Value chains and the value chain development approach: Basic concepts and principles
Value chains and the value chaindevelopment approach: Basic concepts and principlesBerhanu Gebremedhin, Scientist-Agricultural Economist, ILRICIDA Stakeholder Workshop, ILRI, Addis Ababa, 2 May 2012
Presentation outline The value chain concept Value chains and marketing channels Business development services (BDS) Value chain upgrading
The value chain concept A typical value chain consists of all the firms and their activities involved in input supply, production, assembly, processing, wholesaling, retailing, and utilization (consumption), with export included as another stage for commodities that are destined for export. A commodity value chain starts from input supply, since production is unthinkable without inputs. A value chain consists of chain actors who are involved in direct ownership of the product and value addition. It is important to distinguish between chain actors and value chain service providers. It is also important to note that not all value chains may have all the stages after production. For example, a value chain of a commodity that is not processed will not have the processing stage. A value chain can be defined for a particular commodity or group of commodities that are closely related.
The value chain concept (2) The value chain concept entails the addition of value Therefore, a value chain incorporates productive transformation and value addition at each stage of the value chain. At each stage of the value chain, the product changes hands through chain actors, transaction is effected and costs incurred, and some form of value is created. Value addition results from diverse transformational and marketing functions including production, bulking, cleaning, grading, packaging, transporting, storing and processing. The transformative functions can either be done by the value chain actors themselves as part of their business, or as service functions by service providers at cost or for free. That is why the set of value chain actors does not include service providers as separate categories. Transporting Processing
The value chain concept (3) Value chains are also the conduits through which: finance (revenues, credit, working capital) moves from consumers to producers; technologies are disseminated among producers, processors, and transporters; a information on customer demand preferences are transmitted from consumers to producers and processors and other service providers.
The value chain concept (4) Effective demand: Value chain approach to development views effective demand as the force that pulls goods and services through the vertical value chain system. Hence, value chain analyses need to understand the dynamics of how demand is changing at both domestic and international markets, and the implications for value chain organization and performance.
The Value Chain & Business Development Services Consumption Retailing Trading Research Processing Transportation Govt. policy Trading Communications Post-harvest handling Production input supply Tech. & business training & assistance- - Production Financial services Market information and intelligence
Value chains and market channels A market channel is a particular path through which commodity passes from producers to consumers. Other than defining the route through which a commodity passes from producers to consumers, nothing in the market channel concept indicates value addition, although potentially value may still be generated A typical value chain is composed of several market channels i.e. several market channels can be used by producers.
Business development services (BDS) Business development services are services that play supporting role to enhance the operation of the different stages of the value chain and the chain as a whole. Business support services are, therefore, essential for the development and efficient performance of value chains and the transformation of subsistence agriculture into market orientation. Business development services may provide services at cost or for free. Business development services can be grouped into: infrastructural services; production and storage services; marketing and business services; financial services; and policies and regulations.
Business development services• Basic infrastructural services includes market place development, roads and transportation, communications, energy supply, and water supply etc.• Production and storage services include input supply, genetic and production hardware from research, farm machinery services and supply, extension services, weather forecast and storage infrastructure etc.• Marketing and business support services include market information services, market intelligence, technical and business training services, facilitation of linkages of producers with buyers, organization and support for collective marketing etc.• Financial services include credit and saving services, banking services, risk insurance services, and futures markets etc.• Policy and regulatory services include land tenure security, market and trade regulations, investment incentives, legal services, and taxation etc.
Value chain upgrading Value chain upgrading refers to improvements in the performance of chain actors and/or the whole chain. Value chain upgrading may also require improvements in service provision. Types of value chain upgrading: Process upgrading: process upgrading refers to the efficiency of production in terms of cost reduction, increasing the speed of delivery, reduction of post-harvest losses, etc.. Product upgrading: product upgrading refers to the introduction of new products or improving existing products. Functional upgrading: functional upgrading refers to the issue of which activities the actors in the chain should concentrate on. In planning upgrading options of a value chain, it is also important to focus on the more important market channels of the value chain. Moreover, value chain upgrading should target points of leverage that have a multiplier effect of interventions in order to maximize impact and outreach. In order to identify sources of leverage, one has to look at four key indicators: system nodes; geographic clustering; policy and institutions; and infrastructure.
Value chain upgrading options Input supply Farm and firm level technical assistance and training needs Farm and firm level business training needs Market development Market options Improvements in the organization and coordination of market functions Improvements in market information and market intelligence Development of market institutions (grades and standards, contracts, legal framework etc.) Establishment of market associations or producer groups/cooperatives Improvements in market infrastructure (roads, transport, storage, processing, communication, electricity) Improvements in financial services Policy and regulatory issues (taxation, subsidy, laws, price control, etc.)