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(Taken
from the paper “Exploring the link between supply chain
management and transaction cost economics: a cursory evaluation
of export mango and small-hold banana marketing in the Philippines”
by Albert P. Aquino, Ernesto O. Brown and Richard B. Daite
presented during the “International Seminar on Economics
and Marketing of Tropical and Sub-tropical Fruits” held
in Kuala Lumpur, Malaysia on 16-18 July 2007.)
Tropical
fruit marketing in the country is saddled with transaction
cost-related inefficiencies. Minimizing these “frictions”
under a coordinated supply chain regime may translate to an
efficient marketing system.
Tropical
fruits contribute largely to the Philippine economy with banana
and mango leading in terms of production area, quantity, and
value of production. The Philippines is also a significant
world trade player in these fruits, which bring in millions
of dollars in export earnings.
Export
mangoes are mainly the fresh fruits although puree, dried,
and concentrated juices have also penetrated and gained recognition
in the export market. The export variety, “Carabao Mango,”
also known as “Manila Super Mango” is popular
in the international market. About 95% of the country’s
mangoes are consumed locally, 75% are consumed fresh and the
rest are processed into various products.
Banana
is the country’s most important fruit crop in terms
of quantity and value of production, and export earnings.
As a consistent banana exporter, the Philippines has cornered
about 10% of the world market for this fruit. However, almost
75% are grown in small-hold farms and are largely consumed
domestically.
Supply
Chain Management Issues Related to Philippine Fruits: The
Case of Export Mango and Small-hold Banana
Two empirical works on Philippine fruits (mango and banana)
marketing show how marketing constraints are better understood
through a transaction cost perspective.
On
export mangoes, an ongoing PCARRD-ACIAR-UPLB research project
is mapping the marketing channels in order to recommend trial
improvements to current practices for better management of
mango supply chains.
On
small-hold banana, a recently-concluded study commissioned
by PCARRD analyzed the marketing efficiency in the main island
of Luzon based on data gathered from major banana-producing
provinces and key demand centers.
These
case studies bare the problems of price information asymmetry,
adversarial marketing, non-differentiated pricing, and difficulty
in relational contracting that take a toll on efficiency.
Price
information asymmetry at the farm level
Mango and banana growers do not have information as to where
their produce are destined – whether to local or export
markets. It is costly for them to access such information,
which have bearing on price setting at the farm gate. Since
price signals come exclusively from agents and traders, growers
are mere price-takers.
Adversarial
marketing
The loyalty of growers with traders is mostly non-existent
and repeat transactions cannot be ensured. Farmers sell their
mangos to the highest paying trader even if there were prior
arrangements with another trader. This “pole-vaulting”
tactic is also common among traders when dealing with exporters.
This
scheme may disturb the supply chain due to the inability of
the affected trader or exporter to raise the needed volume.
A better option would have been long-term relations that preserve
contracting integrity, thereby assuring repeated transactions.
Non-differentiated
pricing at the farm gate
Banana and mango traders normally buy on an “entire
lot” or “all-in” basis wherein fruits are
bought in bulk at a single price regardless of quality. Price
differentiation only occurs when the trader sorts and values
the fruits by quality (size and appearance).
In
banana, pricing inefficiency is compounded by well-established
traditional counting and volume discounting practices. The
volume discounting in Quirino province lets traders enjoy
a 10% volume discount on bananas being bought.
Meanwhile,
the lima-lima or patalsik system in Oriental Mindoro and karate
system in Quirino let traders take for free fingers in excess
of multiples of 5 to account for potential losses when marketing
and transporting the fruits. Thus, in a hand of 13 bananas,
the trader pays only for the price of 10.
Farm
gate prices as inadequate signals for farm productivity enhancing
investments
The inefficient pricing system does not provide incentives
for farmers to invest in quality-enhancing technologies and
farm management practices. When the fruits are bought on “all-in”
basis regardless of quality, a farmer will not strive to raise
quality since he is paid a single price for the entire lot
anyway.
Given
this set-up, innovations at the farm level may not suffice
for farmers to secure the gains from productivity.
Coordinated
supply chaining to curb transaction costs
Supply chain-related recommendations, like the “cluster
approach” in mango, must be seen in the context of transaction
cost-governance structure. A coordinated mango supply chain
would enable full and transparent exchanges of information
on prices, quality, and volume, among others.
Relational
marketing between growers and exporters could minimize information
asymmetry and the need for layers of middlemen. In banana,
a key recommendation is to form a strategic cluster that could
synchronize production and farm gate marketing operations.
Farmers would usually find it costlier to arrange for the
assembly and transport of their harvest by themselves when
using the spot market.
Under
a coordinated supply chain, the inefficient “rumble”
or “all-in” pricing scheme may be debunked when
information is transparent and trust is maintained along the
chain.
Conclusion
In a coordinated supply chain, maintaining long-term relationships
among different actors can encourage preservation and improvement
of quality and volume along the chain. At the upstream, producers
will have the incentives to revise production process to improve
quality and volume. At midstream, the middlemen, who source
products from growers, will necessarily maintain the quality
and deliver the products to the final retailers. Maintaining
contractual relations along the chain minimizes uncertainty
and the producers’ collective action rids the farm gate
of disadvantageous price-setting arrangements.
In
this set-up, transaction costs are economized leading to a
better-functioning marketing chain. Whatever governance structure
arises, the fundamental issues on logistics and technology
still need to be addressed. (Richard B. Daite, S&T Media
Service)
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