Magazine article Financial Management (UK)

Target Cost Management: Louise Ross Reports on the Latest CIMA-Backed Research into the Financial Management Problems Facing Primary Producers in the Food Supply Chain

Magazine article Financial Management (UK)

Target Cost Management: Louise Ross Reports on the Latest CIMA-Backed Research into the Financial Management Problems Facing Primary Producers in the Food Supply Chain

Article excerpt

Agriculture is a unique and fascinating industry. It's characterised by oligopsony: a situation where large numbers of primary producers supply relatively few large retailers. Historically, many of these producers have paid little attention to cost management, perhaps because subsidies account for a significant proportion of farms' revenues, while the inefficient planning of demand and supply has caused high levels of waste. A recent CIMA-funded study into the potential for target cost management (TCM) suggests that this strategic tool could help to make their costs more transparent, foster more effective collaboration among supply chains and discourage short-termism.

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The research was done by Lisa Jack, senior lecturer in accounting at the University of Essex. She gathered together farmers, policy-makers and pressure groups, along with CIMA members interested in the industry, for a series of round-table discussions late last year. Her earlier study had found that farmers and other primary producers were often using an intuitive form of TCM, working backwards from predicted market prices to set informal cost targets and then re-engineering their processes to achieve those cost savings (see Technical matters, October 2008).

These findings led Jack to advocate a more formal approach to TCM, because it would give farmers an understanding of costs that many were lacking and also because TCM can be hugely informative about where the rewards accrue in supply-chain relationships. For profits to be sustainable in the long term, they need to be shared fairly throughout the supply chain. As one roundtable participant commented, it is pointless for a retailer to beat down the price it will pay for carrots to 24 pence a pound if this forces some growers out of business.

The participants mentioned the power of the supermarkets over their supply chains in several contexts, including that of demand planning. Nature has its crop cycles, but a 13-week notice period for cancellations is a standard supermarket agreement with farmers. In some cases it's as little as a fortnight. Supermarkets might indicate their annual requirements (on which basis the farmers then plan their planting) but later buy only a proportion of these crops--for example, in reaction to a cold summer, which lowers demand for salad vegetables. If the grower can't find a buyer for the remaining crops, they are often simply ploughed back into the fields.

The fragmented nature of the industry is largely to blame for this. …

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