- Email: [email protected]
Small farmer suppliers from local to global
JBR-08898; No of Pages 6 Journal of Business Research xxx (2016) xxx–xxx
Contents lists available at ScienceDirect
Journal of Business Research
Small farmer suppliers from local to global Francisco Leguizamon ⁎, Guillermo Selva 1, Manuel Santos 2 INCAE Business School, La Garita, Alajuela, Costa Rica
a r t i c l e
i n f o
Article history: Received 1 February 2015 Received in revised form 1 December 2015 Accepted 1 January 2016 Available online xxxx Keywords: Agricultural supply chain Small farmers Management mindfulness Emerging strategy
a b s t r a c t This case study analyzes Walmart's initiative to purchase directly from small fruit and vegetable farmers in developing countries through its Global Direct Farm Program by recounting the development of its predecessor, the Tierra Fértil (Fertile Soil) program in Central America. This case demonstrates how the program creates both economic value for the company and social value for participating farmers. Importantly, the case reveals general learning during the program's successive stages, the close relationship between the company and suppliers, and the support provided to farmers to ensure the use of best practices in agricultural production. The case also details the processes required to prepare, plant, grow, harvest, clean, pack, and deliver agricultural products meeting all relevant requirements. This case thus portrays four of the principles of mindfulness as applied to an emerging strategy: (1) do not oversimplify, (2) be sensitive to operations, (3) commit to resilience, and (4) defer to experts. © 2016 Published by Elsevier Inc.
1. Introduction
2. The case
This article is comprised of two sections. The first part of the study is a longitudinal analysis of the Tierra Fértil Program, an agricultural supply program consisting of small farmers who supply Walmart directly. This section presents the program's trajectory, from its creation in 1972 by the CEO of CSU-CCA, a Costa Rican supermarket chain operating in Central America, through 2012, when Walmart adopts and implements the program, as its own initiative, in several developing countries around the world. Primary data were obtained from three smaller case studies. First, CSU-CCA (Prado & Leguizamón, 2004) portrays the Tierra Fértil Program as a social responsibility-driven initiative of the above-mentioned supermarket chain. Second, Tierra Fértil Program (2009) (Leguizamón & Ickis) details the consolidation stage of the program in Costa Rica, Nicaragua, and Honduras, up to when Walmart acquires CCU-CSA, in 2009. Third, Direct Farm Supply Program (2014) (Leguizamón & Santos) describes the program's road map until the point at which Walmart's CEO decides to expand it to other parts of the world. The article then goes on to propose that the maturation of the program reflects the inclusion of several principles of mindfulness, as enunciated by Weick, Sutcliffe, and Obstfeld (2008) and explains the relative success of the program in Central America, which may even help predict the possibilities of further achievements in other parts of the world.
On October 4, 2011, Mike Duke, President and CEO of Walmart, announces that the company has decided to make the Global Direct Farm Program its new global strategy for direct agricultural product supply. To support farmers and their communities, we promise to sell one billion dollars of food products produced by one million smalland medium-sized farmers in emerging markets and to train one million farmers and farm workers, of which we expect half to be women. By doing this, we expect to increase income for these people by 10 to 15%. “Walmart Central America already has the best Global Direct Farm Program for small and medium-sized farmers, eliminating intermediaries, which increases farmer income and emphasizes sustainability. We are working to replicate the success of this program in the communities that we serve around the world, while clearly understanding that each region has its own opportunities, needs and challenges. The Direct Farm Program allows us to offer fresher products that can be bought locally in communities that are close to the farms.” (Leguizamón & Santos, 2014, p. 14)
⁎ Corresponding author. Tel.: +506 22930268. E-mail addresses: [email protected] (F. Leguizamon), [email protected] (G. Selva), [email protected] (M. Santos). 1 Tel.: + 506 24372299. 2 Tel.: + 506 88463324.
3. Background Enrique Uribe, President of CSU-CCA, a chain of supermarkets in Costa Rica, and Jesús Salas, an agricultural engineer (Prado & Leguizamón, 2004), join efforts and launch the Global Direct Farm Program. In March 1972, Salas takes over the management of the CCU-CCA fruit and vegetable warehouse, Hortifruti, which is also the unit responsible for buying and managing production from small farmers. To improve on the system, Uribe and Salas develop the idea of going
http://dx.doi.org/10.1016/j.jbusres.2016.03.017 0148-2963/© 2016 Published by Elsevier Inc.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
2
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
directly to small farmer producers by using gathering centers and Hortifruti grows along with small farmers rather than large farmers. Hortifruti proposes to manage production from the field while providing each farmer permanent advisory services designed to improve their processes, all this with the ultimate satisfaction of the supermarket's consumers in mind. The operational stages and links in Walmart's agro-industrial chain, in addition to each player's primary role and price index formation, can be observed in Fig. 1. With the inclusion of direct farm purchases, the roles within the system evolve as follows: • Farmer: Farmers enter into an agreement with Hortifruti regarding the amount and types of crops that will be planted and accepts advice regarding appropriate agricultural management techniques to prepare the soil, plant, grow, harvest, clean, pack, and deliver the products to Hortifruti. • Truck driver: This role is now often carried out by the farmer, who provides transportation to deliver the agreed-upon amounts of products based on the established timeframe. • Cenada: The non-affiliated national distribution center, provides products to other markets and/or supermarket chains. • Hortifruti: Hortifruti develops close relationships with the farmers participating in the Tierra Fertil Program by entering into individual agreements with them regarding crops, volumes, and prices (Leguizamón & Ickis, 2009). Mr. Salas highlights several experiences regarding the development of the program between 1972 and 1983 (J. Salas, personal communication, November 11, 2013): “Reaching this level of maturity is not easy. It is hard to convince one farmer to change his polypropylene bags to wood crates (or to the even more practical plastic crates) for his lettuce, or to build a selection and treatment plant that would strengthen his business. “From then on, the operation becomes profitable for both Hortifruti and the farmer. Agreeing on prices is something that needs a lot of work. Hortifruti sets a margin that pays for the wholesale center's costs and allows enough profit for the supermarket.” So, why does the supermarket chain begin working with small-size farmers as providers of fruits and vegetables? The purpose behind the Direct Farm supply model is to satisfy the growing demand for fresh fruits and farm products while providing customers with a wide variety of high-quality products at low prices. As the supermarket chain grows and the supply of fruits and vegetables becomes difficult, Hortifruti realizes the need to develop partnership relationships with small suppliers (Wagner and Boutellier, 2002). The company also identifies the need to develop these new and small suppliers in the same manner as other innovative companies that are pursuing continuous improvement initiatives to enhance their own performance do, that is, by monitoring small failures (Weick et al., 2008) to better serve their customers (Lambert & Knemeyer, 2004; Liker & Choi, 2004).
The Global Direct Farm Program is significant for a number of reasons: • Farmers' experience an increase in income in areas where supermarkets operate. • Small farmers benefit from the application of best practices in agricultural production. • The program generates a more favorable relationship with the community. 4. The Costa Rica experience Hortifruti engages with farmers, and their families, who plant and harvest one single crop, generation after generation. These farmers often have little formal schooling but possess a deep knowledge of practices appropriate to their environment. They typically do not have access to technology, cleaning or packing systems, transportation, working capital, or even own telephones: all conditions that frequently create market gaps quickly filled by intermediaries. In addition, the fertilization, irrigation, and packing line systems used by these farmers are rudimentary with no guarantee that they will actually sell their products. They harvest based on tradition and intuition. While they definitely know how to produce, they seldom take into account market conditions such as price, supply or demand. Hortifruti's first undertaking is to modify production plans, establish quality standards, use better packaging materials, and resolve transportation issues. In addition, the company establishes its own gathering centers. These initial improvements focus on reducing product spoilage. Over time, the farmers take on the responsibility of these functions and intermediaries virtually disappear. The company seeks to diversify products, introduce new varieties grown on farms, schedule deliveries, stagger harvests, promote the use of new technologies and specialized equipment along with the rational use of agrochemical products, and help implement efficient irrigation, management, and environmental conservation practices throughout the growing and harvesting processes. This new approach changes and standardizes the processes of planting, growing, harvesting, storing, transporting and post-harvest land treatment, while seeking to avoid over-simplification. Hortifruti persuades its new small farmer suppliers to be sensitive to better operational practices, in the same manner the organization practices sensitivity regarding its own operations (Weick et al., 2008). Under the Tierra Fertil Program, and in compliance with the provisions set forth by Hortifruti, each farmer agrees to • • • • • •
designate an area of land to grow the crop, receive training, practice what is learned in order to meet quality and sanitary standards, sell the agreed-upon harvest exclusively to Hortifruti, respect standards for financing, and pay their loans back on time.
Fig. 1. Key concepts and relationships.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
Hortifruti supports farmers in other areas as well, such as guaranteed purchases, product diversification programs, best agricultural practices (BAP) and best manufacturing practices (BMP), control of irrigation water, production staggering and sustainability, and environmental conservation programs. In providing technical assistance, Hortifruti maintains sensitivity in all components of the operations: seed selection, soil rotation, fertilization, pest and disease control programs, use of appropriate packing materials to ensure sanitation and reduce spoilage, and constant monitoring of market prices (Weick et al., 2008). Hortifruti is not always the buyer. José Ramirez, a farmer with a plot of land in the Central Valley, plants several crops. He has grown to become a medium-size farmer and now sells to three types of clients: Cenada (the wholesale market), Hortifruti, and directly to restaurants. Ramirez states, “Hortifruti's standards are very high. Lettuce, for example, has to weigh a minimum of 200 grams. It cannot be brown and it cannot have slugs or spiders. That is not easy to accomplish, so I do not think that organic production is profitable; it requires a lot of labor because you cannot use herbicides, and the product does not grow as well because you cannot use non-organic fertilizers. “Hortifruti becomes very necessary for small farmers because nobody else will buy such small amounts of production. One can say that most farmers are happy with Hortifruti. Once they get used to their standards, things go well for them. Hortifruti receives large quantities and pays every two weeks. If you deliver today, in two weeks, or three at the most, you get your payment. “If I want to continue working with Hortifruti, I have to think about getting a truck. A cheap one costs $22,000. To buy that, I have to do good business, which isn't easy, especially selling small amounts.” (Leguizamon & Santos, 2014, p. 21)
5. Tierra Fertil in Nicaragua The program expands from Costa Rica to Nicaragua in 1998. Prior to this, and during the Sandinista Revolution, the government ran local supermarkets, importing nearly all fruits and vegetables. In 1993, Nicaragua, with 4.9 million inhabitants, has only five supermarkets; Costa Rica, with 3.7 million inhabitants, has 113 supermarkets; and Guatemala, with 13.0 million inhabitants, has 66 (Reardon & Berdegué, 2003). In 1991, new supermarkets emerge with the change of government. As awareness about quality and hygiene standards grows, fresh products begin to be a differentiating factor. The agricultural sector develops slowly. Farmers who specialize in a single crop, have poor logistics, considerable losses, low-quality and sanitary standards, and a lack of uniformity in product size. All these problems translate into reduced supply for Hortifruti. From the start, the Tierra Fertil program encounters several obstacles in Nicaragua. At the time, knowledge among small farmers in Nicaragua focuses on rudimentary agricultural practices, inequitable marketing arrangements, unrealistic expectations of income, poor relationships with other community members, and an aversion to risk-taking. With the exception of land use, everything introduced by Hortifruti is new: products, planting procedures, input requirements, relationships with new suppliers, growing and harvesting seasons and their practices, quality demands (in terms of the product's color, size, and texture), product packing and conservation techniques, price-negotiating strategies, and payment modalities. Based on the Costa Rica experience, a group of trained and motivated agronomists travels to Nicaragua to recruit and register 350 farmers with the program. Soon after, only 250 farmers – those with the most resilience – remain in the program. (Weick et al., 2008). The Tierra Fertil agronomists attribute the high desertion rate to the farmers' unwillingness to accept the new discipline of vegetable production and to an incomplete application of new agricultural practices. These factors result in products that do not meet standards, lower-than-expected profits
3
for the farmers, and failed commitments. In addition, whereas most Costa Rican farmers have finished primary school, few Nicaraguan farmers have done so. Hortifruti persistently works with those farmers that are willing to introduce the new products and best practices into their farming processes. The organization and its personnel working in Nicaragua do not oversimplify the tasks at hand, based on their success in Costa Rica; on the contrary, they identify the challenges, creatively react to different conditions and tenaciously work with the small farmer suppliers to overcome obstacles (Weick et al., 2008). Tierra Fertil begins working with farmers from several regions to produce varieties of previously unknown products in Nicaragua, such as baby vegetables, carrots, and zucchini. Jorge Cavallini, Hortifruti's Agricultural Development Director, commented on this topic: “Some farmers are living in very precarious situations because they insist on growing crops on land that is not appropriate. “To deal with the cultural barriers that field personnel face, we hire agricultural professionals who, in addition to knowing growing techniques, are specialists in social factors. They understand traditional farming cultures and processes and are capable of facilitating transitions toward vegetable production. “When these professionals from Tierra Fertil arrive, they find that farmers' profits are so low that they are barely surviving. When we entered Nicaragua, the retail price at that time is almost four times the price paid to the farmer. The first step is to open storage centers to solve the problem of long distances and dangerous roads. When they start earning more money, the program quickly gains credibility among farmers” (Leguizamon & Ickis, 2009, p. 7, 8). Hortifruti has a payment policy whereby small producers receive cash and medium-sized producers receive short-term payments. For many farmers, this is one of the program's benefits. As in Costa Rica, the program's product quality standards (traceability, size, appearance, and safe transportation, among others) help several farmers increase their export capacity. Jugos del Valle, a company owned by tenant farmers, initially sells its product to intermediaries. When Hortifruti becomes one of its main clients, the company is selling less than US $450 per month. By 2003, its sales increase to US $15,000 per month. With production increases and proper land use, products are consistently of higher quality and sales volume increases. Consumers now receive a greater variety of higher quality products at stable prices. One of Hortifruti's programs helps farmers access the financial system because banks offer lower interest rates when they identify lower risks in the relationship between farmers and a prime customer. In general, the program's implementation represents an example of collaborative teamwork among the different actors in society.
6. The Honduras experience The program expands to Honduras in 2001 with good results. Farmers' sales increase and credit histories are established. With regard to the implementation of the Tierra Fertil Program, Cavallini states the following: “With technical assistance and higher quality demands, farmers improve their export capacity, as in Costa Rica. However, technical assistance from the government in Honduras is practically non-existent. In Costa Rica, when there is a problem with the roots of a crop, the farmer contacts the Ministry of Agriculture or a fertilizer product company, searches online, gathers information and solves the problem. In Honduras, we provide seeds, help farmers become creditworthy, and teach them to use drip irrigation. We have to be involved in the whole process.” (Leguizamon & Ickis, 2009, p, 8) Again, Hortifruti adapts to the different requirements of operating in Honduras when implementing Tierra Fertil, avoiding both shortcuts and oversimplifying the tasks of the processes. Hortifruti helps farmers
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
4
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
understand the benefits of the program and works in collaboration with institutional agents (Weick et al., 2008). 7. Walmart in Central America In September 2005, Walmart announces the purchase of one-third of CARHCO stock, the Central American Retail Holding Company, the biggest retail operator of the region. In 2007, H. Lee Scott, Global CEO of Walmart, travels to Costa Rica to become better acquainted with the recently acquired supermarket chain. He is surprised when he finds a successful direct supply model. In 2009, Walmart Mexico becomes Walmart Mexico and Central America. Among other things, the operation initiates discussions about maintaining the Tierra Fertil Program run by Hortifruti both as a means through which CSU-CCA can buy fruits and vegetables directly from small- and medium-sized farmers, which they have done for more than two decades, and as a profit center. Walmart's managers begin to question whether they should adopt the program as a way to offer supermarket consumers excellent quality products at the lowest market prices. The consensus is that the possibility of supplying high-quality products at a good price through a conglomerate of small producers implies rigorous supply chain management that can prove difficult. 8. Walmart executives' visits In early 2010, Michael Terry Duke, appointed Walmart's Global President in 2009, visits several Costa Rican farmers that participate in the Tierra Fértil Program. During one of his first visits, he arrives precisely when a farmer's wife is taking her two children to school. At the time of that particular visit, the farmer already owns his home, a warehouse, a product washing machine, a tractor, and rents additional land to grow crops. One of the visitors from the local team says about the visit, “Mike is positively surprised. Not only has the farmer gained economic prosperity; he is also sending his children to school” (Leguizamon & Santos, 2014, p, 11, 12). In a later speech, Michael Duke relates his surprise at seeing how the farmers' children are going to school well dressed, with shoes, uniforms, and backpacks, expressing their desire to go to university. One of the kids is interested in becoming an agronomist like his father. Then, on October 14, 2010, Walmart unveils its global sustainable agricultural goals, including sales of $1 billion in food sourced from 1 million small- and medium-sized farmers. In support of the Tierra Fertil Program, Walmart will provide training to 1 million farmers and farm workers, half of them women, in subject areas such as crop selection and sustainable farming practices, all by the end of 2015. As a result, these small farmers may expect an increase in income between 10% and 15%. 9. Direct farm summit in Costa Rica In an effort to support these goals and implement them on a global level, Walmart's CEO decides to host a high-level event with a group of senior managers to analyze the Global Direct Farm program's characteristics in detail and to promote its general adoption. The CEO explains, “The first meeting of Walmart's senior executives is held in San José, Costa Rica, from November 8 to 10 in 2011. INCAE Business School, one of the top business schools in Latin America, is the host. This meeting makes our dreams come true. For the first time, we bring together leaders who produce and buy products from our stores around the world. Executives come from Argentina, Brazil, Canada, Chile, China, Japan, Mexico, Puerto Rico, South Africa, the United Kingdom and the United States. “The purpose is to focus our Global Direct Farm Team to determine our goals and create a platform from which to lever our Global Direct Farm business model. For three days, we collaborate and gain direct experience regarding our farms, with the following objectives in mind:
1) to create a shared vision for a Global Direct Farm strategy and our links with small- and medium-sized farmers; 2) to learn what was required to create the Global Direct Farm Program, commercially, environmentally and socially speaking; 3) to exchange knowledge and best practices; 4) to spend some time at the farms to foster understanding and 5) to create a common understanding about how to measure progress. “This meeting is a great example of Walmart bringing together worldwide operations to scale a program that is very successful in one of our markets, analyzing the business models of the product supply source and exploring how the attributes of economic, social and environmental sustainability in the new model can be integrated with them. We are waiting for the innovation that will result from this first collaboration. We are changing lives, one farmer at a time.” (Leguizamon & Santos, 2014, p, 13) The critical success factors and the barriers that would have to be overcome to implement the program become clear to Walmart managers. They come to understand that the Global Direct Farm program is one that evolves over time, through a process that focuses on the importance of supporting small farmers' business development, and now have the map to adopt the program to other countries around the world. 10. Lessons learned from the implementation of the direct supply model An analysis of the implementation of this successful direct supply model sheds light on the program's essential elements, including direct observations made during and about the program's implementation, detailed monitoring, the establishment of a profit center, scrutiny of the model by managers from different countries, coordination, innovation, corporate strategy, and sustainability (Weick et al., 2008). 10.1. Direct observation Before deciding whether to continue or suspend the program, Walmart's managers make direct observations of its processes, personally visiting small farmers, as well as engaging in a detailed examination of not only the program's operations but also its economic and social impact on both the farmers and the company, while avoiding oversimplification (Weick et al., 2008). Despite the company's willingness to consider the program's benefits, its managers must proceed with caution to avoid, for example, the difficulties faced in Germany when trying to apply a model successfully implemented in the USA. In Central America, the program is already beyond the pilot project stage. In fact, the company can point to three success stories from three different countries. The organization can learn important lessons from these thriving experiences and use these antecedents to make adjustments in other countries when expanding the program in the future. 10.2. Monitoring The decision to consolidate the program in other Central American countries and maintain constant monitoring of the progress of these programs allows managers to identify best practices, make salient observations, scope out potential problems, and undertake modifications to improve implementation. In summary, managers show a strong will for continuous learning (Weick et al., 2008). 10.3. Profit center Walmart's decision to keep the program as a profit center – reaffirming both the program's importance to the company's business goals as well as the company's social goals that are implicit in the program – leads to long-term sustainability.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
10.4. Scrutiny and discussion of the model Before deciding whether to implement the Global Direct Farm strategy, a group of the company's managers from different parts of the world comes together to learn, evaluate, and estimate the appropriateness of generalizing the model to other developing countries in which the company operates. 10.5. Coordination The new system not only assumes a change in the supply source but also demands complementary efforts in agricultural extension support to help small farmers incorporate new technologies into planting, growing, harvesting, and storing their products. The new Tierra Fertil Program also represents a new relationship among registry, control, and internal finance activities. Each actor must relate to the other actors and be aware of unexpected challenges that may surface in the development process. Thriving distribution and retail companies primarily ground their success on their mastery of all operations through the vertical integration of supply chains (Fisher & Raman, 2010; Lee, 2004) and, later, by opening spaces to develop small suppliers as direct suppliers. The strong support provided by top management, for experts and responsible parties in the agricultural chain, consolidates the model (Weick et al., 2008). The relationships observed in the Tierra Fertil Program are qualitatively defined by several factors that are generally mentioned in supply chain management literature as contributors to develop and strengthen collaborative ties between suppliers and customers (Chopra & Meindl, 2013; Fawcett, Magnan, & McCarter, 2008; Liker & Choi, 2004). These include frequent communication and exchanges of information regarding production schedules, delivery and quality issues, clear supplier performance criteria, the goodwill to develop the supplier's abilities, long-term contracts, frequent visits and informal contact, and market adaptations. Several researchers, in different parts of the world, have also identified the benefits of food supply chains whose members work in collaboration to produce, distribute, and sell fruits, vegetables and other agricultural products competitively (Hogarth-Scott & Dapiran, 1997; Kottila & Rönni, 2008; Mikkola, 2008; Rabade & Alfaro, 2006). The successful expansion of the Global Direct Farm Program depends largely on the ability of program leaders to replicate the processes with the creativity needed to make improvements along with a willingness to face any unexpected situations that may surface while working with small farmers. Success also depends on the farmers' abilities to access public and institutional services. “The goal is a strategy that is forever morphing, forever conforming itself to emerging opportunities and incipient trends” (Hamel & Välikangas, 2003, p. 53).
5
challenges and obstacles that are different from previous successful experiences, and diligently works to surpass these barriers without oversimplifying matters (Weick et al., 2008). Fawcett, Jones, and Fawcett (2012) indicate that large innovative companies, such as Honda, Procter and Gamble and Walmart, largely depend on other members in their supply chains with distinctive and complementary abilities to offer innovative products and processes through special collaborative relationships. Leat and Revoredo-Giha (2008) posit that such relationships must be stable and mutually beneficial to be sustainable and add that many now acknowledge that the proactive management of such relationships represents a critical source of competitive advantage. Fig. 2 presents the five interrelated elements of the Global Direct Farm system, revealing the critical importance of these interrelationships and the complementary nature of these five elements in achieving the program's goals (Weick et al., 2008). Hortifruti understands the strategic implications of the direct supply model to satisfy a continuously growing and more challenging demand from end consumers. The CEO of the company is involved in the initial stages of the program and gives his full support to implementing the program in Costa Rica. Hortifruti works closely with small farmers to increase their capabilities and learns from the responses of the farmers and the environment. When the chain expands to Nicaragua and Honduras, the direct supply program is part of the penetration strategy in those new markets. The chain learns quickly that the new business, agricultural, and social environments are not the same and, with great doses of innovation, circumvents the barriers and challenges to assist the Nicaraguan and Honduran farmers in elevating their production to the necessary performance level by helping them continuously improve their abilities and results. The level of internal (within the supermarket chain) communications and coordination is critical to the program's success in obtaining the required support for the initiatives of the direct supply program. Similarly, the level of communication with farmers is also important to support their efforts, monitor their progress, and guide them in the application of better agricultural- and produce-processing techniques. The program generates a self-strengthening mechanism as Hortifruti and the farmers find that the program is producing sustainable mutual benefits. The company enjoys a reliable supply of fruits and vegetables at competitive prices, and the small farmers find their income growing because of their entrepreneurial efforts, which eventually yields a higher quality of life for the farmers and their families. The core of the program that sustains all other elements is the careful attention that both Hortifruti and the farmers pay to the full range of
10.6. Innovation Direct supply from small farmers represents an innovation that substitutes for, or complements, other supply systems. Before implementation, the responsible parties must carry out a series of actions, including • • • •
research local production processes and consumption patterns; run tests with groups of potential suppliers; elaborate detailed definitions of new practices; methodically observe, to anticipate potential initial problems related to consumption, production, and trial results; • make adjustments before generalizing the program model; and/or • invite new groups to join as suppliers. In this manner, the company can systematically evaluate the elements of the model and thus react to implementation challenges in different locations. The organization scans the environment, identifies
Fig. 2. Channels.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
6
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
operations related to farming, preparation, processing, and delivery of the applicable fruits and vegetables. 10.7. Corporate strategy Because the Global Direct Farm Program is more demanding than traditional supply systems in terms of establishing relationships with suppliers and the agricultural extension agents responsible for working with small farmers, its basis lies on a high level of trust in the program managers' abilities and on strong support from senior management. 10.8. Sustainability Walmart's commitment to sustainability in recent years creates a favorable environment to believe that the corporate program has great potential for positive social impact around the world. The program is no less ambitious or demanding with respect to sustainability. In fact, even when the number of suppliers is small, the program can provide examples of satisfying results. However, as the program grows, a more rigorous demonstration of positive impacts must consider a range of topics, including incorporation of women as suppliers, the appropriate use of water, biodiversity, and improving the quality of life of small farmers' families. Achieving these goals and measuring the results rigorously is a particularly critical undertaking for future program expansion. The case clearly demonstrates that including a broad base of farmers in the supply chain is important for both suppliers' income and Walmart's supply practices. Without this extended base of farmers, Walmart would not be able to profitably offer a large variety of products, particularly in emerging markets. The farmers also obtain important benefits, particularly due to their transformation from traditional farming to modern farming. This change means both higher incomes and improved quality of life for suppliers and their families. A review of the supply program's history illustrates certain key interrelated factors for success. The program originates when the president of a Costa Rican supermarket chain realizes that unless his company finds a way to cut distances and simplify the supply chain by buying directly from local producers, they will not be able to meet the demand for fresh vegetables in a growing and more pressing market. The decision to buy directly from suppliers goes against the common practice of buying at a wholesale center and pushes the supermarket chain to improve operational processes, including setting competitive prices, providing technical assistance to producers and later expanding the program to other countries as the chain grows. The second key factor is the meticulous analysis and monitoring process undertaken by Walmart's managers when they purchase the local company almost 30 years later. They critically and independently examine all aspects of the program's history to ascertain the appropriateness of generalizing the best practices of this program in other parts of Central America. With this attention to detail, the Tierra Fertil Program continues to grow well beyond the first decade of the new century. The third key element that explains the program's duration and later success is a thorough review of the company's supply operations, from identifying farmers and training them in agricultural practices for each crop, to negotiating prices, verifying product quality along the supply chain until reaching the supermarket and consumers, and fostering long-term relationships with individual suppliers. Mikkola (2008) stipulates that a key component of survival and competitive success in supply chains is the ability of members to learn from one another and
effectively adapt to market changes or to new markets based on the need to enhance coordination in the supply chain. These three elements help ensure a promising future for the program. In fact, the decision made by Walmart's CEO to adopt the Global Direct Farm Program is similar to that made some forty years earlier by the president of the Costa Rican supermarket chain to implement the program on a national level (Leguizamon & Ickis, 2009). A review of progress achieved and problems faced by the program at this point may be useful to help refine goals and further improve results. Lastly, when preparing to implement the program, each country manager must identify the particular characteristics of her/his environment and carefully observe the different implementation stages. With no universal formula to address problems that may arise, country managers, and their personnel, must face these problems with the same creativity and independence employed by the managers of the Costa Rican supermarket chain when they implemented the program in other countries in Central America. In conclusion, Walmart's commitment to sustainability in recent years creates a favorable environment in which to believe that this program has a high potential for social impact around the world. Each of the country managers and their partners must be a model of resilience to overcome all future hurdles. Acknowledgments The authors are grateful to John Ickis, Connie Jones, and American Journal Experts for their editorial assistance. References Chopra, S., & Meindl, P. (2013). Supply chain management, strategy, practices and operations. Upper Saddle River, NJ, USA: Pearson Education Inc. Fawcett, S. E., Jones, S. L., & Fawcett, A. M. (2012). Supply chain trust: The catalyst for collaborative innovation. Business Horizons, 55(2), 163–178. Fawcett, S. E., Magnan, G. M., & McCarter, M. W. (2008). A three-stage implementation model of supply chain collaboration. Journal of Business Logistics, 29(1), 93–112. Fisher, M., & Raman, A. (2010). The new science of retailing. Boston: Harvard Business Review Press. Hamel, G., & Välikangas, L. (2003). The quest for resilience. Harvard Business Review, 81(9), 52–63. Hogarth-Scott, S., & Dapiran, G. P. (1997). Management relationships in the food distribution channels in the UK and Australia. Management Decision, 35(4), 310–318. Kottila, M., & Rönni, P. (2008). Collaboration and trust in two organic food chains. British Food Journal, 110(4/5), 376–394. Lambert, D. M., & Knemeyer, A. M. (2004). We're in this together. Harvard Business Review, 82(12), 114–122. Leat, P., & Revoredo-Giha, C. (2008). Building collaborative agri-food supply chains. British Food Journal, 110(4/5), 395–411. Lee, H. L. (2004). The triple-A supply chain. Harvard Business Review, 82(10), 102–112. Leguizamón, F., & Ickis, J. C. (2009). Caso. Tierra Fértil. SEKN: INCAE. Leguizamón, F., & Santos, M. (2014). Global Direct Farm Program, case study. INCAE Business School. Liker, J. K., & Choi, T. Y. (2004). Building strong supplier relationships. Harvard Business Review, 82(12), 104–113. Mikkola, M. (2008). Coordinative structures and development of food supply chains. British Food Journal, 110(2), 189–205. Prado, A., & Leguizamón, F. (2004). CSU-CCA, case study. INCAE-SEKN. Rábade, L. A., & Alfaro, J. A. (2006). Buyer–supplier relationship's influence on traceability implementation in the vegetable industry. Journal of Purchasing and Supply Management, 12(1), 39–50. Reardon, T., & Berdegué, J. A. (2003). La rápida expansión de los supermercados en América Latina: Desafíos y oportunidades para el desarrollo. Estudios Sociedade e Agricultura, 23, 5–41. Wagner, S. M., & Boutellier, R. (2002). Capabilities for managing a portfolio of supplier relationships. Nov-Dec: Business Horizons, 79–88. Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2008). Organizing for high reliability: Processes of collective mindfulness. In A. Boin (Ed.), Crisis management VOL. III. London: Sage Publications Ltd.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
Contents lists available at ScienceDirect
Journal of Business Research
Small farmer suppliers from local to global Francisco Leguizamon ⁎, Guillermo Selva 1, Manuel Santos 2 INCAE Business School, La Garita, Alajuela, Costa Rica
a r t i c l e
i n f o
Article history: Received 1 February 2015 Received in revised form 1 December 2015 Accepted 1 January 2016 Available online xxxx Keywords: Agricultural supply chain Small farmers Management mindfulness Emerging strategy
a b s t r a c t This case study analyzes Walmart's initiative to purchase directly from small fruit and vegetable farmers in developing countries through its Global Direct Farm Program by recounting the development of its predecessor, the Tierra Fértil (Fertile Soil) program in Central America. This case demonstrates how the program creates both economic value for the company and social value for participating farmers. Importantly, the case reveals general learning during the program's successive stages, the close relationship between the company and suppliers, and the support provided to farmers to ensure the use of best practices in agricultural production. The case also details the processes required to prepare, plant, grow, harvest, clean, pack, and deliver agricultural products meeting all relevant requirements. This case thus portrays four of the principles of mindfulness as applied to an emerging strategy: (1) do not oversimplify, (2) be sensitive to operations, (3) commit to resilience, and (4) defer to experts. © 2016 Published by Elsevier Inc.
1. Introduction
2. The case
This article is comprised of two sections. The first part of the study is a longitudinal analysis of the Tierra Fértil Program, an agricultural supply program consisting of small farmers who supply Walmart directly. This section presents the program's trajectory, from its creation in 1972 by the CEO of CSU-CCA, a Costa Rican supermarket chain operating in Central America, through 2012, when Walmart adopts and implements the program, as its own initiative, in several developing countries around the world. Primary data were obtained from three smaller case studies. First, CSU-CCA (Prado & Leguizamón, 2004) portrays the Tierra Fértil Program as a social responsibility-driven initiative of the above-mentioned supermarket chain. Second, Tierra Fértil Program (2009) (Leguizamón & Ickis) details the consolidation stage of the program in Costa Rica, Nicaragua, and Honduras, up to when Walmart acquires CCU-CSA, in 2009. Third, Direct Farm Supply Program (2014) (Leguizamón & Santos) describes the program's road map until the point at which Walmart's CEO decides to expand it to other parts of the world. The article then goes on to propose that the maturation of the program reflects the inclusion of several principles of mindfulness, as enunciated by Weick, Sutcliffe, and Obstfeld (2008) and explains the relative success of the program in Central America, which may even help predict the possibilities of further achievements in other parts of the world.
On October 4, 2011, Mike Duke, President and CEO of Walmart, announces that the company has decided to make the Global Direct Farm Program its new global strategy for direct agricultural product supply. To support farmers and their communities, we promise to sell one billion dollars of food products produced by one million smalland medium-sized farmers in emerging markets and to train one million farmers and farm workers, of which we expect half to be women. By doing this, we expect to increase income for these people by 10 to 15%. “Walmart Central America already has the best Global Direct Farm Program for small and medium-sized farmers, eliminating intermediaries, which increases farmer income and emphasizes sustainability. We are working to replicate the success of this program in the communities that we serve around the world, while clearly understanding that each region has its own opportunities, needs and challenges. The Direct Farm Program allows us to offer fresher products that can be bought locally in communities that are close to the farms.” (Leguizamón & Santos, 2014, p. 14)
⁎ Corresponding author. Tel.: +506 22930268. E-mail addresses: [email protected] (F. Leguizamon), [email protected] (G. Selva), [email protected] (M. Santos). 1 Tel.: + 506 24372299. 2 Tel.: + 506 88463324.
3. Background Enrique Uribe, President of CSU-CCA, a chain of supermarkets in Costa Rica, and Jesús Salas, an agricultural engineer (Prado & Leguizamón, 2004), join efforts and launch the Global Direct Farm Program. In March 1972, Salas takes over the management of the CCU-CCA fruit and vegetable warehouse, Hortifruti, which is also the unit responsible for buying and managing production from small farmers. To improve on the system, Uribe and Salas develop the idea of going
http://dx.doi.org/10.1016/j.jbusres.2016.03.017 0148-2963/© 2016 Published by Elsevier Inc.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
2
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
directly to small farmer producers by using gathering centers and Hortifruti grows along with small farmers rather than large farmers. Hortifruti proposes to manage production from the field while providing each farmer permanent advisory services designed to improve their processes, all this with the ultimate satisfaction of the supermarket's consumers in mind. The operational stages and links in Walmart's agro-industrial chain, in addition to each player's primary role and price index formation, can be observed in Fig. 1. With the inclusion of direct farm purchases, the roles within the system evolve as follows: • Farmer: Farmers enter into an agreement with Hortifruti regarding the amount and types of crops that will be planted and accepts advice regarding appropriate agricultural management techniques to prepare the soil, plant, grow, harvest, clean, pack, and deliver the products to Hortifruti. • Truck driver: This role is now often carried out by the farmer, who provides transportation to deliver the agreed-upon amounts of products based on the established timeframe. • Cenada: The non-affiliated national distribution center, provides products to other markets and/or supermarket chains. • Hortifruti: Hortifruti develops close relationships with the farmers participating in the Tierra Fertil Program by entering into individual agreements with them regarding crops, volumes, and prices (Leguizamón & Ickis, 2009). Mr. Salas highlights several experiences regarding the development of the program between 1972 and 1983 (J. Salas, personal communication, November 11, 2013): “Reaching this level of maturity is not easy. It is hard to convince one farmer to change his polypropylene bags to wood crates (or to the even more practical plastic crates) for his lettuce, or to build a selection and treatment plant that would strengthen his business. “From then on, the operation becomes profitable for both Hortifruti and the farmer. Agreeing on prices is something that needs a lot of work. Hortifruti sets a margin that pays for the wholesale center's costs and allows enough profit for the supermarket.” So, why does the supermarket chain begin working with small-size farmers as providers of fruits and vegetables? The purpose behind the Direct Farm supply model is to satisfy the growing demand for fresh fruits and farm products while providing customers with a wide variety of high-quality products at low prices. As the supermarket chain grows and the supply of fruits and vegetables becomes difficult, Hortifruti realizes the need to develop partnership relationships with small suppliers (Wagner and Boutellier, 2002). The company also identifies the need to develop these new and small suppliers in the same manner as other innovative companies that are pursuing continuous improvement initiatives to enhance their own performance do, that is, by monitoring small failures (Weick et al., 2008) to better serve their customers (Lambert & Knemeyer, 2004; Liker & Choi, 2004).
The Global Direct Farm Program is significant for a number of reasons: • Farmers' experience an increase in income in areas where supermarkets operate. • Small farmers benefit from the application of best practices in agricultural production. • The program generates a more favorable relationship with the community. 4. The Costa Rica experience Hortifruti engages with farmers, and their families, who plant and harvest one single crop, generation after generation. These farmers often have little formal schooling but possess a deep knowledge of practices appropriate to their environment. They typically do not have access to technology, cleaning or packing systems, transportation, working capital, or even own telephones: all conditions that frequently create market gaps quickly filled by intermediaries. In addition, the fertilization, irrigation, and packing line systems used by these farmers are rudimentary with no guarantee that they will actually sell their products. They harvest based on tradition and intuition. While they definitely know how to produce, they seldom take into account market conditions such as price, supply or demand. Hortifruti's first undertaking is to modify production plans, establish quality standards, use better packaging materials, and resolve transportation issues. In addition, the company establishes its own gathering centers. These initial improvements focus on reducing product spoilage. Over time, the farmers take on the responsibility of these functions and intermediaries virtually disappear. The company seeks to diversify products, introduce new varieties grown on farms, schedule deliveries, stagger harvests, promote the use of new technologies and specialized equipment along with the rational use of agrochemical products, and help implement efficient irrigation, management, and environmental conservation practices throughout the growing and harvesting processes. This new approach changes and standardizes the processes of planting, growing, harvesting, storing, transporting and post-harvest land treatment, while seeking to avoid over-simplification. Hortifruti persuades its new small farmer suppliers to be sensitive to better operational practices, in the same manner the organization practices sensitivity regarding its own operations (Weick et al., 2008). Under the Tierra Fertil Program, and in compliance with the provisions set forth by Hortifruti, each farmer agrees to • • • • • •
designate an area of land to grow the crop, receive training, practice what is learned in order to meet quality and sanitary standards, sell the agreed-upon harvest exclusively to Hortifruti, respect standards for financing, and pay their loans back on time.
Fig. 1. Key concepts and relationships.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
Hortifruti supports farmers in other areas as well, such as guaranteed purchases, product diversification programs, best agricultural practices (BAP) and best manufacturing practices (BMP), control of irrigation water, production staggering and sustainability, and environmental conservation programs. In providing technical assistance, Hortifruti maintains sensitivity in all components of the operations: seed selection, soil rotation, fertilization, pest and disease control programs, use of appropriate packing materials to ensure sanitation and reduce spoilage, and constant monitoring of market prices (Weick et al., 2008). Hortifruti is not always the buyer. José Ramirez, a farmer with a plot of land in the Central Valley, plants several crops. He has grown to become a medium-size farmer and now sells to three types of clients: Cenada (the wholesale market), Hortifruti, and directly to restaurants. Ramirez states, “Hortifruti's standards are very high. Lettuce, for example, has to weigh a minimum of 200 grams. It cannot be brown and it cannot have slugs or spiders. That is not easy to accomplish, so I do not think that organic production is profitable; it requires a lot of labor because you cannot use herbicides, and the product does not grow as well because you cannot use non-organic fertilizers. “Hortifruti becomes very necessary for small farmers because nobody else will buy such small amounts of production. One can say that most farmers are happy with Hortifruti. Once they get used to their standards, things go well for them. Hortifruti receives large quantities and pays every two weeks. If you deliver today, in two weeks, or three at the most, you get your payment. “If I want to continue working with Hortifruti, I have to think about getting a truck. A cheap one costs $22,000. To buy that, I have to do good business, which isn't easy, especially selling small amounts.” (Leguizamon & Santos, 2014, p. 21)
5. Tierra Fertil in Nicaragua The program expands from Costa Rica to Nicaragua in 1998. Prior to this, and during the Sandinista Revolution, the government ran local supermarkets, importing nearly all fruits and vegetables. In 1993, Nicaragua, with 4.9 million inhabitants, has only five supermarkets; Costa Rica, with 3.7 million inhabitants, has 113 supermarkets; and Guatemala, with 13.0 million inhabitants, has 66 (Reardon & Berdegué, 2003). In 1991, new supermarkets emerge with the change of government. As awareness about quality and hygiene standards grows, fresh products begin to be a differentiating factor. The agricultural sector develops slowly. Farmers who specialize in a single crop, have poor logistics, considerable losses, low-quality and sanitary standards, and a lack of uniformity in product size. All these problems translate into reduced supply for Hortifruti. From the start, the Tierra Fertil program encounters several obstacles in Nicaragua. At the time, knowledge among small farmers in Nicaragua focuses on rudimentary agricultural practices, inequitable marketing arrangements, unrealistic expectations of income, poor relationships with other community members, and an aversion to risk-taking. With the exception of land use, everything introduced by Hortifruti is new: products, planting procedures, input requirements, relationships with new suppliers, growing and harvesting seasons and their practices, quality demands (in terms of the product's color, size, and texture), product packing and conservation techniques, price-negotiating strategies, and payment modalities. Based on the Costa Rica experience, a group of trained and motivated agronomists travels to Nicaragua to recruit and register 350 farmers with the program. Soon after, only 250 farmers – those with the most resilience – remain in the program. (Weick et al., 2008). The Tierra Fertil agronomists attribute the high desertion rate to the farmers' unwillingness to accept the new discipline of vegetable production and to an incomplete application of new agricultural practices. These factors result in products that do not meet standards, lower-than-expected profits
3
for the farmers, and failed commitments. In addition, whereas most Costa Rican farmers have finished primary school, few Nicaraguan farmers have done so. Hortifruti persistently works with those farmers that are willing to introduce the new products and best practices into their farming processes. The organization and its personnel working in Nicaragua do not oversimplify the tasks at hand, based on their success in Costa Rica; on the contrary, they identify the challenges, creatively react to different conditions and tenaciously work with the small farmer suppliers to overcome obstacles (Weick et al., 2008). Tierra Fertil begins working with farmers from several regions to produce varieties of previously unknown products in Nicaragua, such as baby vegetables, carrots, and zucchini. Jorge Cavallini, Hortifruti's Agricultural Development Director, commented on this topic: “Some farmers are living in very precarious situations because they insist on growing crops on land that is not appropriate. “To deal with the cultural barriers that field personnel face, we hire agricultural professionals who, in addition to knowing growing techniques, are specialists in social factors. They understand traditional farming cultures and processes and are capable of facilitating transitions toward vegetable production. “When these professionals from Tierra Fertil arrive, they find that farmers' profits are so low that they are barely surviving. When we entered Nicaragua, the retail price at that time is almost four times the price paid to the farmer. The first step is to open storage centers to solve the problem of long distances and dangerous roads. When they start earning more money, the program quickly gains credibility among farmers” (Leguizamon & Ickis, 2009, p. 7, 8). Hortifruti has a payment policy whereby small producers receive cash and medium-sized producers receive short-term payments. For many farmers, this is one of the program's benefits. As in Costa Rica, the program's product quality standards (traceability, size, appearance, and safe transportation, among others) help several farmers increase their export capacity. Jugos del Valle, a company owned by tenant farmers, initially sells its product to intermediaries. When Hortifruti becomes one of its main clients, the company is selling less than US $450 per month. By 2003, its sales increase to US $15,000 per month. With production increases and proper land use, products are consistently of higher quality and sales volume increases. Consumers now receive a greater variety of higher quality products at stable prices. One of Hortifruti's programs helps farmers access the financial system because banks offer lower interest rates when they identify lower risks in the relationship between farmers and a prime customer. In general, the program's implementation represents an example of collaborative teamwork among the different actors in society.
6. The Honduras experience The program expands to Honduras in 2001 with good results. Farmers' sales increase and credit histories are established. With regard to the implementation of the Tierra Fertil Program, Cavallini states the following: “With technical assistance and higher quality demands, farmers improve their export capacity, as in Costa Rica. However, technical assistance from the government in Honduras is practically non-existent. In Costa Rica, when there is a problem with the roots of a crop, the farmer contacts the Ministry of Agriculture or a fertilizer product company, searches online, gathers information and solves the problem. In Honduras, we provide seeds, help farmers become creditworthy, and teach them to use drip irrigation. We have to be involved in the whole process.” (Leguizamon & Ickis, 2009, p, 8) Again, Hortifruti adapts to the different requirements of operating in Honduras when implementing Tierra Fertil, avoiding both shortcuts and oversimplifying the tasks of the processes. Hortifruti helps farmers
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
4
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
understand the benefits of the program and works in collaboration with institutional agents (Weick et al., 2008). 7. Walmart in Central America In September 2005, Walmart announces the purchase of one-third of CARHCO stock, the Central American Retail Holding Company, the biggest retail operator of the region. In 2007, H. Lee Scott, Global CEO of Walmart, travels to Costa Rica to become better acquainted with the recently acquired supermarket chain. He is surprised when he finds a successful direct supply model. In 2009, Walmart Mexico becomes Walmart Mexico and Central America. Among other things, the operation initiates discussions about maintaining the Tierra Fertil Program run by Hortifruti both as a means through which CSU-CCA can buy fruits and vegetables directly from small- and medium-sized farmers, which they have done for more than two decades, and as a profit center. Walmart's managers begin to question whether they should adopt the program as a way to offer supermarket consumers excellent quality products at the lowest market prices. The consensus is that the possibility of supplying high-quality products at a good price through a conglomerate of small producers implies rigorous supply chain management that can prove difficult. 8. Walmart executives' visits In early 2010, Michael Terry Duke, appointed Walmart's Global President in 2009, visits several Costa Rican farmers that participate in the Tierra Fértil Program. During one of his first visits, he arrives precisely when a farmer's wife is taking her two children to school. At the time of that particular visit, the farmer already owns his home, a warehouse, a product washing machine, a tractor, and rents additional land to grow crops. One of the visitors from the local team says about the visit, “Mike is positively surprised. Not only has the farmer gained economic prosperity; he is also sending his children to school” (Leguizamon & Santos, 2014, p, 11, 12). In a later speech, Michael Duke relates his surprise at seeing how the farmers' children are going to school well dressed, with shoes, uniforms, and backpacks, expressing their desire to go to university. One of the kids is interested in becoming an agronomist like his father. Then, on October 14, 2010, Walmart unveils its global sustainable agricultural goals, including sales of $1 billion in food sourced from 1 million small- and medium-sized farmers. In support of the Tierra Fertil Program, Walmart will provide training to 1 million farmers and farm workers, half of them women, in subject areas such as crop selection and sustainable farming practices, all by the end of 2015. As a result, these small farmers may expect an increase in income between 10% and 15%. 9. Direct farm summit in Costa Rica In an effort to support these goals and implement them on a global level, Walmart's CEO decides to host a high-level event with a group of senior managers to analyze the Global Direct Farm program's characteristics in detail and to promote its general adoption. The CEO explains, “The first meeting of Walmart's senior executives is held in San José, Costa Rica, from November 8 to 10 in 2011. INCAE Business School, one of the top business schools in Latin America, is the host. This meeting makes our dreams come true. For the first time, we bring together leaders who produce and buy products from our stores around the world. Executives come from Argentina, Brazil, Canada, Chile, China, Japan, Mexico, Puerto Rico, South Africa, the United Kingdom and the United States. “The purpose is to focus our Global Direct Farm Team to determine our goals and create a platform from which to lever our Global Direct Farm business model. For three days, we collaborate and gain direct experience regarding our farms, with the following objectives in mind:
1) to create a shared vision for a Global Direct Farm strategy and our links with small- and medium-sized farmers; 2) to learn what was required to create the Global Direct Farm Program, commercially, environmentally and socially speaking; 3) to exchange knowledge and best practices; 4) to spend some time at the farms to foster understanding and 5) to create a common understanding about how to measure progress. “This meeting is a great example of Walmart bringing together worldwide operations to scale a program that is very successful in one of our markets, analyzing the business models of the product supply source and exploring how the attributes of economic, social and environmental sustainability in the new model can be integrated with them. We are waiting for the innovation that will result from this first collaboration. We are changing lives, one farmer at a time.” (Leguizamon & Santos, 2014, p, 13) The critical success factors and the barriers that would have to be overcome to implement the program become clear to Walmart managers. They come to understand that the Global Direct Farm program is one that evolves over time, through a process that focuses on the importance of supporting small farmers' business development, and now have the map to adopt the program to other countries around the world. 10. Lessons learned from the implementation of the direct supply model An analysis of the implementation of this successful direct supply model sheds light on the program's essential elements, including direct observations made during and about the program's implementation, detailed monitoring, the establishment of a profit center, scrutiny of the model by managers from different countries, coordination, innovation, corporate strategy, and sustainability (Weick et al., 2008). 10.1. Direct observation Before deciding whether to continue or suspend the program, Walmart's managers make direct observations of its processes, personally visiting small farmers, as well as engaging in a detailed examination of not only the program's operations but also its economic and social impact on both the farmers and the company, while avoiding oversimplification (Weick et al., 2008). Despite the company's willingness to consider the program's benefits, its managers must proceed with caution to avoid, for example, the difficulties faced in Germany when trying to apply a model successfully implemented in the USA. In Central America, the program is already beyond the pilot project stage. In fact, the company can point to three success stories from three different countries. The organization can learn important lessons from these thriving experiences and use these antecedents to make adjustments in other countries when expanding the program in the future. 10.2. Monitoring The decision to consolidate the program in other Central American countries and maintain constant monitoring of the progress of these programs allows managers to identify best practices, make salient observations, scope out potential problems, and undertake modifications to improve implementation. In summary, managers show a strong will for continuous learning (Weick et al., 2008). 10.3. Profit center Walmart's decision to keep the program as a profit center – reaffirming both the program's importance to the company's business goals as well as the company's social goals that are implicit in the program – leads to long-term sustainability.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
10.4. Scrutiny and discussion of the model Before deciding whether to implement the Global Direct Farm strategy, a group of the company's managers from different parts of the world comes together to learn, evaluate, and estimate the appropriateness of generalizing the model to other developing countries in which the company operates. 10.5. Coordination The new system not only assumes a change in the supply source but also demands complementary efforts in agricultural extension support to help small farmers incorporate new technologies into planting, growing, harvesting, and storing their products. The new Tierra Fertil Program also represents a new relationship among registry, control, and internal finance activities. Each actor must relate to the other actors and be aware of unexpected challenges that may surface in the development process. Thriving distribution and retail companies primarily ground their success on their mastery of all operations through the vertical integration of supply chains (Fisher & Raman, 2010; Lee, 2004) and, later, by opening spaces to develop small suppliers as direct suppliers. The strong support provided by top management, for experts and responsible parties in the agricultural chain, consolidates the model (Weick et al., 2008). The relationships observed in the Tierra Fertil Program are qualitatively defined by several factors that are generally mentioned in supply chain management literature as contributors to develop and strengthen collaborative ties between suppliers and customers (Chopra & Meindl, 2013; Fawcett, Magnan, & McCarter, 2008; Liker & Choi, 2004). These include frequent communication and exchanges of information regarding production schedules, delivery and quality issues, clear supplier performance criteria, the goodwill to develop the supplier's abilities, long-term contracts, frequent visits and informal contact, and market adaptations. Several researchers, in different parts of the world, have also identified the benefits of food supply chains whose members work in collaboration to produce, distribute, and sell fruits, vegetables and other agricultural products competitively (Hogarth-Scott & Dapiran, 1997; Kottila & Rönni, 2008; Mikkola, 2008; Rabade & Alfaro, 2006). The successful expansion of the Global Direct Farm Program depends largely on the ability of program leaders to replicate the processes with the creativity needed to make improvements along with a willingness to face any unexpected situations that may surface while working with small farmers. Success also depends on the farmers' abilities to access public and institutional services. “The goal is a strategy that is forever morphing, forever conforming itself to emerging opportunities and incipient trends” (Hamel & Välikangas, 2003, p. 53).
5
challenges and obstacles that are different from previous successful experiences, and diligently works to surpass these barriers without oversimplifying matters (Weick et al., 2008). Fawcett, Jones, and Fawcett (2012) indicate that large innovative companies, such as Honda, Procter and Gamble and Walmart, largely depend on other members in their supply chains with distinctive and complementary abilities to offer innovative products and processes through special collaborative relationships. Leat and Revoredo-Giha (2008) posit that such relationships must be stable and mutually beneficial to be sustainable and add that many now acknowledge that the proactive management of such relationships represents a critical source of competitive advantage. Fig. 2 presents the five interrelated elements of the Global Direct Farm system, revealing the critical importance of these interrelationships and the complementary nature of these five elements in achieving the program's goals (Weick et al., 2008). Hortifruti understands the strategic implications of the direct supply model to satisfy a continuously growing and more challenging demand from end consumers. The CEO of the company is involved in the initial stages of the program and gives his full support to implementing the program in Costa Rica. Hortifruti works closely with small farmers to increase their capabilities and learns from the responses of the farmers and the environment. When the chain expands to Nicaragua and Honduras, the direct supply program is part of the penetration strategy in those new markets. The chain learns quickly that the new business, agricultural, and social environments are not the same and, with great doses of innovation, circumvents the barriers and challenges to assist the Nicaraguan and Honduran farmers in elevating their production to the necessary performance level by helping them continuously improve their abilities and results. The level of internal (within the supermarket chain) communications and coordination is critical to the program's success in obtaining the required support for the initiatives of the direct supply program. Similarly, the level of communication with farmers is also important to support their efforts, monitor their progress, and guide them in the application of better agricultural- and produce-processing techniques. The program generates a self-strengthening mechanism as Hortifruti and the farmers find that the program is producing sustainable mutual benefits. The company enjoys a reliable supply of fruits and vegetables at competitive prices, and the small farmers find their income growing because of their entrepreneurial efforts, which eventually yields a higher quality of life for the farmers and their families. The core of the program that sustains all other elements is the careful attention that both Hortifruti and the farmers pay to the full range of
10.6. Innovation Direct supply from small farmers represents an innovation that substitutes for, or complements, other supply systems. Before implementation, the responsible parties must carry out a series of actions, including • • • •
research local production processes and consumption patterns; run tests with groups of potential suppliers; elaborate detailed definitions of new practices; methodically observe, to anticipate potential initial problems related to consumption, production, and trial results; • make adjustments before generalizing the program model; and/or • invite new groups to join as suppliers. In this manner, the company can systematically evaluate the elements of the model and thus react to implementation challenges in different locations. The organization scans the environment, identifies
Fig. 2. Channels.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017
6
F. Leguizamon et al. / Journal of Business Research xxx (2016) xxx–xxx
operations related to farming, preparation, processing, and delivery of the applicable fruits and vegetables. 10.7. Corporate strategy Because the Global Direct Farm Program is more demanding than traditional supply systems in terms of establishing relationships with suppliers and the agricultural extension agents responsible for working with small farmers, its basis lies on a high level of trust in the program managers' abilities and on strong support from senior management. 10.8. Sustainability Walmart's commitment to sustainability in recent years creates a favorable environment to believe that the corporate program has great potential for positive social impact around the world. The program is no less ambitious or demanding with respect to sustainability. In fact, even when the number of suppliers is small, the program can provide examples of satisfying results. However, as the program grows, a more rigorous demonstration of positive impacts must consider a range of topics, including incorporation of women as suppliers, the appropriate use of water, biodiversity, and improving the quality of life of small farmers' families. Achieving these goals and measuring the results rigorously is a particularly critical undertaking for future program expansion. The case clearly demonstrates that including a broad base of farmers in the supply chain is important for both suppliers' income and Walmart's supply practices. Without this extended base of farmers, Walmart would not be able to profitably offer a large variety of products, particularly in emerging markets. The farmers also obtain important benefits, particularly due to their transformation from traditional farming to modern farming. This change means both higher incomes and improved quality of life for suppliers and their families. A review of the supply program's history illustrates certain key interrelated factors for success. The program originates when the president of a Costa Rican supermarket chain realizes that unless his company finds a way to cut distances and simplify the supply chain by buying directly from local producers, they will not be able to meet the demand for fresh vegetables in a growing and more pressing market. The decision to buy directly from suppliers goes against the common practice of buying at a wholesale center and pushes the supermarket chain to improve operational processes, including setting competitive prices, providing technical assistance to producers and later expanding the program to other countries as the chain grows. The second key factor is the meticulous analysis and monitoring process undertaken by Walmart's managers when they purchase the local company almost 30 years later. They critically and independently examine all aspects of the program's history to ascertain the appropriateness of generalizing the best practices of this program in other parts of Central America. With this attention to detail, the Tierra Fertil Program continues to grow well beyond the first decade of the new century. The third key element that explains the program's duration and later success is a thorough review of the company's supply operations, from identifying farmers and training them in agricultural practices for each crop, to negotiating prices, verifying product quality along the supply chain until reaching the supermarket and consumers, and fostering long-term relationships with individual suppliers. Mikkola (2008) stipulates that a key component of survival and competitive success in supply chains is the ability of members to learn from one another and
effectively adapt to market changes or to new markets based on the need to enhance coordination in the supply chain. These three elements help ensure a promising future for the program. In fact, the decision made by Walmart's CEO to adopt the Global Direct Farm Program is similar to that made some forty years earlier by the president of the Costa Rican supermarket chain to implement the program on a national level (Leguizamon & Ickis, 2009). A review of progress achieved and problems faced by the program at this point may be useful to help refine goals and further improve results. Lastly, when preparing to implement the program, each country manager must identify the particular characteristics of her/his environment and carefully observe the different implementation stages. With no universal formula to address problems that may arise, country managers, and their personnel, must face these problems with the same creativity and independence employed by the managers of the Costa Rican supermarket chain when they implemented the program in other countries in Central America. In conclusion, Walmart's commitment to sustainability in recent years creates a favorable environment in which to believe that this program has a high potential for social impact around the world. Each of the country managers and their partners must be a model of resilience to overcome all future hurdles. Acknowledgments The authors are grateful to John Ickis, Connie Jones, and American Journal Experts for their editorial assistance. References Chopra, S., & Meindl, P. (2013). Supply chain management, strategy, practices and operations. Upper Saddle River, NJ, USA: Pearson Education Inc. Fawcett, S. E., Jones, S. L., & Fawcett, A. M. (2012). Supply chain trust: The catalyst for collaborative innovation. Business Horizons, 55(2), 163–178. Fawcett, S. E., Magnan, G. M., & McCarter, M. W. (2008). A three-stage implementation model of supply chain collaboration. Journal of Business Logistics, 29(1), 93–112. Fisher, M., & Raman, A. (2010). The new science of retailing. Boston: Harvard Business Review Press. Hamel, G., & Välikangas, L. (2003). The quest for resilience. Harvard Business Review, 81(9), 52–63. Hogarth-Scott, S., & Dapiran, G. P. (1997). Management relationships in the food distribution channels in the UK and Australia. Management Decision, 35(4), 310–318. Kottila, M., & Rönni, P. (2008). Collaboration and trust in two organic food chains. British Food Journal, 110(4/5), 376–394. Lambert, D. M., & Knemeyer, A. M. (2004). We're in this together. Harvard Business Review, 82(12), 114–122. Leat, P., & Revoredo-Giha, C. (2008). Building collaborative agri-food supply chains. British Food Journal, 110(4/5), 395–411. Lee, H. L. (2004). The triple-A supply chain. Harvard Business Review, 82(10), 102–112. Leguizamón, F., & Ickis, J. C. (2009). Caso. Tierra Fértil. SEKN: INCAE. Leguizamón, F., & Santos, M. (2014). Global Direct Farm Program, case study. INCAE Business School. Liker, J. K., & Choi, T. Y. (2004). Building strong supplier relationships. Harvard Business Review, 82(12), 104–113. Mikkola, M. (2008). Coordinative structures and development of food supply chains. British Food Journal, 110(2), 189–205. Prado, A., & Leguizamón, F. (2004). CSU-CCA, case study. INCAE-SEKN. Rábade, L. A., & Alfaro, J. A. (2006). Buyer–supplier relationship's influence on traceability implementation in the vegetable industry. Journal of Purchasing and Supply Management, 12(1), 39–50. Reardon, T., & Berdegué, J. A. (2003). La rápida expansión de los supermercados en América Latina: Desafíos y oportunidades para el desarrollo. Estudios Sociedade e Agricultura, 23, 5–41. Wagner, S. M., & Boutellier, R. (2002). Capabilities for managing a portfolio of supplier relationships. Nov-Dec: Business Horizons, 79–88. Weick, K. E., Sutcliffe, K. M., & Obstfeld, D. (2008). Organizing for high reliability: Processes of collective mindfulness. In A. Boin (Ed.), Crisis management VOL. III. London: Sage Publications Ltd.
Please cite this article as: Leguizamon, F., et al., Small farmer suppliers from local to global, Journal of Business Research (2016), http://dx.doi.org/ 10.1016/j.jbusres.2016.03.017