Banana Supply Chains in Indonesia and Australia: A bargaining theory approach

Singgih, S. M. (2005). Banana Supply Chains in Indonesia and Australia: A bargaining theory approach PhD Thesis, School of Natural and Rural Systems Management, The University of Queensland.

       
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Author Singgih, S. M.
Thesis Title Banana Supply Chains in Indonesia and Australia: A bargaining theory approach
School, Centre or Institute School of Natural and Rural Systems Management
Institution The University of Queensland
Publication date 2005
Thesis type PhD Thesis
Supervisor Elizabeth Woods
Sherrie Wei
Total pages 418
Collection year 2005
Language eng
Subjects L
0701 Agriculture, Land and Farm Management
Formatted abstract

The trend in the agri-food industries around the world, particularly in developed countries, has seen open markets gradually being replaced by various forms of contract systems where farmers produced according to the specifications demanded by retailers, which are increasingly demanding consistency in quality and supply to operate efficiently. This practice tends to marginalize small farmers who are unable to meet all these requirements. The situation could easily become worse for small producers in developing countries who are poor and live isolation from the end markets for their products. The banana industry in Indonesia, which is the focus of this research, is dominated by small farmers. Lack of capital and the scattered location of farmers' fields forces farmers to adopt minimum input production systems, which consequently result in low quality bananas. Most farmers' bananas in Indonesia are marketed through long supply chains involving collectors and wholesalers in villages, and their urban partners, wholesale merchants and traditional market traders. 

In the past few years, demand has increased for high quality local banana varieties for sale through supermarkets and traditional markets that serve middle to high class consumers. A large agribusiness consortium consisting of a modern plantation and in-house distribution company, has successfully stepped in to meet part of the demand by introducing Cavendish banana into the markets, notably in Jakarta and Surabaya. However, a large part of the demand remained unfulfilled because of the low quality of bananas produced by most farmers. This research aimed to address the challenge to improve the Indonesian banana supply chains to enable farmers to produce better quality local bananas. These could be efficiently delivered to meet the demand, while still ensuring that fair value sharing and smallholder participation was encouraged. 

Bargaining theory was initially selected because bargaining allows the ways in which the chain's value was distributed to be observed and studied. Typically, such study would have led to the study of power relationships among the bargainers. However, as the data later suggested, bargaining in the Indonesian Banana Supply Chains (BSCs) was a means to study the economic and personal relationships between the chain members, rather than power. Both constructivist and critical theory paradigms were used to understand the chains from the perspectives of the people within the chains and to design the system that could potentially meet the challenge faced by the Indonesian banana industry. 

Supply chain methodology adapted from Harland et al. (1993), was developed to conduct the study. The methodology consisted of six stages and was designed to allow the researcher to gradually become familiar with the concept of supply chain management, the banana industry in Indonesia, and the selected BSCs, to eventually be able to recommend a system could potentially be able to assist the Indonesian BSCs to operate more competitively. Due to the exploratory nature of the study, obtaining depth, rather than breadth, of data was considered necessary. The case study method was selected as suitable because it allowed the banana supply chains to be investigated in depth. Five cases (four in Indonesia and one in Australia) were selected based on their suitability to meet the objectives of the study and access to their supply chains and their chain members. Banana industries in both countries are dominated by small farmers who have to compete with high quality imported fruits to attract consumers' attention. The industries are also characterized by preference for long-term relationships with farmers acting as price-takers and exercising the least power compared to other members of the chains. 

Banana Supply Chain 1 (BSC1) involved farmers who grew local banana varieties in three villages in the Bayah District of Lebak Regency in the Banten Province in West Java, Indonesia. The bananas were marketed through collectors and wholesalers in the villages; the latter were also responsible for the ripening processes before delivering them to specialized banana wholesale agents at the Jakarta central market who worked on commission basis. From here the bananas were sold to traders from traditional markets that served consumers of all market segments. BSC2's upstream levels in the villages in West Java were similar to those in BSC1; however, from the villages, the local varieties of bananas were sold, rather than commissioned, to banana wholesale merchants who added value by selecting the high quality bananas, ripening, and packing them for sale to supermarkets. The lower quality bananas from BSC2 were marketed through traditional markets. 

BSC3 involved the large agribusiness consortium that grew and distributed Cavendish bananas professionally to supermarkets and selected traditional markets in Jakarta and its neighbouring big cities. No farmer was involved in BSC3. In BSC4, the upstream chain members resided in Sumatra, while the bananas were marketed to end consumers in Jakarta and Bogor through wholesale merchants in Ciawi (near Jakarta), hence, bypassing the central market. The only Australian banana supply chain, BSC5, involved a Cavendish banana wholesaling agency in Sydney that has some farmer ownership. The bananas were consigned from growers in the North Queensland and sold to supermarkets and independent retailers (fruit shops) in Sydney. 

Horticultural industries in Indonesia were seldom studied from the supply chain management theory because of the novelty of the concept to many researchers in Indonesia. As a result of in-depth investigation into the Indonesian BSCs, rich descriptions about the logistic, economic, and socio-cultural aspects of the chains could be provided. This understanding could be used to identify the potentially strong and weak aspects of banana supply chains in Indonesia for the purpose of developing policies in the banana industry, or to identify key players in the chains to act as the chain champions to assist in the implementation of a banana improvement program. 

Various price-setting mechanisms occurred in the five BSCs, ranging from full fixed-price setting to complete bargaining transactions, with occasional bargaining somewhere in between the two extremes. The occurrence/lack of bargaining was influenced by several factors that can be grouped into three: personality values, relationship values, and trading environment. The two personality values that were critical in determining the existence/lack of bargaining were confidence and risk taking attitude. Although interdependency was prominent in almost all chain members' relationships in the BSCs, the nature of the interdependency differed at the upstream and downstream levels of the chains because of the differences in the nature of the relationships at these levels. At the upstream levels in the Indonesian BSCs, chain member relationships were characterized by the existence of peasant solidarity, social stratification, and indebtedness. At the downstream levels, where relationships were more direct than in the villages, the interdependency was characterized by familiarity (kekeluargaan in Indonesian language) and the perception of equality among the chain members. Farmer-agent relationships in the Australian, BSC5, resembled more the relationships at the downstream levels of the Indonesian BSCs because of the shorter and the egalitarian nature of the Australian chain. The trading environment attributes that affected the occurrence/lack of bargaining in transactions were competition, availability of information, quality certainty, and the traders' opportunity cost of time/trading pressure. Knowledge about the factors that affect the selection of price-setting mechanisms in banana transactions and how they affected the selection may be useful in designing a banana supply chain system that could encourage fair value sharing. 

The marketing margin analysis contributed to the findings in three aspects. First, the Indonesian BSCs that supplied to traditional markets were found to distribute the chains' value relatively fairly among the upstream and downstream chain members, while most value in BSC2 that supplied to supermarkets was appropriated by the wholesale merchants. Second, it showed the capacity of the Indonesian BSCs to adapt to the lack of real-time market information. Third, the analysis also suggested that the lack of consistent selling units and grading standards within each chain often resulted in the loss of potential value of the bananas to farmers and increased the gain for downstream members. In the short-term, the issue of having consistent selling unit and grading standards is critical to prevent manipulation of the quality/price mix to the disadvantage of farmers. In the long-term, such consistency is important to increase efficiency and competitiveness in the operation of BSCs to meet consumers' needs. 

Both power and bargaining theories were found to be inappropriate approaches to study the power plays between chain members in the Indonesian BSCs. The former was unsuitable because of the non-existence of the power concept (the ability to control the decision variables in the marketing strategy of the chain partners) among the Indonesian chain members. Bargaining was not a suitable approach either because, against common belief that chain members may exert their power during transactions, power was not exerted during bargaining in individual banana transactions within the Indonesian BSCs. Instead, in the Indonesian BSCs, power was exerted through the societies within which the two traders resided or through the dominant institutions/companies in the chains. Individual power in the Indonesian traditional BSCs was derived from the societies that allowed individuals in certain positions (such as village wholesalers) to judge the quality of bananas and, hence, determine the prices one-sidedly. In BSCs that involved large and professional companies (such as supermarkets), power was exerted by determining what the societies should consider as 'normal', such as what varieties of bananas were available, how they should look and taste, and how they should be marketed. Bargaining in the Indonesian BSCs was less about a medium for power to be exercised; rather, it was a price-setting mechanism that depicted the relationships between the two chain members within their personal values and the trading environment. 

Supermarkets' attempts to introduce high quality standards as a common practice in the Indonesian agri-food industries could potentially widen the price gap between high and inferior quality bananas, which eventually would marginalize small farmers who were unable to produce high quality bananas because of their lack of capital to maintain their banana trees. A proposed BSC system that integrated the socio-culture values of the Indonesian BSCs and important features adapted from horticultural supply chains in developed countries was developed in this study. Unknowingly, some supply chain principles that those in supply chains in developed countries strive to achieve occurred naturally in the Indonesian traditional BSCs, particularly in the villages. The existence of peasant solidarity (pre-existing trust and respect for the right of everybody to earn money) and the informal micro-credit system through the upstream chain relationships in the Indonesian traditional BSCs encouraged fair value sharing among the chain members. Many of these features were eroded when relationships with supermarkets were formed; decreased competition and impersonal relationships at the downstream levels (in BSC2 and BSC3) allowed the emergence of opportunistic behaviour. 

The proposed system relies on the role of banana wholesale agents/merchants as the chain champions. Rather than avoiding middlemen in villages, as has happened in most government-initiated programs in the past. Village wholesalers should be involved to coordinate activities in the villages and to act as the contact persons that connect upstream chain members with the chain members at the downstream levels and the stakeholders. The important idea is to optimize the roles and responsibilities carried out by members at each level of the chain, rather than streamlining them, which has become the trend in building Western-style supply chains in developing countries. Construction of Agribusiness Terminal (ATs) near major cities and converting village wholesalers' warehouses into Sub Agribusiness Terminal (SATs) in the villages as points of assembly and centres for conducting value-adding activities would also be necessary. Cooperatives of wholesale merchants/agents would ideally be established to manage the activities at the ATs. 

In the proposed BSC system, farmers' key role is to make the most of the assistance offered to them to produce better quality bananas. Collectors, apart from their usual role in assembling bananas from the scattered production fields in the villages, would be the extended hands of their village wholesalers in coordinating activities and programs with farmers. Financial institutions' role in developing a credit system adapted to small-scale agricultural businesses would be crucial. Credit may be distributed through village wholesalers and collectors to ease monitoring costs and maintain the pre-existing credit relationships in the villages. The provision of credit to farmers to meet their unexpected needs is important to eliminate forward selling. Research centres/universities might be involved in the training of the chain members, particularly farmers. The government's roles in supporting and facilitating the whole process, and promoting the system to investors and input supply companies, would be critical to the success of the proposed system. Downstream chain members such as retailers would be responsible to ensure that information about consumer demands and preferences is passed up the chains to all stakeholders to enable the systems to adapt to changes in demand. Considering the complexities involved because of the potential number of participants involved, the proposed BSC system has to be planned carefully and commitments from all participants would need to be secured before implementation starts. 

Keyword Business logistics
Banana trade -- Indonesia
Banana trade -- Australia
Business logistics -- Indonesia
Business logistics -- Australia

 
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Created: Fri, 24 Aug 2007, 18:49:04 EST