KEY DRIVERS OF LIVESTOCK BUSINESS & THEIR MANAGEMENT IN LIVESTOCK MARKETING
Praveen Srivastava, CEO, LBCS
Introduction:
The livestock sector globally is highly dynamic. In India, it is evolving in response to rapidly increasing demand for livestock products. In developed countries, demand for livestock products is stagnating, while many production systems are increasing their efficiency and environmental sustainability. Historical changes in the demand for livestock products have been largely driven by human population growth, income growth and urbanization and the production response in different livestock systems has been associated with science and technology as well as increases in animal numbers. In the future, production will increasingly be affected by competition for natural resources, particularly land and water, competition between food and feed and by the need to operate in a carbon-constrained economy. Developments in breeding, nutrition and animal health will continue to contribute to increasing potential production and further efficiency and genetic gains. Demand for livestock products in the future could be heavily moderated by socio-economic factors such as human health concerns and changing socio-cultural values. There is considerable uncertainty as to how these factors will play out in different regions of the world in the coming decades.
Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world. The current wave of globalization has been driven by policies that have opened economies domestically and internationally. Business today is in a global environment. This environment forces companies, regardless of location or primary market base, to consider the rest of the world in their competitive strategy analysis. Firms cannot isolate themselves from or ignore external factors such as economic trends, competitive situations or technology innovation in other countries, if some of their competitors are competing Of are located in those countries.
Livestock prices—-
Parameters for success in globalized markets Cost—–
Cost factors could be considered as the cost drivers that are responsible for success in globalized markets. There are several costs involved in going global which are the major critical factors for success. Some important areas where costs play and lead to success are due to continuing push for economies of scale. Accelerating technological innovation advances in transportation, emergence of newly industrialised countries with productive capability and low labour costs and increasing cost of product development relative to market life are pointed as the major areas where costs are involved. When these are handled with proper strategies there is no doubt in succeeding the global markets. Sourcing efficiency and costs vary from country to country and global firms can take advantage of this fact
Livestock prices: The top 10 most important drivers
1) Feed prices
If feed grain prices increase (so that total input costs rise) the cost of raising livestock also goes up, reducing margins for farmers. Rather than feed cows, pigs and chickens at flat to negative operating margins, livestock owners may opt to slaughter more of their herd instead.
This then supplies the market with excess meat and drives prices lower in the short-term. In the long-term, equilibrium in operating margins is restored by either greater supply of feed grains driving input prices lower or decreased livestock production increasing market prices.
Conversely, if feed prices decline, it costs less to feed livestock for each additional pound of gain. This lower cost makes it more profitable to continue feeding animals longer and thus creates a short-run reduction in livestock supply. The expected long-run increase in supply will not appear for a time equal to the length of the feeding period for each animal.
When feed prices decline, livestock feeders buy more young animals to increase their feeding herd size. However, not until these animals are fed to slaughter weight is the increase in supply realized.
2) The weather
High temperatures affects livestock’s appetite, reducing the weight that they gain and extending the time it takes to get them to slaughter weight. Heat stressed livestock are also less likely to produce fewer offspring, thereby affecting the future size of the herd.
By extension the weather can also affect the supply of livestock and products derived from them. Food items with a shorter shelf life and fast production times are particularly vulnerable. High temperatures means stressed out cattle and poultry and results in less milk being produced and fewer eggs.
Drought also reduces the availability and quality of pastureland, also reducing the amount of feed for grazing livestock.
Any extreme weather conditions can be harmful. Very cold winters can be particularly dangerous for young cattle, reducing future supplies of cattle while also slowing the rate of weight gain among the remaining cattle.
3) Income growth
The demand for meat is closely linked to a country’s economic development with richer consumers generally consuming a greater amount of meat in their diets. Urbanisation and rising incomes mean that more of the world is converging on European and American levels of meat consumption, which is roughly 100 kg a year. At the moment, most of Africa and South Asia eats less than 20 kg of meat a year.
Although meat demand generally has a positive relationship with income growth, not all meats respond in the same way. For example, if income increases, the demand for more expensive cuts of meat, such as steaks, may increase while the demand for less expensive products, such as ground beef, may decrease.
4) Substitutes
Since chicken and pigs convert 1 kg of feed into 2-4 times as much body mass than a cow, it makes producing poultry and pork less expensive than beef. A rise in the price of beef may encourage consumers to switch away from beef towards cheaper meats like chicken and pork, thereby reducing demand for cattle, but increasing demand for chicken and pigs.
5) The hog cycle
In general, cattle prices follow a broadly predictable pattern known as the ‘hog cycle’ lasting around 10-12 years (a similar pattern is observed in other forms of livestock). Increasing cattle prices spur producers to retain female animals to increase the breeding herd, initially reducing slaughter numbers and as a result, prices increase even further. However, once these female animals begin producing offspring and eventually reach slaughter weight, there may be an oversupply of livestock.
Prices then begin to decline and it eventually becomes unprofitable to raise and feed young cattle. Producers then begin culling the breeding herd and sending them to slaughter, adding additional numbers to supply and causing prices to decrease even further.
6) Disease
A disease outbreak can be devastating for livestock supply. Even in an outbreak where livestock can be treated the medication used may require a withdrawal period before slaughter, delaying the time at which livestock can come to market.
7) Energy prices
The price of energy affects the cost of running a farm and indirectly the number of cattle that the farm can support. The most obvious impacts is on the price of diesel, used to run machinery and transport while propane is often used to dry grain and heat livestock buildings. Indirectly the price of natural gas is a key determinant of fertiliser prices which may affect the price of feed. In addition livestock also compete with ethanol production for available corn supplies, so an increase in the price of oil may lead to an increase in ethanol demand, further boosting demand for corn away from livestock.
8) The US dollar
Like most internationally traded commodities livestock are priced in US dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa. Unlike many other commodities livestock prices (live cattle and lean hog futures) only has a small inverse correlation against the dollar with of around -0.2 with the previous nine factors appearing to be much more important in determining sugar prices.
9) Seasonal trends
Seasonal periods can clearly and predictably result in changes in tastes and preferences. For example, there is increased demand for certain cuts of meat during the summer (more pork and beef) because many people enjoy BBQs. Similarly, at Christmas the demand for turkey increases while the demand for pork and beef decreases
The supply of livestock is highly seasonal too. For example, most cattle herds are bred in late summer and after a 9 month gestation period, produce a spring calf crop. Most producers breed their herd to calve in the spring to avoid the harsh weather of winter and to assure abundant forage for the new calves during their first few months.
10) Consumer preferences
For health, moral, environmental or for other reasons demand for meat, or certain types of meat may reduce over time. In contrast to the impact of changes in price on demand for substitutes, changes in consumer preferences results in much longer term changes in demand.
Quality—-
A global and a domestic company may each spend 5 percent of sales on research and development, but the global company may have many times the total revenue of the domestic because it serves the world market. Global marketing strategies can generate greater revenue and greater operating margins, which, in turn, support design and manufacturing quality. Global companies “raise the bar” for all competitors in an industry. When a global company establishes a benchmark in quality, competitors must quickly make their own improvements and come up to par. Global competition has forced all companies to improve quality. For truly global products, uniformity can drive down research, engineering, design, and production costs across business functions
Customer satisfaction-———–
Over the past three decades, customer expectations have risen by leaps and bounds . Customers continue to become more sophisticated and interested in innovative pro&ucts and customized services. They are becoming more unpredictable in their wants and needs. At the same time, they continue to expect and demand more ‘value’ from brands. In their bid to satisfy the customer’s fancy, businesses are vying with one another to service the customers with their product and service offerings. Heightened competition has given cllstomers tremendous freedom of choice – a freedom they have been increasingly willing to exercise. Thus, to achieve sustainable advantage in this competitive scenario, it is imperative for businesses to service the needs of their customers excellently across any and all loci points.
Traceability————-
Traceability is a very important element in food supply chain in order to ensure product and process integrity, improve consumer trust and maintain quality standards. The new age consumers are highly conscious of the origin of food products to ensure verified or disease-free food products. Since the quality of food products will affect consumer health directly, the food products should be traced on both upstream and downstream of the supply chain. In case any contaminated or disease affected products are in supply chain, the food supplier can recall them immediately. The traceability also facilitates identifying and removing the cause of the problem in the entire supply chain from supplier to customer. Traceability creates consumer trust and delivers quality and safety food to the consumer.
Production and distribution———
It is not unreasonable to wonder why all products are not sold directly from producer to final consumer. In general, it starts from the consumer. IdentifYing the actual needs and wants of the consumers is a major factor for any business enterprise to be successful. The preferences of the customers are changing with time posing a greater challenge for the producers. The demand created by the customers and the demand created by the firms should be mutually benefiting. The firms or the producers consider the time as the critical factor for success as the customers need their need met in time. The modem customer base is varied with the different preferences they show for a particular product in terms of variety and quality. The customers of today are not ready to compromise quality for price or the vice versa. The organizations that fail in servicing their customers properly are in a danger of losing their business.
Traditional systems———–
In the past, supply, production and distribution systems were organized into separate functions that reported to different departments of a company. Often policies and practices of the different departments maximized departmental objectives without considering the effect they would have on other parts of the system. These three systems are interrelated, conflicts often occurred. While each system made decisions that were best for it, overall company objectives suffered. For example, the transportation department would ship in the largest quantities possible so it could minimize shipping costs. However, the increased inventory and resulted in higher inventory-carrying costs.
The major objectives of a company should be to Provide best customer service
- Provide lowest production costs
- Provide lowest inventory investment
- Provide lowest distribution costs
The traditional/past systems also had different department but the major differentiating factor is that they were independent in their operations. The profit! loss was separate for the different departments. These objectives create conflict among the marketing, production, and finance departments because each has different responsibilities in these areas. Marketing’s objective is to maintain and increase revenue therefore, it must provide the best customer service possible.
There are several ways of doing this:
Maintain high inventories so goods are always available for the customer Interrupt production runs so that a non-invoiced item can be manufactured quickly. Create an extensive and costly distribution system so goods can be shipped to the customer rapidly. Finance must keep investment and costs low This can be done in the following ways: Reduce inventory so inventory investment is at a minimum Decrease the number of plants and warehouses Produce large quantities using long production runs Manufacture only to customer order production must keep in operating costs as low as possible.
This can be done in following ways: Make long production runs of relatively few products. Fewer changeovers will be needed and specialized equipment can be used, thus reducing the cost of making the product. Maintain high inventories of raw materials and work in process so production IS not disrupted by shortages.
These conflicts among marketing, finance and production center on customer service, disruption of production flow, and inventory levels. One important way to resolve these conflicting objectives is to provide close coordination of the supply, production and distribution functions. The problem is to balance conflicting objectives to minimize the total of all the costs involved and maximize customer service consistent with the goals of the organization. This requires some type of integrated materials management or logistics organization that is responsible for supply, production, and distribution. Rather than having the planning and control of these functions spread among marketing, production and distribution, they should occur in a single area of responsibility.
Supply chain management———–
A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.
Need for supply chain management-——–
Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their Own objectives and these are often conflicting. Marketing’s objective of high customer service and maximum sales conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization—there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved. Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race
Requirements of supply chain management———–
The major requirements of supply chain are the different intermediaries involved in the chain. Although these are important the following are the major requirements for a supply chain. I. Segment customers based on service needs. Companies traditionally have grouped customers by industry, product (or service), or trade channels and then provided the same level of service to everyone within a segment. Effective supply chain management, instead, groups customer by distinct service needs regardless of industry and then tailors services to those particular segments. 2. Customize the logistics network. Companies need to design their logistics network based on the service requirements and profitability of the customer segments identified. The conventional approach of creating a “monolithic” logistics network runs counter to successful supply chain management. 3. Listen to signals of market demand and plan accordingly. Sales and operations planning must span the entire chain to detect early warning signals of changing demand in ordering patterns, customer promotions and so forth. This demand-intensive approach leads to more consistent forecasts and optimal resource allocation. 4. Differentiate product (or service) closer to the customer. Companies today no longer can afford to stockpile inventory to compensate for. possible forecasting errors. Instead, they need to postpone product (or service) differentiation in the manufacturing process closer to actual consumer demand. 5. Strategically manage the sources of supply. By working closely with their key suppliers to reduce the overall costs of owning materials and services, supply chain leaders enhance margins both for themselves and their suppliers. 6. Develop a supply chain wide technology strategy. Information technology must support multiple levels of decision making across the supply chain. The IT system also should afford a clear view of the flow of products, services, and infonnation 7. Adopt channel-spanning performance measures. Excellent supply chain measurement systems do more than just monitor internal functions. They adopt measures that apply to every link in the supply chain, incorporating both service and financial metrics
Value chain Vs Supply chain-————–
The Value Chain concept was developed and popularized in 1985 by Michael Porter, in Competitive Advantage,” (I) a seminal work on the implementation of competitive strategy to achieve superior business performance. Porter defined value as the amount buyers are willing to pay for what a firm provides, and he conceived the “value chain” as the combination of nine generic value added activities operating within a firm _ activities that work together to provide value to customers. Porter linked up the value chains between firms to fortn what he called a Value System; however, in the present era of greater outsourcing and collaboration the linkage between multiple firms’ value creating processes has more commonly become called the “value chain.” As this name implies, the primary focus in value chains is on the benefits that accrue to customers, the interdependent processes that generate value, and the resulting demand and funds flows that are created. Effective value chains generate profits.
A comparison of a value chain with a supply chain———
Supply Chain Management (SCM) emerged in the 1980s as a new, integrative philosophy to manage the total flow of goods from suppliers to the ultimate user and evolved to consider a broad integration of business processes along the chain of supply. Keith Oliver coined the term “supply chain management” in 1982. The primary focus in supply chains is on the costs and efficiencies of supply, and the flow of materials from their various sources to their final destinations. Efficient supply chains reduce costs. a supply chain and a value chain are complementary views of an extended enterprise with integrated business processes enabling the flows of products and services in one direction, and of value as represented by demand and cash flow in the other. Both chains overlay the same network of companies. The customer is the source of value, and value flows from the customer, in the form of demand, to the supplier. The primary difference between a supply chain and a value chain is a fundamental shift in focus from the supply base to the customer. Supply chains focus upstream on integrating supplier and producer processes, improving efficiency and reducing waste, while value chains focus downstream, on creating value in the eyes of the customer. This distinction is often lost in the language used in the business and research literature. Creating a profitable value chain therefore requires alignment between what the customer wants, i.e., the demand chain, and what is produced via the supply chain. And while supply chains focus primarily on reducing costs and attaining operational excellence, value chains focus more on innovation in product development and marketing. Value is highly conditioned by the larger social and economic environment through which complex and numerous interactions affect the human perception of value-based transactions. Advertising, social trends, and economic conditions all influence consumer and business valuations of products, serv1.ces, and resources flowing through the value systems in our economy. One of the most watched figures in the marketplace is the consumer confidence index based on a survey of households. This index is an aggregate measure of confidence in the economy and a leading indicator of how consumers will value, and therefore how they will spend money on goods and services. When perceptions of value in a marketplace become exaggerated, market bubbles occur such as the internet technology bubble several years ago. When significant trends take hold in this larg. environment it is difficult, ifnot impossible, for individual companies or households to avoid being swept alor in the sudden creation and destruction of value that may result.
Supply Chain management must address the following problems—————
1.Distribution Network Configuration: Number and location of suppliers, production facilities, distribution centers, warehouses and customers
- Distribution strategy: Centralized Vs decentralized, cross docking, direct shipment, pull or push strategies third party logistics
- Information: Integrate systems and processes through the supply chain to share valuable information including demand signals, forecasts, inventory and transportation
- Inventory management: Quantity and location of inventory including raw material, work-in-process an( finished goods service providers and customers.
Benefits
Lower costs
Better customer service
Efficient manufacturing
Better trust among the partners leading to win-win
Reference:On request
