- 19 Jan 2012
- Working Paper Summaries
Got Local Food?
Executive Summary — As consumers become more aware of the health and environmental implications of how food is grown and produced, demand for local food has increased considerably. This paper examines the operational tradeoffs in fresh produce supply to gain insights on what drives the structure of the supply chain and how "local food" can become a viable sourcing strategy for a large retailer. HBS professor Deishin Lee and coauthors show that there are complementary operational synergies when retailers and farmers increase scale and specialize. This implies that when small farmers are capacity constrained, they can be squeezed out of the supply chain. Technological advances in farming practices, efficiency gains in transportation, and space constraints in retail stores result in supply chain members mutually benefitting from their decision to increase scale, leading to specialization. The study characterizes the conditions under which vertical differentiation and operational scope can increase the viability of the small local farmer. This paper contributes to work on supply chain design and environmental sustainability. Key concepts include:
- At the most basic level, the fresh produce supply chain works like many others: the farmer (manufacturer) grows the produce, the retailer buys the produce from the farmer and sells it to the consumer.
- Spatial constraints imposed by the geography of the fresh produce supply chain create operational tradeoffs. For consumers to access fresh produce, the supply chain must coordinate the production, harvest, and transportation from farms to consumers in a timely manner.
- The operating decisions of a retailer and farmers are interdependent and technological advances in transportation, spatial characteristics of population distributions, and advances in farming technologies have led to a dominant economies-of-scale model of production, distribution, and retailing in fresh produce supply.
- Small local farmers can exploit operational scope and vertical differentiation to increase their competitiveness.
- Operational scope could be leveraged through the practice of polyculture farming to leverage biological synergies. These practices can increase the resilience of crops when there is yield uncertainty due to such factors as weather and pests.
- Vertical differentiation is also key. There are several dimensions along which local farmers can differentiate: 1) taste/freshness, 2) nutrition and health, 3) production methods that are environmentally friendly, and 4) fair labor wages.
We study the operational tradeoffs of a retailer and farmers in a fresh produce supply chain to determine the equilibrium supply chain structure. These operational tradeoffs arise as a result of the geographic constraints posed by the availability of arable land and the spatial population distribution. We model the interdependent operating decisions of a retailer and farmers and show that technological advances in transportation, spatial characteristics of population distributions, and advances in farming technologies has led to a dominant economies-of-scale model of production, distribution, and retailing in fresh produce supply. When farm capacities are asymmetric, the small local farmer has a disadvantage and can be completely squeezed out of the supply chain if the large farm has enough capacity to fill demand. However, we quantify how backhauling and vertical differentiation can increase the retailer's margin for local food, thus increasing the small local farmer's competitiveness. We also show how the local farmer can leverage polyculture farming, a farming practice that increases the resilience and yield of crops, to mitigate risk of weather or pest damage, increasing his competitiveness.