Quality and co-ordination in supply chains - the case of pork chains in the Netherlands

Transcription

1 Quality and co-ordination in supply chains - the case of pork chains in the Netherlands Nel Wognum, Mark Wever Wageningen University, Department of Social Sciences, Management Studies Group, Hollandseweg 1, 6706 KN Wageningen, the Netherlands, [nel.wognum;mark.wever]@wur.nl Abstract To satisfy consumer demands co-ordination between member organisations of a supply chain is necessary. Various co-ordination mechanisms exist, like standardisation of products or processes, quality management systems, chain integrators, or inter-organisational information systems. In this paper we will investigate which type of co-ordination mechanisms are suitable to use in connection with particular quality choices. Our approach is tested for two rather different pork chains in The Netherlands: one large, open, chain, and one small, closed, chain. A research agenda is proposed for investigating similar relationships in other chains in Europe. By relating such relationships to performance cross-border knowledge exchange and learning is made possible. The work is part of the FP6 Integrated Project Q-Porkchains. Keywords Supply chain integration, information systems, quality management, supply chain governance 1 Introduction Increasingly, the process of producing products and services that satisfy consumer demands is performed by more than one organisation, each contributing part of the final product or performing one stage of the production or realisation process. In a supply chain organisations perform different stages of the process of transforming raw material into final products or of the process to realise services in accordance with customer requirements. Co-ordination between supply chain members is necessary to achieve a desired level of efficiency and effectiveness. Co-ordination can be defined as managing dependencies between activities [Mallone and Crowston, 1994]. Several co-ordination mechanisms to manage these dependencies can be found in the literature, like standardisation of processes, output, or knowledge and skills [Thompson, 1967; Mintzberg, 1979], co-ordination by direct supervision [Mintzberg, 1979] or plan [Thompson, 1967], or mutual adjustment, requiring e.g., mechanisms for enhancing information processing capacity of organisations [Galbraith, 1974]. Selection of co-ordination mechanisms depends on several situational aspects, among which task uncertainty and organisational size [Van de Ven et al., 1976]. Another aspect is the desired quality level of products and processes as has been recognised in quality management approaches like CMM (Capability Maturity Model) in which different sets of co-ordination mechanisms can be found at different maturity levels [see e.g., Bate et al., 1995]. A particular quality level choice influences the task uncertainty involved and dependency between activities. For example, to achieve an average quality level, standardisation of output might be suitable, while for high quality levels, mutual adjustment in combination with standardisation of processes and co-ordination by hierarchy might be needed. In a supply chain, the situation is complex, because activities are performed by different organisations, which perform different stages of the overall production or realisation process. In this paper, we will especially focus on relationships between quality management approaches and mechanisms to co-ordinate the different supply chain actors. Our application area is the pork

2 supply chain. We aim to identify patterns in the relationship between quality management and co-ordination. The work presented in this paper is a first step towards achieving this goal. After a theoretical investigation in section 2, we will introduce two pork supply chains in section 3. One chain is a large, rather standard, supply chain, and the one is a small, rather exclusive, supply chain. In section 4, our approach is illustrated for each of the two supply chains. In section 5, conclusions are presented and an agenda for further research. 2 Supply chain co-ordination Consumer demands are increasingly satisfied by chains of companies, each performing a particular stage of the process of transforming raw material into products or of realising services that satisfy these demands [Chopra and Meindl, 2001]. For each supply chain choices have to be made with respect to which markets to serve, the range of products for these markets, and the level of quality these products should have. These choices influence the type of co-ordination mechanisms needed to achieve the quality demanded by the market. With respect to choices of product-market combinations, supply chains may either focus on the mainstream market or on niche markets. Mainstream markets are served with base-line quality products, while niche markets are served with excellent product quality for special products. In the first type of market, low margins are obtained, and consequently, high volumes need be produced for chain actors to be profitable. As a result, supply chain actors, while needing to guarantee the baseline quality standards demanded by the market, may allow a relatively large variety in the quality of the products as long as the products meet the baseline quality requirements. This is especially true in the food sector. In the second type of market, supply chain actors need to guarantee products of a particular and consistent quality. To consistently produce higher quality products, a smaller variety in the quality of the products is allowed. This is possible because of the higher margins obtained in this market, which allows chain actors to be profitable, even at lower levels of production. Below, we first introduce co-ordination mechanism as can be found in the literature. After that we further detail relationships between quality level choices and co-ordination mechanisms. 2.1 Co-ordination mechanisms In the literature, broadly three classes of co-ordination mechanisms have been identified [Mintzberg, 1979; Thompson, 1967], based on earlier work of March and Simon [1958]: Co-ordination by standardisation [Thompson, 1967]; this class can be further subdivided into standardisation of process, standardisation of output, and standardisation of knowledge and skills [Mintzberg, 1979]; Co-ordination by direct supervision [Mintzberg, 1979] or planning [Thompson, 1967]; we will call this class co-ordination by hierarchy or plan; Co-ordination by mutual adjustment; this class can be refined with mechanisms to enhance information processing capacity of an organisation [Galbraith, 1974], such as creation of lateral linkages. In the order introduced, co-ordination costs tend to increase. In this order, co-ordination also places increasingly heavy burdens on communication and decision-making [Thompson, 1967]. Thompson [1967] relates the co-ordination mechanisms to types of dependencies between activities, incorporating dependencies between people in an organisation. These dependencies reflect the flow of work, material, information, and decisions [Mintzberg, 1979]. Dependencies can be clustered in three classes: pooled, sequential and reciprocal dependencies.

3 Pooled dependencies denote situation in which activities contribute to the whole and each is supported by the whole; when one activity fails, this can threaten the whole and thus the other activities; Sequential dependency between activities takes a serial form in which the output of one activity becomes input of another; Reciprocal dependency refers to the situation in which the outputs of each activity become inputs for all others. The three types of dependencies, in the order introduced above, are increasingly difficult to coordinate. Organisations tend to minimise their co-ordination costs by applying standardisation in recurring and known situations. Standardisation of processes is the most restricting of the standardisation mechanisms. Standardisation of output may be used when standardisation of process is not possible or desirable. Standardisation of knowledge and skills may by used when neither the process nor the output can be fully standardised. The last form of standardisation put demands on the education level of the people who perform the process and generate the output [Mintzberg, 1979]. When uncertainty increases co-ordination by standardisation is not sufficient or not possible anymore. Uncertainty is inherent in complex organisations in dynamic environments. Uncertainty arises when the technology to be applied is new to the organisation or new to the market. In situations with growing uncertainty co-ordination by hierarchy or plan is used to manage the increased communication, or information-processing, needs. In highly uncertain situations, mutual adjustment is needed to co-ordinate activities. Communication is an essential, but costly, part of mutual adjustment. Galbraith [1974] has defined two ways to deal with increasing information-processing needs of an organisation: 1. reducing the information-processing needs, and 2. increasing the informationprocessing capacity of an organisation. He proposes the introduction of slack resources or creation of self-contained tasks to reduce the information-processing needs. Investment in vertical information systems can help to increase the information-processing capacity of an organisation. In addition, several horizontal organisational structures have been proposed for the same purpose [Galbraith, 1974]. In complex processes, all three types of co-ordination may be used in many possible configurations. This assertion is supported by a study by Van de Ven et al. [1976] of 197 work units within a large employment security agency. It appeared that mutual adjustment is favoured over standardisation when uncertainty increases. Whit increasing group size, on the other hand, the use of standardisation increases. The use of co-ordination by hierarchy and plan seems to be rather stable. The findings presented by Van de Ven et al. [1976] are limited to the unit level. In a complex organisation like a supply chain, the configuration of co-ordination mechanisms may differ at different levels, at different points in time and within and between different supply chain links. For example, a downstream organisation may have the policy to perform a market assessment once a year (standard (high-level) process). It will plan the activities needed (plan) to acquire the necessary information on market developments in the environment. Management may install a task force to execute the activities (mutual adjustment). The results of market assessment may lead to the definition of a portfolio of projects to develop new products. Each project will proceed in standard way (standard process/standard output/standard knowledge and skills). Project management will plan and monitor the activities (hierarchy/plan). The activities in the earliest phase of a project to develop a new product may require an autonomous team to execute the tasks (mutual adjustment). In addition, the downstream organisation needs to communicate new product developments to upstream parties to align supply and supplier production processes with the new developments (mutual adjustment). Each upstream organisation should then

4 develop a new process or output standards to satisfy downstream requirements (standardisation). Co-ordination by hierarchy and plan is needed to varying extents in a supply chain and between and within the different stages of the supply chain process. Food supply chains essentially consist of sequential relationships between subsequent stages and also within especially the earlier stages of raising animals or growing vegetables and fruit. It can be expected that suitable co-ordination mechanisms are standardisation and co-ordination by hierarchy and plan. The particular choice of the set of co-ordination mechanisms to choose depends on particular context differences, like the task uncertainty and stage of the process, size of the supply chain and of supply chain members, strategy and culture [Van de Ven et al., 1976]. 2.2 Quality level choices and co-ordination mechanisms The choice for a specific quality level, aimed at a specific market, influences the type and combination of co-ordination mechanisms needed. Production for high quality standards, for example, may require coordination by standardisation. The degree of standardisation depends on the variety in the level of product (and process) allowed throughout the supply chain. This is called the degree of bandwidth in this paper. Production for high quality standards in agri-food supply chains is usually associated with a small bandwidth in quality fluctuations. For small-bandwidth production, standards may be needed for input, process, and output. Furthermore, production may require direct supervision (hierarchy) to enforce quality conformance. In addition, alignment between activities of the different supply chain actors, i.e., a shared goal and vision, is important to achieve homogeneity of quality. Some form of hierarchical coordination is needed to achieve this alignment, but also mutual adjustment. Central co-ordination is needed to prevent that each actor has to individually exchange information with all other actors, thus increasing the information-processing needs. Production for baseline quality standards in agri-food supply chains, on the other hand, is usually associated with a large bandwidth in quality fluctuations. Production in the baseline quality/large bandwidth segment may require a combination of coordination by process standardisation, output, and knowledge and skills. Quality may be enforced by each client organisation in the chain or by independent quality assurance agencies. In the baseline quality/large bandwidth segment, coordination is achieved by means of a baseline process standardisation, i.e., by producing under widely accepted quality standards leaving space for individual choices by chain actors. These quality standards are general, and thus applicable in many situations, and inclusive, many industry actors can meet them. These quality standards implicitly align chain-wide activities, making link-to-link information flows sufficient. Communication between other actors in the chain is only necessary whenever quality standards have to be modified. In table 1, we summarize the two sectors that will be further explored in section 4. Degree of variation in quality Large bandwidth Small bandwidth Quality level choice Base-line quality High quality Table 1. Areas of investigation into exploring relationships between quality-level choice and co-ordination 3 Pork supply chain With around 1.3 million ton of pork produced in 2005, The Netherlands is the sixth largest producer of pork in the EU, after Germany (4.4 million ton), Spain (3.2 million ton), France (2.2 million ton), Denmark (1.8 million ton) and Italy (1.5 million ton) [PVE, 2006a]. The Netherlands exports 0.85 million ton (65% of its production), which makes it the third largest exporter in the EU, behind Denmark (1.7 million ton) and Germany (1.2 million ton) [PVE, 2006b]. Two-thirds of the Dutch export goes to Germany (live animals), the UK (bacon), and Italy (ham), which are the three largest importers of pork in the EU [PVE, 2006 b]. With around 21 million pork produced in 2005, the EU is the second largest producer of pork in the world (after China, which produced round 49 million ton) [PVE, 2006 a]. The EU exports around 59%

5 of this, which makes it the second largest exporter in the world, just behind the U.S. (which exported around million ton in 2005, compared to million ton by the EU). The Dutch (and European) production process consists of 6 stages (see figure 1): 1. Breeding. Breeding companies supply the genetic basis for pig farms. They produce semen, sows and boars. 2. Farrowing. Farrowing farms focus on production of piglets. Piglets are transferred to finishing farms after about weeks. 3. Finishing. In finishing farms, piglets are further raised until they reach a weight of about 110kg at an age of about 6 months. These two stages can be performed by separate farms, but often they are also combined into one organisation. 4. Slaughtering and processing. The modern slaughter process is a highly efficient and sanitary process, consisting of several stages. Carcasses may be further cut into meat parts, which are then sold to processing companies. These companies produce all kinds of meat products, like pre-paced fresh meat, processed meat, and convenience food. 5. Distribution and retail. A large part of meat products is distributed to retail. Other channels are so-called out-of-home channels, like restaurants, business canteens, hospitals, and hotels. 6. Consumers are the final stage of the fresh pork meat chain. Their buying and consumption behaviour strongly influences pork production. Consumer demands are translated upstream by the retailer. Figure 1 Typical pork chain in the Netherlands and Europe The main process of the pork meat chain is supported by transporters that transport pigs and meat in between stages. Traders, distributors, and dealers support exchanges between chain members. Other organisations provide input, like the feed industry, which mixes raw material into feed suitable for particular stages of pig growth. Medicine and vitamins are added to feed according to prescriptions by veterinarians, who offer advice to farmers and monitor the health situation at farms and in transports. Other important stakeholders are government, which imposes rules and regulations, financial institutes, branch organisations, technology developers, research institutes and social pressure groups. Broadly, two types of chains can be characterized within the Dutch pork industry: the fresh meat chain and smaller chains, like the biological chain or the regional chain. Differences, with regard

6 to the production process, can be identified in the scale and scope of operations: about 95% of all pork meat products in the Netherlands is produced in the fresh pork meat supply chain, about 5% is produced in smaller chains, like regional or biological chains. The regional chain at hand operates on a local level with other parties in the region in a mainly closed system. For example, manure is delivered to a farmer who produces grain. This grain is then delivered to the local feed producer involved in the chain, who mixes it into the feed delivered to the pig farm. Close relationships exist between the pig farmer and customer channels, in this case quality butchers. The fresh pork meat chain operates in an open system, on a global level. In the fresh pork meat chain, actors at all stages of the supply chain import and export (intermediate) products. Loose relationships exist between chain actors, who are free to switch between suppliers and buyers. Between the two types of supply chains interesting differences can be found with respect to quality level choice and co-ordination. This is discussed in section 4. 4 Quality level choice and co-ordination in pork chains In this section, we illustrate relationships between quality level choices and co-ordination mechanisms used within the two pork supply chains introduced in section Fresh pork meat chain In the Netherlands, a baseline level of quality has been specified in IKB (Integrated Chain Control), a private quality management system for production and slaughtering of pigs ( IKB conforms and adds to European legislation for food production and hygiene (for example, General Food law (Reg. (EC) 178/2002 and the Hygiene Code (Reg. (EC) 825/2004, 853/2004, 854/2004). More than 95% of all parties in the pork chain in the Netherland have implemented IKB. Each organisation in the pork chain is responsible for producing according to the baseline quality level, as defined in IKB. IKB, however, allows producers to make their own choices on top of the baseline quality standards set. Pig farmers, for example, have freedom in selecting pig species and feed composition. This may lead to large variety in output quality levels. In terms of co-ordination mechanisms, IKB has set standards for parts of the process, while also standards have been set for the quality of process output. Knowledge and skills are needed to use the freedom allowed by IKB to further specify process and output in farming and slaughtering. In addition, in the food area, companies need to manage risks to prevent and solve health problems. HACCP (Hazard Analysis Critical Control Points) is a systematic, preventive international approach to assure food safety ( For the fresh pork meat chain, this means for example that the slaughterhouse has to check each incoming animal to detect medicine residues and diseases that threaten human health. The slaughterhouse, hence, manages its input to safeguard quality. The slaughterhouse communicates findings directly with each supplying farmer. Information processing needs increase with increasing number of suppliers. Because the number of supplying farmers is large, the slaughterhouse has installed an information system to increase information processing capacity. The system supports decision making both in the slaughterhouse and in farms, because it not only shows the quality situation of a particular delivery, but also allows computation of quality trends and quality levels achieved. By relating a particular quality level to payment to the supplying farmer, incentives are created for farmers to improve their process. In addition, regular quality checks are performed by private or public quality assurance agents, thus providing a limited co-ordination by hierarchy. Between slaughterhouse and processors on the one hand and between processors and retail on the other also a link-to-link relationship exists. Retail is a very powerful party, since it is in direct touch with consumers. Retail communicates its wishes to the direct upstream party. Retail does not communicate to farmers. The slaughterhouse has to translate retail requirements to the farmers. A particular problem is formed by discount actions in retail stores. The slaughterhouse

7 must be able to provide retail with the required amount of meat products desired. However, a pig does not only produce that particular part of meat. The slaughterhouse has to find ways to sell the remaining meat products at a still acceptable rate. Information exchange between slaughterhouse and retail is needed to increase awareness of the impact of pushing requirements up the chain. In this case mutual adjustment is needed to create shared goals and vision. A task force may be installed to achieve this. The fresh pork meat chain can be characterised as a chain with baseline (still possibly high) and large-bandwidth quality level. The size of the chain is large necessitating the use of standardisation as co-ordination mechanism. Standardisation is mainly baseline process and output standardisation with the need for knowledge and skills to specify the remaining process characteristics. With a higher quality level, and associated smaller bandwidth in quality fluctuations allowed, more process standardisation might be necessary. Since co-ordination by hierarchy in a large chain leads to huge information processing needs, link-to-link co-ordination is applied, in particular co-ordination of input and quality feedback. Limited co-ordination by hierarchy is provided by private or public quality auditors. Each supply chain link pushes quality requirements upstream to safeguard its own quality levels. This arrangement is suitable for this situation. When the supply wishes to serve different markets with different quality level requirements, other or different sets of co-ordination mechanisms need to be selected. 4.2 Regional chain When a chain chooses to deliver high-quality products for niche markets, the situation is different. To guarantee a particular high quality level leads to a larger need of chain-wide coordination. Co-ordination by hierarchy is needed to maintain a desired quality level by supervising quality levels in each stage of the chain. Co-ordination by mutual adjustment is needed to align chain agents in adopting, achieving, or changing a particular quality level. Continuous feedback is needed from the consumer and translated to requirements to all chain agents. Gathering customer feedback and communicating requirements to chain agents together create large information processing needs. To control quality, align parties within the chain, and gather and process customer feedback, a central agent is needed to co-ordinate activities in contrast with the large fresh pork meat chain. This central agent may be supported by a chainwide information system, which increases information processing capacity. In the particular chain in focus, the farmer has set the quality standard and the associated bandwidth in quality fluctuation in alignment with the customer channels, in this case the local quality butchers. The farmer acts as the central agent and continuously monitors quality, coordinates activities, aligns parties in the chain and gathers customer feedback. Because only one farmer is involved, the process is rather repeatable. When more farms would be included, a high level of process standardisation is needed to reduce output variety. Strict chain arrangements have to be made to bind every chain agent to the quality standard set. Because of the size of the current chain, an automated information system is not yet needed. The smaller regional chain can be characterised as a chain with high-level and small bandwidth quality. Since the size of the chain is small co-ordination by mutual adjustment and by hierarchy is possible. Information flows are chain-wide. When the size of a regional chain may increases, an automated information system could be needed to increase information processing capacity. The findings of the two pork chains need to be related to performance to enable cross-chain and cross-border knowledge exchange and learning after further work in pork chains in Europe and beyond. In table 2 we summarise our findings.

8 Large bandwidth / baseline quality level Baseline process and output standardisation Knowledge and skills Link-to-link information flow Table 2. Summary of findings in two pork chains Small bandwidth / high quality level Process and output standardisation Hierarchy Mutual adjustment Chain-wide information flow 5 Conclusions and further work We have presented an exploration into relationships between quality level choices and coordination mechanisms. We have discussed quality level choices and co-ordination mechanisms in two different pork chains in the Netherlands. The large fresh pork meat chain is, in essence, a chain with baseline (possibly high) and large-bandwidth quality level with process and ouput standardisation, knowledge and skills, and link-to-link information flow. The small regional chain can be characterised as a chain with high and small-bandwidth quality level with coordination by hierarchy and mutual adjustment. A central agent gathers and combines chain-wide information to manage quality level compliance. With increasing size this chain should define a process standard. Further work is needed to further explore quality level co-ordination mechanism relationships for more pork chains in the Netherlands and to extend our exploration for pork chains in other countries in Europe and beyond. By identifying patterns in quality level co-ordination mechanism relationships and relate these to chain performance, cross-border knowledge exchange and learning is made possible. Extensive data will soon be available from a current inventory of pork chains in five European countries, in South Africa and China. Acknowledgement This work has been partly funded by the European Commission through FP6 project Q-Porkchains ( The authors wish to acknowledge the Commission for their support. We also wish to acknowledge our gratitude and appreciation to the Q-Porkchains project partners who have contributed to collecting the case data used in this paper. References Bate, R. et al. A Systems Engineering Capability Maturity Model. Version 1.1., CMU/SEI-95-MM-003, Software Engineering Institute, Carnegie Mellon University, Pittsburgh, Pennsylvania, Chopra, S., Meindl, P.: Supply chain management. Strategy, planning, and operation. Prentice Hall, Inc. New Jersey, Galbraith, J.R.: Organization design: an information processing view. Interfaces, Vol 4, No 3, 1974, pp Mallone, T.W., Crowston, K.: The interdisciplinary study of co-ordination. ACM Computing Surveys, Vol 26, No 1, 1994, pp March J.G., Simon, H.A.: Organizations. John Wiley & Sons, Inc., New York, Mintzberg, H.: The structuring of organization A synthesis of the research. Prentice-Hall, Inc., Englewood Cliffs, PVE: Development in the pork meat sector 2005 and expectations for Report 0602, Product boards of Cattle, Meat, and Eggs, The Hague, The Netherlands, 2006a (in Dutch). PVE: Statistical annual report. Report Product boards of Cattle, Meat, and Eggs, The Hague, The Netherlands, 2006b (in Dutch). Thompson, J.D.: Technology and structure, in: Organizations in action. McGraw-Hill, New York, 1967, pp Van de Ven, A.H., Delbecq, A.L., Koenig, R.: Determinants of coordination modes within organizations, in American Sociological Review, 41 (April), 1976, pp