adequate information resources. In addition, the agriculture products go through such complicated and inefficient route of distribution that, in turn, affect the price of such products. To lessen the above-mentioned problems, a virtual network for agriculture products distribution in Indonesia is proposed. The network takes into consideration the inherent and specific characteristics of agriculture system in Indonesia. The objectives of the network are: To promote production planning in agriculture; To optimize the distribution system; To collect and share information among network members There are two means to achieve the objectives, namely the Supply Chain Management (SCM) for ensuring efficient production and distribution and the deployment of IT to support communication and information sharing among entities involved in the chain. In the long run, the network is expected to result in cost reduction by cutting down distribution costs and eliminating losses caused by unplanned production. In addition, the network should be able to promote continuation and diversification of agriculture products as well as to improve farmers welfare. The distribution flow of the proposed SCM network is shown in Figure 2. The common distribution mechanism is adopted in order to utilize the existing network. Hence, the products from farmers are collected by collectors who sell the products to retailers, and subsequently retailers sell them to consumers. The other two categories of distribution systems are not yet included in the current model due to the highly dependence nature of such systems with other parties (government and industries). The proposed SCM network is shown in Figure 3. It consists of suppliers, farmers, collectors, retailers and an Zubir, H.Y.; Prihanto, H.; Handoko, D.; Sulistyo, B. and Ohta, T. 199

4 SCM virtual organization. The functions of an SCM virtual organization are: to develop a trusted network; to support market information system; to provide advise to farmers in management, farm planning, and farming technologies (through regional coordinator); to arrange an efficient distribution system for agriculture products Suppliers Farmers Collectors/ Distributors Retailers Regional Coordinators PPL (Farmer Advisor) Clusters Farmer Association SCM Organizer SCM Virtual Organization Figure 3 The SCM Network To establish a trusted network, a closed network membership will be applied. Any information related to agriculture and agriculture products distribution is shared among the network members with the SCM virtual organization acts as the information host. The organization also performs data analysis and administrative functions. An efficient distribution system is the key in reducing production costs. In this case, regional coordinators play an important role since they have tight relationships with both farmers and collectors. The roles of regional coordinators in SCM virtual organizations are: To provide technical advise to farmers; To provide information to farmers; To collect information from farmers and shared them through SCM. Information Flow Procedure In this model of SCM network, four primary flows of information are identified. The flows are listed below: Regional coordinator to SCM: provides information on price, demand, agriculture condition, product stock; SCM to regional coordinator: provides information on price, demand, and technical advice; Regional coordinator to farmer: provides information on price, demand, agriculture condition, and product stock; SCM to collector: provides information on wide-scale harvest projection Design of SCM Application Based on the model of SCM network described above, the design of SCM application is derived. The application is developed as an internet-based clientserver application to facilitate an effortless widespread deployment of application. In addition, the application will use open source platform in order to reduce the costs for development and operation. Information Processing The main inputs for SCM application are market demand and price information. In addition, experts advice in agriculture management is also provided as input to the application. The information processing engine will process all input information along with the information stored in knowledge base and database. The output for the application will consists of: Production planning which consists of, among others schedule, types of crops, region, etc. Distribution system which includes product market destination, transportation route and schedule, etc. Various supporting information such as weather report, expert advice, market demand, etc Application Interface The interface for application is required for interaction with other external systems such as suppliers, collectors, and retailers. Due to low deployment of IT on the side of supporting parties, the initial release of the application will not facilitate online interface with them. Instead, data will be entered into the system manually or 200 Zubir, H.Y.; Prihanto, H.; Handoko, D.; Sulistyo, B. and Ohta, T.

5 through web forms. To support an efficient communication among members of the network an e- mail system will be provided. Development Phases The project will be implemented in several phases, each of which shall produce a working prototype, to allow rapid deployment of the application. For the initial phase, the implementation will be focused on facilitating communication among PPL clusters (on behalf of the farmers) and providing supporting information such as market condition and expert advice. This also supports as introduction of the system into the agriculture community. On subsequent phases of the development, the system shall gradually be equipped with various tools for production planning and distribution optimization. Thus, the application is expected to perform more intelligence processing and deliver more advanced outputs. Pilot Project The initial SCM network will be implemented in two locations: Nganjuk and Lembang. The regions selected as the pilot project represent two different conditions of existing agriculture systems in Indonesia. The farming in Nganjuk is rather traditional in terms of agriculture management and farmers education compared to that in Lembang. In addition, Lembang farmers have already had a farmer association which will later be invited to join the network. This project will focus on the main products of each region, namely melon (Nganjuk) and tomato (Lembang). Table 1 describes targeted members of the network. Table 1 Targeted Members of SCM Network Member Lembang Nganjuk Farmer Tomato farmers Melon farmers Collector Farmer association Collector Distributor Farmer association Collector Retailer / Consumer Retailers/ Consumers in Jakarta Retailers/Consumers in Mojokerto, Surabaya, and Jakarta To develop the SCM virtual organization, links between members of the network should be established. Currently, the link between suppliers and farmers has already been established in Lembang in form of farmer association, while similar network does not yet exist in Nganjuk. On the other hand, neither farmers-collectors nor collector-retailer links have been established in both regions. Three regional coordinators in Nganjuk, Lembang, and Jakarta will be appointed. In Nganjuk, the coordinator consists of district-based PPL Clusters, which will be coordinated by one PPL Coordinator. The regional coordinator in Lembang will be handled by a Farmer Association which will replace the functions of PPL cluster. In order to obtain accurate information om market condition, a regional coordinator in Jakarta will perform market survey in wholesale markets. Conclusion and Future Works This paper describes a result of our research on the implementation of IT for agriculture products SCM in Indonesia. In this initial phase of the project, field and literature surveys on agriculture products distribution in Indonesia and in several developed countries. From this study, it is concluded that: Developed countries like Japan, the United States, and Europe have fully utilized IT in agriculture products distribution using various transaction and distribution models; Indonesia has unique problems in agriculture products distribution and IT infrastructure, thus a special distribution model is required. Based on this survey, a model of SCM network is developed that will promote a well planned production, more efficient distribution system, and better information resources for agriculture system in Indonesia. The network will use the existing distribution chain in Indonesia in order to get full support from all involving parties. There are several future works to accomplish our project, among them are: 1. Implement and promote the SCM organization, including the organization s financial flows; 2. Implement a suitable IT-based system for the SCM organization considering available infrastructure and human resource potentials. References Prihanto, H. and Ohta, T Implementation IT in SCM for Agricultural Products Distribution in Indonesia, in the Proceedings of APCC International Conference 2002, Bandung, Indonesia -, Directions on the Introduction of IT in Wholesale Market of Japan Agriculture Products. Wilson, P An Overview of Developments and Prospects for E-Commerce in the Agricultural Sector, European Commission Agriculture Directorate-General. Gumbira-Said, E. and Harizt Intan, A Manajemen Agribisnis, Ghalia Indonesia. Note of Contributor: This research project is partly funded by APT (Asia Pacific Telecommunity) Grant Zubir, H.Y.; Prihanto, H.; Handoko, D.; Sulistyo, B. and Ohta, T. 201