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Presented by Karl M. Rich at the Training program for “Methods for livestock value chain analysis: Qualitative and quantitative methods”, ILRI, Nairobi, 2 July 2013
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Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative methods and metrics for VCA
Prof. Karl M. Rich, Ph.D.
Norwegian Institute of International Affairs
Training program for “Methods for livestock value chain analysis: qualitative and quantitative methods”
ILRI, Nairobi, 2 July 2013
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Outline
• Gaps in qualitative VCA
• Metrics for examining chain performance
• Quantitative tools for ex-ante VC assessment
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Gaps in qualitative VCA
• Last lecture, we saw a number of positive aspects of VCA as a framework for understanding value chains
• However, a number of important gaps still remain
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Gaps in qualitative VCA
• A particular gap concerns understanding the impact of VC investments – The general performance of a chain
– The ability to evaluate ex-ante between different options
• Value chain analysis does a very nice job of telling stories, of describing the chain and things that influence it. But it is less good on measurement.
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Gaps in qualitative VCA
• An example: suppose tomorrow you were given US$20 million to improve an existing agricultural value chain
• Given the tools you have so far, could you evaluate how best to use that money?
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Gaps in qualitative VCA
• A second example: let’s say you have successful started a new value chain (maybe one of the ones from yesterday).
• Given the tools from yesterday, how would you assess how “successful” that chain is? What measurements would you use to look at its performance?
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Gaps in qualitative VCA
• In this lecture, we will look at quantitative measurements and tools to better evaluate value chains.
• This remains a very rich research field – not much has been done here and many tools have not yet been fully explored.
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Value chain performance
• The measurement of value chain performance is a relatively new topic (last 15 years or so).
• Early performance measures focused primarily on cost, with little focus on non-financial indicators that could influence the supply chain (Arayman et al. 2006).
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Value chain performance
• Some broad categories of performance indicators:
– Efficiency
– Responsiveness (recall discussion on strategic fit)
– Quality
– Flexibility
– Customer satisfaction
– Reliability
– Product availability
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Value chain performance
• In development contexts, one could consider other types of performance measures:
– Degree of inclusiveness
– Poverty reduction
– Environmental protection
– Gender
– Livelihoods enhancing
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Value chain performance
• Types of models used to assess supply chain performance (Arayaman et al. 2006)
– Supply Chain Operations Reference Model (SCOR)
– Balanced scorecards
– Multi-criteria analysis
– Data-envelopment analysis
– Life-cycle analysis
– Activity-based costing
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Aramyan et al. (2006)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• How can we link value chain performance to VCA, as discussed earlier?
• And can we link performance to areas of upgrading, where metrics of performance are most critical?
Value chain performance
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• A recent article by Trienekens et al. (2008) attempts to do this in the context of a fruit value chain in the Netherlands.
• Their contribution is to develop a performance-innovation matrix that links measures of performance with upgrading-type activities.
Value chain performance
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• Trienekens et al. (2008) first map processes within the value chain at each node, distinguishing between primary processes and supporting processes like in Porter.
• They illustrate this in a performance pyramid. For each node of the VC, companies are viewed through: – Vision and objectives of the firm (top of the pyramid)
– Supporting processes to achieve strategic performance
– Operations (day-to-day activities)
Value chain performance
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
Performance pyramid
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Growers Cooperatives Packers
Source: Trienekens et al. (2008)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
Food industry Wholesalers Retailers
Norwegian Institute
of International
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Utenrikspolitisk
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• Trienekens et al. (2008) then look at innovation, distinguishing between four different types: – Product innovations
– Process innovations
– Marketing innovations
– Organizational innovations
• Do these sound familiar?
• Each of these are associated with a set of CSF and indicators
Value chain innovation
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
INNOVATION INDICATORS
Norwegian Institute
of International
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Utenrikspolitisk
Institutt
• A similar approach is taken for performance indicators, classifying these according to: – Efficiency
– Responsiveness
– Quality
– Flexibility
• Similarly, each of these are associated with a set of CSF and indicators, some of which are qualitative and others quantitative.
Value chain performance indicators
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
PERFORMANCE
INDICATORS
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• These are put together in a performance-innovation matrix, which for each node of the VC highlights: – Processes involved in the VC
– CSFs involved in performance and innovation at each node
– Tradeoffs between performance and innovation, and in which processes
– Instruments to measure and improve performance and innovation
Value chain performance-innovation matrix
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Performance-innovation matrix
Source: Trienekens et al. (2008)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Trienekens et al. (2008)
PERFORMANCE-
INNOVATION MATRIX AT
GROWER LEVEL
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• So far, we have had practice mainly with qualitative approaches for VCs and SCs.
• Let’s introduce some more quantitative rigor.
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• One thing that we might want in our analyses is some sort of index that tells us something about the performance of a VC
• Norina and Bailey (2005) develop a simple index that we could use to quantify our analysis.
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• Their method involves two parts: – Measurement of material flow performance (from A to B to C)
– Measurement of financial flow performance (from C to B to A)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• Material flows are measured through the following two measures:
1. Product quality: a set of characteristics important to satisfy customer needs – Normalized quality (NQ) = 1 when all criteria are satisfied
– NQ = 0 when product rejected
– NQ < 1 if some characteristics below expected quality
– NQ > 1 if some characteristics above expected quality
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
2. Delivery value: a set of characteristics related to volumes ordered and delivery time
– Normalized quality (ND) = 1 when all criteria are satisfied
– ND = 0 when product rejected
– ND < 1 if some characteristics below expected quality
– ND > 1 if some characteristics above expected quality
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• Normalized material flow performance (NMP) is calculated by the following:
– Calculate NQ*ND; if zero, then NMP=0
– Define weights for NQ and ND and calculate the weighted sum: wQ*NQ + wD*ND, where wQ+wD =1.
– If NMP>1 but either NQ or ND < 1, set NMP to 1.
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Quantitative performance measures
• Normalized financial flow performance (NFP) is the actual amount of payment made by the consumer, taking into account any delays or advancements in payments made.
𝑁𝐹𝑃 = 𝐴𝑃𝑖(1 + 𝑟)
(𝐸𝑇𝑖−𝑇𝑖)𝑗𝑖=1
𝐴𝑃𝑖𝑗𝑖=1
Here, j=#payments, AP= actual payment, ET=expected payment time, T=actual payment time, r= discount rate
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
Source: Norina and Bailey (2005)
Balanced value: Difference between outflow of material and inflow of finance (for supplier); different between inflow of material and outflow of finance for customer Balanced value > 0, relative advantage of one link in the chain Balanced value < 0, relative disadvantage. Note that performance of one link will depend on others!
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• Let’s move from performance measures to tools to assess ex-ante the benefits and costs of different types of VC interventions
• We will mainly focus on tools that look at the value chain (or supply chain) as an entity.
• Other more traditional tools could have application that are not discussed in detailed here (e.g., SAMs).
Quantitative approaches to VC modeling
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• Numerous examples of agricultural supply chains in the logistics/operations research literature: – Van der Vorst et al. (2000, Eur. J. OR) – Minegishi & Thiel (2000, Sim. Prac. & Theory) – Trienekens & Hvolby (2001, Prod. & Plant Control) – Gigler et al. (2002, Eur. J. OR) – Georgiadis et al. (2005, J. Food Eng.) – Fiala (2005, Omega) – Meijer et al. (2005, working paper, Wageningen U.)
• Main focus is on micro (firm) level strategies (reducing costs, lead times, inventories)
Quantitative approaches to VC modeling
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
• System dynamics (SD) models present a means to capture sector/macro level interventions in supply chains:
– Assess investment options
– Analyze dynamic feedbacks to determine sustainability
• Applications of SD models in agribusiness:
– Mowat et al. (1997): R&D strategies in persimmons
– Cloutier & Sonka (1998): SD model of coordination between producers/processors in the hog supply chain
– Fisher et al. (2000): SD model of adoption/diffusion of precision agriculture
– Ross (2005): assessment of entrepreneurial innovations in the hog supply chain.
Quantitative approaches to VC modeling
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
PLANT ING
RAT E
HARVEST
RAT E
CROPS IN FIELD
MARKET
SALES
INVENT ORIES
PRODUCT ION DELAYS
DEMAND
DEMAND
SHIFT ERS
RELAT IVE
PRODUCT
VALUEPRICE OF
SUBSTIT UT ES
PRICE
INVENT ORY
COVERAGE
EXPECT ED
PROFIT ABILITY
CAPACIT Y
UTILIZAT ION
EXPECT ED PROFIT ABILITY
OF NEW CAPACIT Y
VARIABLE
COST S
CAPACIT Y
LOSS
CAPACIT Y
CAPACIT Y
ACQUISITION
SUPPLY LINE OF
CAPACIT Y ON ORDER
CAPACIT Y
INIT IAT ION
CAPACIT Y
COST S
AVG LIFE
OF CAPACITY
Adapted from Sterman (2000)
Norwegian Institute
of International
Affairs
Norsk
Utenrikspolitisk
Institutt
PLANT ING
RAT E
HARVEST
RAT E
CROPS IN FIELD
MARKET
SALES
INVENT ORIES
PRODUCT ION DELAYS
DEMAND
DEMAND
SHIFT ERS
RELAT IVE
PRODUCT
VALUEPRICE OF
SUBSTIT UT ES
PRICE
INVENT ORY
COVERAGE
EXPECT ED
PROFIT ABILITY
CAPACIT Y
UTILIZAT ION
EXPECT ED PROFIT ABILITY
OF NEW CAPACIT Y
VARIABLE
COST S
CAPACIT Y
LOSS
CAPACIT Y
CAPACIT Y
ACQUISITION
SUPPLY LINE OF
CAPACIT Y ON ORDER
CAPACIT Y
INIT IAT ION
CAPACIT Y
COST S
AVG LIFE
OF CAPACITY
How do different interventions
compare over time? Are they
sustainable? Roles of public
vs. private sectors? Roles of
chain-level interventions?
INTERVENTIONS IN
TECHNOLOGY/POST-
HARVEST TECHNIQUES INTERVENTION IN
NEW MARKETING
CHANNELS
INTERVENTIONS IN
MARKETING INTERVENTIONS IN
COORDINATION LINKAGES
(CONTRACTS)
INTERVENTIONS IN NEW
SUPPLY CHAINS
