Adding value in the value-chain

The need is to identify nodes in various value-chains, create training infrastructure and link them with specialised value chains

Large “exploiting” the medium and the medium “exploiting” the small are often heard terminologies in development. Here, unequal stakeholders play their predefined roles in the value-chain, with each trying to “take advantage” of the other, learning from endless historical evidences of short run dealings grounded on pillars of mistrust.

However, at some point of time in their growth history, few firms thought otherwise. A Harvard Business Review compilation found that furniture giant Ikea broke a value-chain monotony by ‘making customers their suppliers’, involving them in furniture creation (which the customers loved) and ‘making suppliers their customers’ by buying technical services (which they are best capable) from them, thereby creating a partnership that shaped a phenomenal growth model. Chrysler created a Suppliers Cost Reduction (SCORE) programme where it truthfully shared the savings based on formal suggestions of the suppliers—a new value-chain role for them. Caterpillar did not bypass its dealers who have unique local knowledge during its good times and instead gave them training in preempting complaints, a new value-chain role.

Few issues are of importance here. First, such operations are a result of long-term policies that clearly saw scope for higher value creation by creating partnership among stakeholders having skill-based comparative advantages. Second, new sources of value addition are identified by a lead firm and the necessary training is provided to qualified chain partners. Above all, there is a genuine sharing of both pain and gain.

While there was no typical advantage of geographic concentration in such performances, transformations towards such relationships have been witnessed across clusters of micro and, at times, own-account enterprises (having no hired labour) in India. Here, often, fully price-based relationships were transformed to hierarchical/quasi-hierarchical relationships, with large firms interacting with groups of better quality own-account enterprises for volume production. While this is a good beginning, the real transformation into high level performance occurs when the units specialise and upgrade as true partners. Such situations require sharing and involvement and creating innovative roles for the chain partners. For example, in a handloom cluster, one can think in terms of changing the role of weavers, the bottom of pyramid (BoP) enterprises in terms of raw material aggregator, production aggregator, quality controller, designer and the like, all being very important steps in the value-chain and can geographically take place in the cluster. However, the scope for such new roles is low for traditional weaver because of two issues. First, it is beyond the scope of existing teaching materials, methodologies and infrastructure. That there is no known study material in Hindi (or any other vernacular language) for training of adult weavers on designing is one example of this. Second, the traditional thinking is that enhancing value for weavers can be achieved through the manufacturing process only—that other innovative, “new role” value addition can be done still doesn’t beep on the radar. Also, being unequal partners with no current or future growth that is worth taking note of, weavers generally end up as partners who share the risks but not the rewards, unlike successful turnaround cases.

A similar situation is also witnessed in the farm sector. Here, again we look at farmers mostly as agents who can earn by enhancing farm productivity. However, the scope is much larger. In the complex value-chain of farm produce reaching from the end-consumer’s plate (from farm to fork)—with the toning down of the APMC Act provisions and rapid growth of various private sector operators—farmers can upgrade themselves as farm infrastructure supplier, raw material supplier, boot strap plant/animal doctors, water managers, transporter, aggregator, packagers, primary/final processors, cold chain managers, etc. All these again face the same dual challenge of lack of support system and the willingness to promote newer roles in the value-chain for a traditional BoP producer. In the absence of such opportunities, farm-level crowding with no specialise skills make farmers unequal partners who share only the pain.

Hence, the need of the hour is (a) identification of nodes where the BoP producers can do innovative value addition, (b) creation of appropriate study material and training infrastructure, (c) evaluation and selection of suitable BoP producers for a typical value node, for training, and (d) linking the newly capacitated (and ready for true partnership) BoP producer with specialised chain partners who have business interest in the value generated. A development fund should be targeted towards such identification and capacity building measures through joint actions of interested BoP producers for the identified value nodes. Clusters provide an easier option of starting the process by providing the requisite mass of producers.

The author is director, Foundation for MSME Clusters. Views are personal

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