Sheep and goat value chains development in Ethiopia: Basic concepts of value chain analysis

Sheep and goat value chains development in Ethiopia: Basic concepts of value chain

analysis

Getachew Legese (ICARDA)

ICARDA-ILRI Training on Tools for Benchmarking Sheep and Goat Value Chains in Ethiopia,

Addis Ababa, 6-9 November 2013

Presentation outline

• Basic concepts in Value Chain Analysis– Value and value addition– Value Chain– Stages of a value chain– Business development services– Value chain leader

• Potential objectives of VCA• How to conduct VCA

– Data collection– Value chain mapping – Analysis of constraints and opportunities– Value Chain frame work– Validating findings of VCA

Basic concepts of Value Chain AnalysisValue and value additionValue – Amount a good or service is worth of in the market– Three types of value• Form value – associated with the change of the form of a

raw material (production, processing) • Time value - related with availing at another period of

time produce produced at a period of time (storage)• Space value - related with availing at another location

product produced in one location (transport)

What is a Value Chain (1)

• VC encompass the full range of activities and services required to bring a product or service from its conception to sale in its final markets.

• VC includes input and service suppliers, producers, processors and buyers.

• They are supported by a range of technical, business and financial service providers

• A value chain entails the addition of value as the product progresses from input supply to production to consumption.

• Value chains are also the conduits through which:– finance (revenues, credit, and working capital)

moves from consumers to producers; – technologies are disseminated among producers,

traders, processors and transporters; – information on customer demand and preferences

are transmitted from consumers to producers and processors and other service providers.

What is a Value Chain (2)

What is a Value Chain (3)

• VCA focuses on chain governance and power relationships which determine how value is distributed at different levels.

• Through the analysis of systems and power relations at different levels, value chain analysis enables a more comprehensive modeling of the effect of interventions at different levels, thus enabling better targeting of interventions aimed at poverty reduction.

Stages of a value chain

• Any operating stage capable of producing a saleable product or service serving as an input to the next stage in the chain or for final consumption or use

• Typical value chain linkages include input supply, production, assembly, transport, storage, processing, wholesaling, retailing, and utilization, with exportation included as a major stage for products destined for international markets.

Business development services• Services that play supporting role to enhance the operation of

the different stages in the value chain and the chain as a whole– Infrastructural services (market place development, roads

and transportation, communication, energy supply, water supply)

– Production and storage services (input supply, genetic and production hardware from research, farm machinery services and supply, extension services, weather forecast, storage infrastructure)

– Marketing and business skills (market information, market intelligence, technical and business training, facilitation of linkages of producers with buyers, organization and support for collective marketing)

– Financial services (credit, saving, risk insurance)– Policy and regulatory services (property rights, market and

trade regulations, investment incentives, legal services, taxation)

The Value Chain and Business support services

Production

Post-harvesthandling

Processing

Retailing

Consumption

Trading

Trading

Market information and intelligenceMarket information and intelligence

Financial servicesFinancial services

TransportationTransportation

CommunicationsCommunications

Govt. policy regulationGovt. policy regulation

Tech. & business training & assistanceTech. & business training & assistance

Production input supplyProduction input supply

ResearchResearch

Transport

Input Supply

Value chain leader

• An organization with major stake in the value chain and plays crucial role in the functioning, performance and development of the value chain.

• Value chain leaders are especially critical in the development of new and emerging value chains

• Value chain leader could be private business which intends to make profit or a public agency which intends to promote the development of the value chain.

Potential objectives of VCA• Identification of leverage points to improve chain

performance• Analysis of agriculture-industry linkages• Analysis of income distribution• Analysis of employment issues• Analysis of economic, social and environmental impacts of

interventions• Guide collective action for marketing• Guide research priority setting• Conduct policy inventory and analysis

How to conduct a VCA

Value chain analysis consists of a four step process: 1. Data collection and analysis, 2. Chain mapping (actors, functions and relationships) and

end market analysis3. Analysis of opportunities and constraints, and4. Validating the findings of the VCA through stakeholders

forum

Data collection (1)

• Good value chain analysis begins with good data collection, from the initial desk research to the targeted interviews.

• Both qualitative and quantitative data are required for the VCA.

• The qualitative data are collected using PRA tools such as: focused group discussions, Key Informant interview, personal observations, etc

• Quantitative data for VCA are collected through formal surveys using structured questionnaire

Quantitative analysis• Most of the VCA works focus on qualitative analysis to

understand trends, incentives and relationships• We did rapid VCA mainly using the PRA tools• Quantitative analysis plays an important role in VCA by

illustrating the current situation and revealing inefficiencies that can be addressed to increase competitiveness

• It involves: – mapping of value added distribution along the chain– Measuring profitability– Measuring competitiveness– Productivity and productive capacity– Comparing competitiveness of the VC and VC actor against

its competitors (Benchmarking)

• Value chain mapping is the process of developing a visual depiction of the basic structure of the value chain.

• It is a compressed visual diagram of the data collected at different stages of the VCA and supports the narrative description of the chain

Mapping Value the Value chain

Value chain mapping(2)

Objectives• To gain basic overview of the value chain to guide the

full VCA to be undertaken• Identify constraints and possible solutions at

different levels in the VC• Visualize networks to get a better understanding of

connections between actor and processes• Demonstrate interdependence between actors and

processes in the VC• Create awareness of actor to look beyond their own

involvement in the VC

Value Chain Mapping (3)

A two phased process for developing the value chain mapping is recommendeda) initial basic mapping based on the information

derived from desk research and knowledge at the outset of the analysis, and

b) adjusted mapping that includes revisions based on interviews and feedback from firms and individuals brought into the analysis process

value chain mapping (4)• There is no such a thing as a comprehensive, all

encompassing VC map• There are many potential dimensions of the VC that could be

included in an initial mapping exercise:– The core processes in the VC– The main actors in the process– The product flows,– Volume of product flow– Costs and margins at different levels– Constraints and opportunities at the different levels– Flow of information etc

• The first step in mapping the distribution of value added is to record prices at different stages in the chain for one unit of a good beginning at the raw material and ending with the final product sold to the consumer

• In order to assess value added at each stage, we need to have information on total input costs

• This exercise identifies the roles of each segment and incremental value that the market assigns to each role based on additional inputs and services to the product

Mapping Value- Added Distribution

Mapping the core processes

• The first question that must be asked in any value chain analysis is what the different processes in the value chain are.

• Example: Core processes in sheep VC (SNNP & Oromia)

Input Supply Production Trading Processing

Domestic Consumption/

Export

Mapping actors along the value chainExample: Actors along the core processes of the sheep value chain

Input Supply Production Trading Processing Consumption

•Sheep producers•The

extension system

Small holder farmers

•Collectors•Brokers•Small traders•Big traders•Sheep

fatteners

•Export abattoirs•Shoat

butchers•Super

markets

•Meat exporters•Live animal

exporters• Individual

consumers in big towns and Addis•Hotels and

restaurants•Farmers (for

fattening/rearing)

VC actors

Small farmers

Traders

companies

Union

Enablers

Supporters

Operators

Mapping activities along the VC

Example: Core processes and activities in the sheep VC

Input Supply Production Trading Processing

Domestic Consumption/

Export

•Breeding stock•Veterinary

services•Feed•Water•Housing

•Rearing•Fattening

•Collection•Transportation•Distribution to

consumers(retail, wholesale)

•Slaughter•Chilling•Packing

•Domestic consumption •Export to

MENA countries

Export markets

Collectors

Consumers in big tows and Addis

Ababa

Small tradersBig

traders

Small holder farmers

Export abattoirs

Shoat butchers

Super markets

Consumption

Processing

Live animal Trading

Production

Input Supply Business and Extension services

Hotels and restaurants

Live animal

exporter

Brokers

Local consumers

Farmers (breeding/ fattening)

Mapping product flowsExample: Sheep value chain functions, actors, and product flows

Mapping Volume of product flows

Collectors

Producers

Big traders

Purchasing agents

Live animal exporters Export abattoirs

Small traders

100%

3%

6%

14%

61% 28% 8% 50%

Cooperatives

23%

50%

22% 60%

12%

54% 46%

23%

77%

63%

Example: Product Supply Pattern in the Shoat Value Chain (Borena)

A typical VC depicting revenue per kg of products at each stage of the chain

  Producers Brokers CollectorsSmall traders

Super markets

Selling price 750 810 820 870 1280

Marketing cost - 0 16 39 95

Marketing margin - 60 70 50 410

Net margin - 60 54 11 315Producer's share of final price (%) - - - - 59

Example: Costs and margins of actors involved in a market channel selling shoats to supermarkets

Mapping the flow of values and benefits

Making a value chain map matrix

• A VC map matrix is the matrix which summarizes the key information from maps in one table.

• The matrix can be used as the basis for designing questionnaires, determining which actor groups to interview and which geographical locations to concentrate field work in.

• It can also serve as an easy to interpret sector summary from VC perspective.

VC map matrixInput supply Production trading processing consumption

Activities

actors

Inputs

outputs

locations

challenges

Possible solutions

Measuring Profitability

• After capturing the value added at each link in the value chain, the next step requires the analyst to establish the relative profitability of each activity.

• To do this, more detailed data on costs are needed- including : material costs, – depreciation costs,– labor costs, – financing costs, – utilities, and – the profit margin at each stage.

• This data can be obtained by adding more inquiry points to the interviews and surveys

Measuring Productivity

• Productivity measures the efficiency of economic units in employing resources in the production process.

• It is frequently expressed as a ratio of output over input. • Productivity measurements are useful for tracking

changes over time in a firm or value chain to assess and bring about improvements, and for benchmarking against competing firms and value chains.

• Productivity measures are important indicators for potential investors and customers, as well as for managers--who use them to determine how efficient their firms are and to identify upgrading strategies.

Value Chain Benchmarking• Benchmarking analysis involves comparing the

performance of a firm, value chain or link in the value chain to its competitors

• Through benchmarking, industry stakeholders can establish their current relative performance and generate a “menu” of potential actions that could lead to improved performance and competitiveness,

• based on an understanding of what competitors do differently, and whether these differences are important drivers of performance

• Thus, benchmarking exercises provide crucial input into competitiveness strategies and upgrading plans

Analysis of Opportunities and Constraints Using the Value Chain Framework

• The process of value chain analysis requires the use of the value chain framework to identify opportunities and constraints along the chain.

• The value chain framework comprises the structure and dynamics of the value chain.

• The structure of a value chain includes all the firms in the chain and can be characterized in terms of the following five elements

i. end marketsii. business enabling environmentiii. vertical linkagesiv. horizontal linkagesv. supporting markets

• The dynamics of the value chain, which refers to the determinants of individual and firm behavior and their effect on the functioning of the chain can be characterized in terms of: value chain governance, inter-firm relationships and upgrading

End Markets• They determine the characteristics—including price, quality, quantity

and timing—of a successful product or service. • End-market analysis assesses current and potential market

opportunities through interviews with current and potential buyers, and takes into consideration trends, prospective competitors and other dynamic factors.

• During chain analysis, the focus should be on the current and potential production capacity of the chain and its ability to respond to end market demand.

• It is through the analysis of end markets that we are able to identify the investment needs that will drive chain upgrading.

Business Enabling Environment (BEE)• Value Chains operate in a business enabling environment (BEE) that

can be global, national and local and includes norms and customs, laws, regulations, policies, international trade agreements and public infrastructure (roads, electricity, etc.).

• The analysis process must determine whether and how the business enabling environment facilitates or hinders performance of the value chain, and if it hinders, where and how can it be improved.

Vertical Linkages• Linkages between firms at different levels of the value chain are critical for

moving a product or service to the end market. • Vertical cooperation reflects the quality of relationships among vertically

linked firms up and down the value chain. • More efficient transactions among firms that are vertically related in a value

chain increase the competitiveness of the entire industry. • The nature of vertical linkages—including the volume and quality of

information and services disseminated—often defines and determines the benefit distribution along the chain and creates incentives for, or constrains, upgrading.

• The efficiency of the transactions between vertically linked firms in a value chain affects the competitiveness of the entire industry.

• An important part of value chain analysis is the identification of weak or missing vertical linkages.

Horizontal Linkages• Horizontal linkages—both formal as well as informal—between firms at all

levels in a value chain can reduce transaction costs, create economies of scale, and contribute to the increased efficiency and competitiveness of an industry.

• It can also contribute to shared skills and resources and enhance product quality through common production standards.

• Such linkages also facilitate collective learning and risk sharing, while increasing the potential for upgrading and innovation.

• Value chain analysis also considers competition between firms.• While cooperation can help firms achieve economies of scale and overcome

common constraints to pursue opportunities, competition can encourage innovation and drive firms to upgrade.

• One of the objectives of value chain analysis is to identify areas where collaborative bargaining power could reduce the cost or increase the benefits to small firms operating in the chain.

Supporting Markets• Support markets include financial services; cross-cutting services such as

business consulting, legal advice and telecommunications; and sector-specific services (feed produces, veterinary services, market information, transportation, etc).

• most service providers themselves need supplies, training and financing in addition to strong vertical and horizontal linkages.

• Value chain analysis should seek to identify opportunities for improved access to services for target value chain actors in such a way that the support markets will be simultaneously strengthened, rather than undermined.

• VCA should take due care to uncover informal sector service providers, which often go unnoticed.

Value Chain Governance• Value chain governance refers to the relationships among the buyers,

sellers, service providers and regulatory institutions that operate within or influence the range of activities required to bring a product or service from inception to its end use.

• Governance is about power and the ability to exert control along the chain

• Governance is particularly important for the generation, transfer and diffusion of knowledge leading to innovation, which enables firms to improve their performance and sustain competitive advantage.

• When conducting VCA, the type of governance structure that exists must be identified since it will contribute significantly to the selection of interventions to increase competitiveness.

Upgrading• In order to respond effectively to market opportunities, firms

and industries need to innovate to add value to products or services and to make production and marketing processes more efficient.

• In VCA, the objective is to identify opportunities and constraints to firm- and industry-level upgrading;

• specifically the analysis looks for catalyst firms with the incentives, resources and willingness to promote and facilitate upgrading within the chain.