Thesis on "Economic Social Ethical and Environmental Sustainability"

Thesis 15 pages (4765 words) Sources: 1+

[EXCERPT] . . . .

Chocolate Value Chain

Analyzing the Chocolate Industry Value Chain

The chocolate industry value chain is one of the most global in scope, encompassing the growing and harvesting of cocoa beans throughout Africa, Asia, South and North America, with processing centers in over 100 different countries of the world (Delfosse, 2009). To the extent that industry's value chain is tightly synchronized across all suppliers and there is a minimum acceptable level of quality, the entire industry can continue growth. It appears from the results this industry has been able to accomplish in terms of growth over the last twenty four months that the industry appears to be recession-resistant (Delfosse, 2009). According to DataMonitor global market research estimates, the global chocolate industry grew at an annualized compound annual growth rate of .5%, achieving $102.4 billion in sales in 2008 from 2006. The global industry is expected to increase its rate of growth however, increasing to a 2.3% compound annual growth rate, achieving $114.6B in sales by 2014. This is attributable to the greater involvement of nations whose economies rely on chocolate as a significant proportion of their Gross Domestic Product (GDP), the continued maturing of trading exchanges throughout the European Union (EU), and the development of supply-side procurement and trading exchanges that are creating buyer groups for more leverage with suppliers. All of these factors are contributing to the supply chains and distribution channels of the industry, transforming the value chain in the process, becoming significant more efficient and focused on cost reduction and quality improvement.

Introduction

In evaluating the value chain for chocolate, the economic, ethical, social and sustainability aspects of the industry need to be taken into account from the perspective of their contributions and detractions of the overall efficiency of the industry's functioning. Beginning with the economic factors, the role of suppliers and the supply chain of this industry is marked by a high level of commoditization and segmentation of quality levels of suppliers across 3rd world and developed nations. As the a result of this high level of supplier consolidation due to market makers including Cadbury, Mars, Ferrero, and Nestle, in addition to smaller regional brands exerting significant price pressure on growers, the buyer-supplier relationship throughout this industry's value chain favors the market makers. This is also being exacerbated by the fact that private label mass merchandisers including Carrefour, Tesco, WalMart and others are creating their own brands to save on costs and more fully control their distribution channels as well. Due to market makers and mass merchandisers having such a significant advantage in the context of this industry's value chain, substitute products are plentiful and often the strategy smaller regional competitors rely on to gain market entry over time. This approach to competing on price and private label chocolate is actually forcing the larger producers to focus on automating and expanding their production processes in order to stay more competitive over time. This is also creating an exceptionally competitive market across all retail channels as well.

The competitive dynamics of the chocolate value chain globally is making shelf space a premium asset in any retail environment. Studies indicate that one of the factors contributing to chocolate being so recession-resilient is the fact that it is one affordable luxury and has an affordable price and pervasive availability, which is due in large part to the exceptionally efficient supply chain of this industry globally (Delfosse, 2009). Market makers including Cadbury, Mars, Ferrero, and Nestle all rely on advanced forms of supply chain coordination and shared risk, including the use of Collaborative Planning Forecasting and Replenishment (CPFR) processes and systems to better manage the high variability of product demand (Doherty, 2009). Demand management in the context of the chocolate industry is one of the more difficult to anticipate and build forecasts around. The traditional spikes in demand during holiday periods are obviously an issue, yet there are aberrations in the data that often create completely unforeseen stresses on the value chains of this industry. Consider for example of how Hershey's lack of clarity and focus on their supply chain forecasting cost them an entire Easter season of selling (Sridharan, Caines, Patterson, 2005). This was primarily due to a prolonged and difficult SAP Enterprise Resource Planning (ERP) system installation process, which had left out key areas of the industry's value chain in terms of integration points. The result was that only a small percentage of the total forecast for Easter was obtained from resellers, and Hershey's suffered significant costs. This illustrates that customers preferences for each type of chocolate, by season, has a significant effect on the total value chain and can impact the overall profitability of the industry (Sridharan, Caines, Patterson, 2005). Better management of supply chain risk is critical for each member of the value chain to stay profitable.

Industry Value Chain Analysis

Using the value chain framework (Porter, Millar, 1985) as defined by Dr. Michael Porter, the chocolate industry is analyzed in the context of its interrelationships of support activities and primary activities. Figure 1, Chocolate Industry Value Chain provides an analysis of this industry's interrelationships according to the model. The primary activities of Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, and After Sales Service are supported by the Firm Infrastructure that is typical throughout this industry, which is by nature oligopolistic.

Figure 1: Chocolate Industry Value Chain

Sources: Based on analysis of (Delfosse, 2009) (Doherty, 2009) (Hildebrandt, 2009) (Monotti, 2008) (Sridharan, Caines, Patterson, 2005) (Tirone, 2008)

Next, the Human Resources practices of the industry are evaluated, which in the case of the chocolate industry have a high level of duality associated with them. On the one hand there is wage equality and fair trade which means the payment of market-based wages. On the other, especially in the more impoverished regions of Africa and throughout Southeast Asia, wages are more often seen as predatory and unethical. This has forced the entire industry to adopt a more thoroughly defined Corporate Social Responsibility (CSR) framework that can provide for greater levels of compliance to human rights guidelines and initiatives over time (Doherty, Tranchell, 2005). As a result of the human resources violations in specific countries there have been audits of specific suppliers' supply chains and their operations to ensure workers are given rights and wages that ensure an adequate quality of life (Doherty, Tranchell, 2005). In many respects this industry is comparable to the authentic shoe industry from the standpoint of ethical oversight of workers. Where Nike in the athletic shoe industry continually rejected the calls for improvements to their supply chain and worker programs, at one point ignoring them for well over a year before taking action and nearly inviting a Congressional investigation as a result, the chocolate industry has been far more forthcoming with human resources information and audit data. This has averted the industry from facing significant fines, investigations from governments that rely on the incomes of these supply chains to generate the majority of their Gross Domestic Product (GDP) and last but certainly not least, major backlash on the brands of these companies that dominate the industry. The human resources factor in the industry value chain continues to be closely analyzed and evaluated to ensure that the costs and legal constraints other industries face do not befall this one. There is a network of industry associations that also work to create more effective governance, risk and compliance (GRC) networks as well (Doherty, Tranchell, 2005), to ensure the industry does not become negatively impacted by human rights violations or a lack of compliance to global human rights standards.

The next support activity is technology development. The entire chocolate value chain and industry is heavily dependent on this support activity. From supply chain synchronization, supplier collaboration, consortia supplier-buyer exchanges, and the use of advanced manufacturing techniques based on process goods manufacturing, this area of the value chain is one of the most rapidly changing today as well. The use of supply chain management, supply chain optimization systems for ensuring that inventory positions are optimized from the cocoa suppliers through the manufacturers, is critically important as the demand curve for this industry is exceptionally seasonal and spikes during specific times of the year. In conjunction with the need to have exceptional insights into the supply chain on the one hand, and an accurate and trustworthy measure of forecasted demand on the other, this industry is heavily dependent on the quality management and traceability aspects of supplier quality management (Pacyniak, 2006). It is in fact the essence of efficiency for this industry's value chain to have sufficient levels of supply chain visibility and synchronization to the product level on the one hand, and accurate and believable forecasts of demand on the other. Keeping in mind that chocolate is inherently a process good, the need for accurately tracking sales-out data through Point of Sale terminals and the use of Electronic Data Interchange (EDI), a batch-oriented communications protocol that functions as a distributed order inquiry and order management system… READ MORE

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