Quantitative methods and metrics for value chain analysis

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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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Quantitative methods and metrics for value chain analysis

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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.
  5. 5. 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?
  6. 6. 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?
  7. 7. 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.
  8. 8. 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).
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Aramyan et al. (2006)
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008) Performance pyramid
  17. 17. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Growers Cooperatives Packers Source: Trienekens et al. (2008)
  18. 18. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008) Food industry Wholesalers Retailers
  19. 19. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt • 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
  20. 20. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008) INNOVATION INDICATORS
  21. 21. Norwegian Institute of International Affairs Norsk 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
  22. 22. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008) PERFORMANCE INDICATORS
  23. 23. 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
  24. 24. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Performance-innovation matrix Source: Trienekens et al. (2008)
  25. 25. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008)
  26. 26. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008)
  27. 27. Norwegian Institute of International Affairs Norsk Utenrikspolitisk Institutt Source: Trienekens et al. (2008) PERFORMANCE- INNOVATION MATRIX AT GROWER LEVEL
  28. 28. 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.
  29. 29. 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.
  30. 30. 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)
  31. 31. 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
  32. 32. 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
  33. 33. 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.
  34. 34. 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)(𝐸𝑇 𝑖−𝑇 𝑖)𝑗 𝑖=1 𝐴𝑃𝑖 𝑗 𝑖=1 Here, j=#payments, AP= actual payment, ET=expected payment time, T=actual payment time, r= discount rate
  35. 35. 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!
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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 VALUE PRICE 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)
  40. 40. 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 VALUE PRICE 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

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