1. Introduction
1.2. Problem Background
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(e.g., long-term, mid-term and short-term) (Grossmann, 2005). All in all, successful supply chain management requires all six notions that make up the two constitutional pillars for the competitiveness of a supply chain be practiced interactively (Stadtler, 2015). In the next section, problems encountered by global agrochemical companies will be discussed.
1.2. Problem Background
Figure 2 shows the entire food production network, starting from the process industry, through agrochemical manufacturers and traders, to the agricultural production sector, and ending with food producers and retailers. Agrochemical producers are situated between the process industry, which turns petrochemicals into raw materials needed for the production of agrochemicals, and the wholesalers and retailers, who distribute and market manufactured agrochemical products to the agricultural production sector (Fritz and Hausen, 2009).
Figure 2 - Supply Network for Crop Production and Processed Food Products (Fritz and Hausen, 2009)
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The FAO defines an agrochemical product as any chemical compound or biological ingredient used in agriculture that repels, destroys or controls any pest, or regulates plant growth for higher yields, better quality produces, and more reliable harvest. The definition is broad, and correspondingly, there exists a wide range of agrochemical products in the market, such as liming and acidifying agents, soil conditioners, hormones and other chemical growth agents, fertilizers, and pesticides. The purveyors of agrochemicals are categorized into sectors of seeds and crop protection, and crop nutrient. As providers of the former sector have more than threefold the revenue streams than the latter one, in most cases, agrochemicals refer to pesticides, such as herbicides, insecticides, and fungicides (Amez-Droz, 2017). Thus, most of the material in this paper is relevant to the seeds and crop protection sector, and the terms, agrochemicals and pesticides are used interchangeably throughout the paper.
From the manufacturing point of view, the global agrochemical industry can be categorized into a few types of key players, including:
i. The massive research and development (R&D) based multinationals with a strong presence in branded products, collectively controlling 75% of the pesticide market, 63% of the seed market and over 75% of the R&D expenses spent in the sector (ETC Group & Heinrich Böll Stiftung, 2015);
ii. The generics companies, which manufacture off-patent products and make up about 30%
of the overall sales in the industry (McDougall, 2011 in Popp, Petö and Nagy, 2013);
iii. Local manufacturing firms producing both branded and generic products under permission (Sahney and Shrivastava, 2009; Hamad and Gualda, 2014);
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iv. Contract manufacturers, such as formulators, blenders, and packagers, who provide outsourcing services of producing key immediate or final products for other companies (Bassett, 2018);
v. Pure R&D-based companies, mostly from developed countries and without significant production capacities (Sparks and Lorsbach, 2017; Society of Chemical Industry, 2017).
This paper mainly deals with the first group, which dominates the marketplace and tends to be involved in the entire line of business activities to discover, develop, manufacture, and distribute seeds and crop protection products to the agricultural production sector. These multinationals are characterized by not only their operations on a global scale but also their complex internal networks. Thus, Figure 2 refers to a much broader geographical scope and network complexity throughout the value chain. As production and customer markets can span in many countries, there exist differences in regional capital and operational costs, duty and taxation, currency exchange, supply chain infrastructures, and sale prices (Sousa, Shah and Papageorgiou, 2008). Indeed, taxes, duties, and tariffs vary widely between countries and can account for up to 10% of the revenues received by selling certain products (Bassett and Gardner, 2010). The ultimate consumers of pesticides are farmers, who apply the products to fields to produce crops. Some large farmers may have direct access to the manufacturers, but generally, manufactured products are distributed and marketed through wholesalers, retailers, and cooperatives, who are small and medium-sized or micro enterprises (Syngenta Crop Protection AG, 2016). This high degree of complexity and market fragmentation on the distribution level entails differences in corporate structures and behaviors (e.g., market power, culture, strategy, and infrastructure) among various business entities of a multinational agrochemical supply chain. Hence, high coordination efforts for material, information, and financial flows are
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required to address the large variety of processes and interfaces in the supply chain network (Fritz and Hausen, 2009). Besides, agrochemical producers operate in a highly regulated business environment. Farmers use seeds and crop protection chemicals to cultivate crops, which are the sources of food and essential nutrients for people. The food that is eaten can influence human health and quality of life. When overly used, agrochemicals can adversely affect the wellbeing of both people and the environment. Therefore, all aspects of sourcing, manufacturing, distribution, storing, and application are regulated by strict approval and licensing policies (Popp, Petö and Nagy, 2013). Indeed, the source countries of chemical ingredients used in producing pesticides can determine where the final products are permitted to be sold and how much taxes and duties are to be charged to the merchandise (Bassett and Gardner, 2010). The considerations are crucial for global agrochemical companies in designing their supply chain networks and product programs in various markets as the profitability of the firms can be significantly affected by these factors in the long run.
The product life cycle of an agrochemical is different from that of the products of many industries but is somewhat similar to the life cycle of a medical drug (Shah, 2004; Fritz and Hausen; Bassett and Gardner, 2010). In both the pharmaceutical and agrochemical industries, the new product development phase is prolonged, cost-intensive, and subject to risks and uncertainty, but in the meantime, product differentiation and time-to-market are essential drivers. Product launches are frequent and are usually designed according to the conditions in the receiving environment. Once commercialized, new products have to compete with substitutes from the same companies or competitors regarding price and performance. New products are protected from direct competitors by patents for about ten years. However, vicious competition from the generic version of products usually occurs after the protection expires.
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Moreover, some products even have a short, limited shelf life or may require special handling for warehousing and transport, thus making working capital and operating challenges intensive for companies (Joly and Lemarié, 2002; Sparks and Lorsbach, 2017; Carroll, 2016).
The production of both agrochemicals and medical drugs involves multi-step processes and requires long lead time, making it challenging to ensure the agility and responsiveness in fulfilling customer demands. In the manufacturing processes, several critical chemicals are mixed with other formulants to be processed to final formulations that are packaged in various forms. Thorough cleaning and special handling of machinery are required to prevent products from contamination when different jobs are performed on the same machinery and other equipment during production, storage, or transport. As a result, changeovers between different items can cause high setup costs and times, and the sequence of jobs performed on the same resource can alter the degree of these costs and time (Sousa, Shah and Papageorgiou, 2008;
Fritz and Hausen, 2009; Bassett, 2018).
However, it appears as if the market for agrochemicals is more complicated than that of pharmaceutical products. Whereas the demand is either seasonal for some medicines linked to winter illness or static for other drugs, the application of agrochemicals on cropland is not only seasonal but also highly variable and discontinuous. For instance, the commodity price of crops can alter farmers’ preferences for which varieties of crops to be cultivated and to supply. This convention affects the types and amount of the operating input supplies that are demanded by the farmers and in turn influences the sales of pesticides. Similarly, the consumption level by the general public at the end of the food supply network can also have an indirect impact. For example, the types of food needed by people can change the demand for various types of agrochemicals in the upstream stage. Moreover, adverse weather conditions, such as droughts
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and flooding, and the infestation levels of pests in regional markets can affect the demand for seeds and crop protection products. As a result, forecasting demands for agrochemicals is a formidable task as it requires one to update unforeseeable demand changes frequently while considering the low responsiveness in the production processes. Also, the demand is seasonal due to growing seasons of crops and the legislation or subsidies that entice farmers to maximize their output at once, store unsold crops, and stop farming for a while until the inventory becomes low again. Therefore, there are breaks in the demand chain, which discontinue the supply of seeds and crop protection products at some point year-round. On the whole, the agrochemical sector is characterized by demand variability and supply inflexibility in fulfilling the demand owing to a mix of factors (Fritz and Hausen, 2009; Caillet, 2015; Informa UK Ltd., 2017;
Bassett, 2018).
The processes for the discovery, development, manufacturing, and distribution of seeds and crop protection products to the agricultural production sector can be influenced by the four dimensions discussed above: the supply network structure, and demand, product and production characteristics of agrochemicals. Indeed, the operational challenges for global agrochemical companies have intensified in the recent past. First of all, the effect on seasons of a changing climate is being observed worldwide. The frequency and severity of extreme weather conditions have increased and varied region to region. The length of growing seasons has become longer and shifting, having substantial effects on agricultural activities (U.S. Department of Agriculture, 2013). Thus, the pressure and difficulties in forecasting and fulfilling the demand for agrochemical products have intensified. Secondly, the downturn in the general agricultural economy has resulted in shrinking sales and rising costs of operations for agrochemical companies, whose profit margins traditionally are high. The industry, in general, has
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experienced lower sales because farmers have less to spend on the input supplies for farming due to the falling commodity price of major crops. In recent years, the price of crude oil, which is needed for the production of active ingredients in agrochemicals, not only has risen, but also has been very volatile, thus intensifying the difficulties and costs of operations for agrochemical firms (Society of Chemical Industry, 2017; The African Centre for Biodiversity (ACBIO), 2017). Also, due to the availability of substitutes in the market, customers have become more elastic to price and more demanding for logistic flexibility and service levels in their supply with agrochemicals, especially in high seasons (Fritz and Hausen, 2009). Thirdly, the R&D efficiency has been declining in the sense that the cost of each new product development has been increasing while the probability of successful product discovery and development has been decreasing (Sparks and Lorsbach, 2017). This phenomenon also has been amplified by the increasingly stringent regulatory requirements on the use of crop seeds and pesticides (Informa UK Ltd., 2017). Lastly, the significant growth of demands in the emerging markets and the need to move into the big data sector of agriculture have pushed agrochemical companies to extend their reach further to new geographical markets and gain access to complementary technological know-how in order to remain competitive (ACBIO, 2017). From all of the above points, it is perceived that the market and the business circumstances for agrochemical companies are changing. Vying for competitive advantages in the global marketplace, the companies need to take actions and adapt their supply chain networks and operations to not only the existing but also new challenges. The importance of SCM certainly has heightened for all companies operating in the business. Therefore, it is crucial to understanding what characteristics of the industry are, how they relate to supply chain planning tasks faced by a generic firm, and how these tasks can be executed successfully in the long run.
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