The International Consortium on Agricultural Biotechnology Research (ICABR)

 

Biotechnology in the Supply Chain: Managing A Product Differentiating Technology

 

Robert D. Weaver, Taeho Kim, Pennsylvania State University

 

 

Abstract

 

Problem. Ag biotech offers an important challenge to supply chain management. This paper considers economic performance of the supply chain and establishes suboptimal performance results when either consumers or producers differentiate across products by technology of origin. Institutional solutions for improving performance of the supply chain through grading, labeling, or contracting are presented. Two interests are considered that may differentiate ag biotech products: 1) consumer preferences and 2) technology suppliers. In either case, product differentiation will define opportunities for supply chain management. For consumers, ag biotech products may be viewed as of lower quality, in fact as being polluted or contaminated. The presence of residues or contaminants in any one supplier’s marketings may result in consumer rejection of the product or discounting of its value. For technology suppliers, ag biotech may offer potential for productivity and quality enhancement that may not find demand and willingness to pay at all levels of the supply chain unless its products are differentiated. This generates an economic externality across all agents in the supply chain and creates incentives for self-regulation that alters supply chain performance. Supply chain management actively feeds back to the supply chain's performance depending on whether bilateral or multilateral contracts are used and depending on the transparency of those contracts. Recent experience in international commodity markets for GMO or ag biotech products provides an important case for analysis of the current state of opportunity for improved supply chain management.

Objectives. This paper will assess the extent of current opportunity for enhanced food supply chain performance through a spectrum of alternatives for enhanced coordination to establish value for products that are differentiated by technology of origin.

Approach. The extent of current opportunity will be assessed for improved management of ag biotech products through the supply chain. First, the natural incentives for coordination along the supply chain will be considered for commodities such as soybeans that through transformation are highly integrated into the food supply chain. Natural incentives for vertical integration along the supply chain will first be considered based on neoclassical microeconomics. The implications of grades and standards will be assessed and their impacts on incentives for vertical coordination will be established. Finally, the role of contracts and alliances will be evaluated and it will be shown that they are often dominate incentives for further vertical coordination. Simulation will be used to illustrate a variety of alternative coordination approaches and to compare their implications for the performance of the food supply chain. The paper will consider a number of types of ag biotech cases to allow generalization of particular results. These cases will range from market neutrality (no impact on production costs or final product physical characteristics) to production or consumption characteristic impacts.

Results.

The paper presents a readily accessible argument that concludes that for technologies such as ag biotech grades and standards on quality inhibit attainment of levels of supply chain value and innovation that can be attained through other approaches. While instrumental in guaranteeing safe minimum quality levels, standards are argued as a starting point for managing use of technologies that differentiate products, rather than a definitive policy approach. Advantages of contracting and labeling are established. The paper builds on ongoing nationally funded research in the U.S. that involves substantial collaboration with the private sector.

 


 

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