Mechanisms for Increasing Sourcing from Capacity‐Constrained Local Suppliers

Abstract

The fresh produce supply chain is characterized by large (mainstream) farms that are located far from consumers, and capacity-constrained (local) farms that are located close to the consumer. In this setting, we study: (i) how leadtime and capacity asymmetry between mainstream and local farms affect a retail grocer's order policy for fresh produce, and (ii) how various operational mechanisms can increase the amount sourced from local farms. We show that this supply chain structure is disadvantageous for local suppliers (farms) because it induces the retailer to treat the local supply as a de facto responsive supply without paying a premium for the responsiveness. This disadvantage is exacerbated when the retailer's objective is to achieve a high service level. We study three mechanisms that can improve conditions for local farms: working with an intermediary, backhauling, and a retail order policy, purchase guarantee, that explicitly supports local farms. The intermediary and backhauling mechanisms help the local farm by making local supply more attractive to the retailer, inducing her to order more locally sourced produce. The intermediary reduces the retailer's overstock and stockout costs whereas backhauling increases the average margin. The purchase guarantee order policy helps local farms at the expense of retail profit. However, we show that purchase guarantee and * We are grateful to the food industry managers and experts who have graciously spent their time and lent their expertise to help us understand the evolution and current operations of the fresh produce supply chain.

The role of small and medium enterprise and family business distinctions in decision‐making: Insights from the farm echelon

“…Diversity of objectives—that is, the pursuit of financial and non‐financial goals—distinguishes family businesses from their non‐family counterparts (Berrone et al., 2012; LaPorta et al., 1999). Non‐financial goals, such as family legacy (Astrachan, 2010), long‐term sustainability (Tongarlak et al., 2017), and socioeconomic wealth (Gómez‐Mejía et al., 2007), are often emphasized more than financial goals. Although the nature and degree of emphasis can vary widely across family businesses (Astrachan, 2010), family business research is generally united about the prominence of non‐financial objectives.…”

“…Diversity of objectives-that is, the pursuit of financial and non-financial goals-distinguishes family businesses from their non-family counterparts (Berrone et al, 2012;LaPorta et al, 1999). Non-financial goals, such as family legacy (Astrachan, 2010), long-term sustainability (Tongarlak et al, 2017), and socioeconomic wealth (Gómez-Mejía et al, 2007), are often emphasized more than financial goals.…”

Pricing decisions in a dual supply chain of organic and conventional agricultural products

“…For example, Chinese consumers in large metropolitan areas, who typically have very busy working schedules and no time to purchase fresh produce every day (a regular practice in China), are increasingly turning to online stores for their daily produce demand (Wang et al 2017). Another factor influencing the growth in direct sales is the increase in public interest in bolstering local economies, and particularly local agriculture, with a strong trend among consumers to switch to local food suppliers (Tongarlak et al 2017). Direct marketing channels are a potentially attractive means for suppliers to capitalize on this trend, as reliance on such channels (as opposed to indirect channels) has been shown to offer increased net incomes to farmers (Monson et al 2008).…”

Optimal Dynamic Order Scheduling under Capacity Constraints Given Demand‐Forecast Evolution

“…In practice, however, capacity expansion is considered more effective than lead-time reduction in reducing mismatch losses when companies rationalize their decisions on long-distance sourcing (Atkinson and Ezell 2012, Girotra and Netessine 2012, Tongarlak et al 2017. For example, Tongarlak et al (2017) commented that retail stores are not willing to pay more to capacity-constrained local suppliers of fresh products for their responsiveness than to large long-distance farms, because they value capacity more than responsiveness. Therefore, our results in this subsection can be considered as counterintuitive in practice.…”

“…In practice, however, capacity expansion is considered more effective than lead‐time reduction in reducing mismatch losses when companies rationalize their decisions on long‐distance sourcing (Atkinson and Ezell 2012, Girotra and Netessine 2012, Tongarlak et al. 2017). For example, Tongarlak et al.…”