Supply Chain Frontiers issue #45
Asia’s economic miracle is often associated with large, multi-national companies. While these organizations are important drivers of the region’s growth, small and medium-sized enterprises (SMEs) also play a key role. However, SMEs often lack the supply chain management (SCM) expertise that is found in larger companies. A research project proposed by the Malaysia Institute of Supply Chain Innovation (MISI) aims to shed new light on these challenges by studying SMEs in the agriculture-food sector.
As the backbone of many economies across Asia, SMEs are key drivers of the remarkable growth that the region has achieved over recent years. More importantly, these enterprises will continue to play an important role in Asia’s economic renaissance. It is estimated that SMEs comprise more than 98% of the number of enterprises in the Asia-Pacific region.
However, the sheer number of the SME organizations is not the only reason why they are important to Asia’s prosperity. SMEs also promote business ownership and entrepreneurial skills. They are agile and can adapt quickly to shifts in supply and demand; attributes that are particularly important in volatile global markets. In addition, SMEs are engines for job creation.
In an increasingly uncertain and complex business environment, SCM is a critical capability for all companies regardless of their size. This is particularly true for SMEs as they compete on scope rather than scale, which requires an adaptable supply chain.
Unfortunately, SMEs are limited in this regard by insufficient resources and a lack of the skills required to design, build, and manage an advanced supply chain; capabilities that are critical for their survival. For example, SMEs have a difficult time accessing and understanding their capital requirements and managing finances effectively both domestically and across borders. Without a sound understanding of currency fluctuations, trans-border transactions and associated costs, these organizations struggle to compete. Also, while larger companies capture efficiencies by forming strategic alliances with core suppliers, SMEs are not equipped financially to enter into such partnerships.
The supply chain difficulties faced by SMEs were studied in detail by researchers at the Center for Latin-American Logistics Innovation in Bogotá, Colombia. The work showed that the stakeholders seek to optimize their results rather than the performance of the supply chain as a whole. Additionally, the producer’s profit-maximizing criteria have more to do with minimizing sales risks than achieving the highest price. Some of the relevant findings are listed below:
- Intermediaries and wholesalers facilitate the transactions that supply the city with food, particularly for low-volume products.
- Intermediaries and wholesalers have accumulated financial resources and contacts, which they will use to defend themselves against any initiative that threatens their businesses.
- For corner-store owner/operators, selling produce is a way to attract customers in a highly competitive market. Convenience, product availability and variety, and the ability to personally select produce are service attributes that are highly valued.
- Each stakeholder group is very specialized, so only a few businesses can offer the potential for integrating two or more stages of the food supply chain.
The MISI project aims to study the flow of products, information, and money through the SME supply chain in the agriculture/food sector. Parallels will be drawn between such supply chains in Malaysia and India. Some recent studies conducted in India have reviewed the role of financial models such as group lending methodologies geared to small businesses, while other studies have specifically targeted logistics issues. MISI, however, aims to take a holistic view in the context of the Association of Southeast Asian Nations, or ASEAN region. In Phase I the focus will be on the wet market value chain in Malaysia.
In the local context of south-east Asia, a wet market is a marketplace for fresh groceries, fish, meat, fruits and vegetables. Wet markets are typically hosted weekly or bi-weekly and in some cases monthly in a particular area, rotating to different areas on the different days of the week. The stalls do not use freezing/thawing processes to preserve product, but use water to manually keep the fish alive and the fruits and vegetables fresh. Similarly, night markets are quite popular in the urban and suburban areas, which are effectively wet markets that function during the evening hours, often run by the same owners moving from a wet market at one location to the night market at the other.
Some of the initial observations by MISI researchers have shed light on SME business practices. For instance, it is noted that some SME’s tend to operate their business in a market condition they are most familiar with, and become alienated from innovative business practices. They tend to be naïve about new ways of doing business and satisfied to maintain the status-quo. The notion of value-add and spending on research and development activities is almost absent in this sector.
In general, innovation takes a backseat in the SME sector, and if any innovation takes place, it remains at the individual level. We do find examples where SMEs have innovated in acquiring their fair share of the market at minimal risk. For instance, a SME would supply products to retail markets that meet the minimal standards set by these supermarkets. They reserve higher quality product for the wet market where market forces allow them to secure higher margins, without increasing the cost to the customer. In many cases, the customer is willing to pay even more for higher quality (fresh) product. This is a clever way to capture more of the value compared to the super market channel, while allowing the farmer to spread his risk by creating a real business option. At the same time we also find that there is no active engagement in brand building or product development.
In the literature there is a notable lack of studies that explore the needs of SMEs given their unique ecosystem and behavior. A better understanding of their challenges will allow MISI to support these businesses, and secure targeted assistance to enhance their performance. For instance, the agriculture-food SME supply chains are mostly managed manually. Training these entrepreneurs to use and apply IT tools could improve productivity, and allow them to run the their businesses profitably. Access to information can provide a competitive advantage. The availability of real time information on other markets and prices including the retail markets through existing technology such as cell phones can be a key source of advantage, for example.
MISI plans to validate some of our initial findings and come up with strategic recommendations. An example is exploring the possibility of a cooperative to foster deeper collaboration among the agriculture-food sector SMEs. Such an organization could help these enterprises to overcome the disadvantages of their small size and focus on their core competencies, while benefiting from the economies of scale that enhance their competitiveness. Another key parameter that MISI aims to explore is the role of finance as an enabler in the agriculture-food SME supply chain.
Providing answers to issues like these is the main objective of MISI’s research initiatives in the SME agriculture-food supply chain initiative.
For more information on the research contact Dr. Mahender Singh or Dr. Asad Ata.