Adoptions of Production Systems to meet Domestic and International Trade Requirements and Standards

This project is funded by the European Union. Training module Adoptions of Production Systems to meet Domestic and International Trade Requirements and Standards Keywords: Production systems, factors of production, batch system, continuous system, project system, mass production, value chain, supply chain, competitive advantage, international Organization for Standardization, GLOBALGAP/EurepGAP and Hazard Analysis and Critical Control Points (HACCP) After completion of this sub module, you would have learnt to about production systems and its different types. Besides this, the value chain and supply chain concept and how the process works from the combination of raw materials to reaching the end customers will also be learnt. You will also learn regarding public and private standards in general and specific to perishable trade.. Hamburg University of Applied Sciences May 2009

Adoptions of Production Systems to meet Domestic and International Trade Requirements and Standards In this sub module, you will learn about the definition of production systems and its different types. Value and Supply chains are defined and described as well in the context of the step by step process that a product goes through from raw materials to the product being delivered to the end user. The case study example used here to highlight the value/supply chain is the banana industry. Besides this, private and public standards are described and three specific standards popular among perishable products are highlighted in detail. These are the International Organization of Standardization (ISO), GLOBALGAP and Hazard Analysis and Critical Control Points (HACCP). 1. Introduction to Production Systems Production systems can be defined as the methods used for the production of goods and services in an industry (example, the food industry) which is created from multiple resources (factors of production)(figure 1). The factors of production (Figure 2) mentioned here are labour, capital (example; machinery and equipment) and space (example; lands and building) or the 5 M s; men, machines, methods, materials and money/1/. Figure 1: Production System Theory

Demand Information Factors of Production Source: http://www.lean-manufacturing-japan.com/interviews/production-management-planning-part1.html/2/. Figure 2: Factors of Production.

Source: http://foxstone.com.au/images/economics/hires/e5_big.jpg/3/. A production system can also be categorized in terms of flows, channels of movements, where it begins in the order of the physical and paperwork flow of raw materials and parts, manufacturing flows (intermediate stage; product development, processing, packaging), final product and information flow. There are limitations to the physical flow as it depends on the capacity of the production system thus directly affecting the maximum output of products. The production manager must be all times aware of the public and corporate demand of the product being produced and adjust product output accordingly/1/. Quality is another important aspect of the production system. Objective standards need to be met especially in terms of packaging (appearance), product safety, performance characteristics, durability, serviceability and other various parameters; delivery efficiency, price and paperwork/1/. 1.1 Basic Production Systems There are four types of basic production systems which are the batch system, the continuous system, the project system/one-off production and mass production/1//4//5/. In the batch system (job shops), productions of same products are done in fixed quantities. It is transferred as a batch through common purpose tools and methods in several steps and the set volume emerges at the end of the production line. A simplified example of a batch system is the bakery shop production of bread and cakes. A fixed amount of buns, cakes, pastries are made every morning by the baker and this resembles a batch production. Other examples are systems for making specific machine tools and processed food products or the system in an insurance company for processing of claims/1//5/. Continuous systems or assembly systems are large volume production where items are processed in steps. Special specific equipment and methods are utilized to ensure lower production costs can be achieved. Production lines run 24 hours and are normally controlled by computer systems. Examples include systems for assembling automobile engines, and consumer products like radio and televisions/1//5/.

Mass production system is a production system where specializations of tasks by workers are done to increase efficiency and skill. It is repetitive work. Normally there is always a combination between the continuous system and mass production system as both systems complement each other. The last production system described here is the project system/one-off production. It is a specialty product done only once and to suit the needs of an individual customer. Normally, these are high end good quality products and are expensive. Special management methods are utilized to ensure reasonable costs of production. Examples of this type of productions are building, ships, prototypes of products like airplanes or computers. 1.2 Further Production System Considerations There are another three main factors need to be considered after the general specifications of the production system have been settled. The first one is that the technology used needs to be chosen and designed. This depends on the industry as it varies. Among the decisions to be made are choice of the equipment and tooling, the layout of plant space and facilities, the working methods and human resource selection and many other aspects of process design. Beyond technology, the next thing to ascertain is the capacity of the system. It is a function of the quantity of available capital, the forecast results on the demand for product output and also other factors. Besides this, the production volume needs to be flexible in the face of changing market demand that each firm or farmer will experience. This adjustment is a complex task and can be extremely challenging to resolve. 2. Concept of value/supply Chains The supply chain can be defined as a network of organizations that are involved through upstream and downstream linkages which have different processes and activities that produce value in the form of products and services for the final consumer. Upstream linkages and flexibility refers to the production plants and its capacity to supply distribution centers with the product produced. Meanwhile, downstream linkages and flexibility refers to the capacity of distribution centers to transport the products produced to the market/6/. There is a clear dependence of each sections of the chain but are also separate entities simultaneously. For

example, the distribution centers will get its supply from the production plants, thus it is dependent on the production plant. However, the distribution center is a separate entity from the production plant as it does not play the same function. The main aim of the supply chains is on cost and efficiencies of supply and flow of materials from different sources to the final destination. If the supply chain is efficient, the overall process will cost less. Figure 3 The Value Chain Source: http://en.wikipedia.org/wiki/file:valuechain.png/7/ On the other hand, the value chain concept was invented in 1985 by Porter. The term value is defined as sum that the customers are willing to pay for the products being offered. Meanwhile value chain is directed to imply the value that the product obtains from the process of its birth to the stage where it reaches the final consumer. Value chain activities are divided into two different categories which are the primary activities and support activities (Figure). The integration of these activities is a new approach for the firm compared to the previous more traditional viewpoint. The principle that drives the firm towards the value chain is to gain competitive advantage over its competitors in the same market. Therefore to achieve greater competitive advantage, high efficiency and value of the products and service must be delivered to the end user/8//9/.

In the current environment, companies strive to achieve the value chain concept via a three step process from supply chain to value chain (Figure 4). It begins with evaluation of the internal management functions of the company such as sales, marketing, production, logistics and procurement. An overview of the entire process needs to be taken into account as what may be an optimum action for one part of the chain may not be the best action for the entire value chain. An example is in procurement of raw materials to make the products, long term purchasing contracts with high volumes does minimize costs; however, upon careful analysis, these contracts may produce high inventories and extra logistic costs as there could be a variability in the demand of finished product hence raw materials procured not being fully utilized/10/. Figure 4: Evolution towards Value Chain NO OPTIMIZATION SUPPLY CHAIN OPTIMIZATION VALUE CHAIN OPTIMIZATION Function Internal Management Minimize Costs to fulfill demand and delivery service level Maximize profit by optimizing volumes and values throughout the Value Chain FUNCTION FOCUS VOLUME FOCUS FOCUS ON VOLUME & VALUE Source: Ijioui, R., et. al (eds) 2008. pg 120 /11/ After the first stage, the optimization of the supply chain can be done using integrated decision making with the intention of reducing supply chain costs, in the provision of a certain level of quality and to meet customers demand. In this level, the emphasis is given to production and

distribution volumes. However, just the focus on supply chain does not produce best profits for the company. The final step is the value chain optimization. In this context, optimization is defined as integrating all volume and value decisions to increase maximum profits throughout the entire value chain from marketing, sales and procurement. 2.1 A Case study: Banana Trade- Value/Supply Chain Figure 5: Banana Value/Supply Chain Source: United Nations Conference on Trade and Development Secretariat- Official Webpage http://www.unctad.org/infocomm/anglais/banana/chain.htm/12/ Figure 6: Shares of Profit Distribution in the Banana Trade

Source:http://farm1.static.flickr.com/83/213512500_f38f9ee201.jpg/13/ The value and supply chain of the banana trade (Figure 6) is heterogeneous and is very dependent on producing and importing countries. The situation in each country and region varies in terms of the presence of key economic stakeholders. For example, in the Caribbean and Ecuador, bananas are produced by small independent farmers. Other forms of producing bananas are via national banana companies and large transnational companies (its growth is expanding; for example Dole bananas)/14/. The supply value chain goes through the cleaning, packaging and quality control and then transported via independent reefer carriers or multinational company ships. Upon arrival at the importing countries, the bananas will be handed over to the importers or wholesalers to allow time for ripening to occur before the bananas are sold at different retail outlets to the final end consumers. In reality, the international banana market is oligopolistic, whereby only a few major transnational banana marketing cooperation dominates the international trade and there is manipulation of market power at stages of the banana supply/value chain/14/. The banana is a very good example of a highly perishable product. Thus, it requires special treatment in the growing, packaging, transport, handling, ripening and distribution process. The banana sector is now highly vertical and large transnational companies tend to control growing

bananas in producing countries, by owning and controlling specialized refrigerated shipping and ripening facilities and even distribution networks in importing countries. The companies will profit from economies of scale due to the mass production of bananas sold to the customers and will compensate the initial high investment capital. The high mass production and high technological knowhow in production, shipping and marketing enables companies to sell quality bananas at very cheap prices /14/. 3. Importance of Public and Private Standards and Certification Currently, the development of public and private standards and certification are developed in three different ways. First, large transnational companies or big companies create their own private standards and certification, labeling and branding systems. Secondly, governments (where products are manufactured) are lobbied to adopt public standards and certification similar to those in export markets in developed regions. Finally, the third way is by small firms and farms, which forms an alliance to access export market and cause institutional change to non- tradable product markets. Public and private standards and certification can be compulsory or voluntary/15/. Globally, certification and standards have grown at tremendous rate due to the demand of well informed clients that needs a required level of product quality and safety which is reflected by certifications, standards and labels/15/. Certifications and standards have also grown because companies realize the growing importance of managing their supply chain and demonstrate social and environmental value of their products. An example would be coffee where in 25 countries it is certified as organic, fair trade in 22 and ecological in 9. Another benefit to the firms is that it gives a competitive edge in comparison to companies without the certification/16/. Three major types of certification process in the food market are organic, environmental management and fair trade/16/. However, in this section we only concentrate on the three main standards and certifications which are popular among perishable food items.

3.1 International Organizations for Standardization (ISO) There are 17500 International Standards developed by ISO (International Organizations for Standardization) on a variety of subjects. Besides this, around 1100 new ISO standards are published annually/17/. Relevant to the market of perishable products are ISO 9000 and the ISO 14000 family of standards and is recognized as one of the best known standards. Currently, the ISO 9001:2000 and ISO 14001: 2004 are being applied by over a million organizations located in 175 nations/18/. Figure 7: Plan Do Check Act (PDCA) cycle is the operating principle of ISO's management system standards. Source: http://www.iso.org/iso/iso_catalogue/management_standards/understand_the_basics.htm/19/ The ISO 9000 family focuses on quality management of the company or organization and its products and services. The standard outlines the customers quality requirements; applicable regulatory requirements while simultaneously also enhancing customer satisfaction and obtain continual improvement of its performance in the fulfillment of these objectives/18/. Meanwhile, the ISO 14000 family focuses on Environmental Management. The organization wishing to obtain this certification needs to fulfill these requirements. Firstly, the organization needs to decrease the harmful effects towards the environment caused by its activities and to gain continual improvement on environmental performance/18/. An example of a company complying to both these standards ISO 9001 and ISO 14001 is DOLE, one of the leading banana retailers and exporters of banana/20/. An alternative of the ISO is EMAS certification (The European Community s Eco-Management and Audit Scheme). Its

content is similar to the ISO 14001 standard and mandatory for countries wishing to export to Germany and Netherlands/18/. 3.2 GlobalGAP/EurepGAP The Euro-Retailer Produce Working Group on Good Agricultural Practices (EurepGAP) was formed in 1997 to serve as a meeting ground for major private sector retailers in Europe. Currently, the EurepGAP is known as the GLOBALGAP. The major private sector retailers convened and developed a certification process of fruits and vegetables (perishable products) and this was further enhanced into an official standard with clear and transparent procedures for private and voluntary certification. This leads to the framework for Good Agricultural Practices on farms/21/ These leading European retail groups via the GLOBALGAP outline the minimum standard of product that can be purchased and on the basis of ethics of risk prevention, risk analysis and sustainable agriculture. As retailers are expanding their market internationally, the issue of branding which includes its branding on food safety is of major concern especially due to competitiveness and tighter regulations in the world market. Therefore, GLOBALGAP has a major function in forming production standards and verification procedures for fruits and vegetables with the goal of global integrity and harmonization programme /21/. Among the practical implementation by GAP are guidelines for animal welfare, water quality and labor standards. It also includes guidelines to achieve standards and grades fixed by retailers and the acceptable quality of the produce for instance in terms of colour, size, taste, appearance, texture, uniformity and packaging/21/. A word of caution needs to be taken in as GLOBALGAP grades and standard is limited to only some types of on-farm and post-harvest practices and processes that leads to sustainable farming systems/22/. In terms growing importance, GLOBALGAP is one of the most widely implemented and required private voluntary standard for primary production of agricultural products. Currently, there are more than 80 000 certified producers in 80 countries. For the suppliers wishing to sell into the European market, it is compulsory to meet GLOBALGAP standards as all GLOBALGAP European supermarket giants requires compliance before any trading can occur. This encompasses small scale suppliers of fresh fruit and vegetables from developing countries/23/.

Two other similar standards to GLOBALGAP are the British Retail Consortium (BRS) and German International Food Standards (IFS)/21Fehler! Textmarke nicht definiert./ 3.3 Hazard Analysis & Critical Control Points (HACCP) In the USA it is a public certification and standard and it is made compulsory for exports into the USA of meat, fish, dairy, juice, retail food services and seafood. Soon this will also include fruits and vegetables/24/. Therefore there has been a large increase of HACCP certified companies in producing countries wishing to trade with the United States. HACCP is defined by the Food and Drugs Administration as a management system in which food safety is monitored and evaluated via analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the end product/24/. Meanwhile, HACCP can also be defined as a systematic preventive approach to food safety and pharmaceutical safety that addresses physical, chemical, and biological hazards as a means of prevention rather than finished product inspection. HACCP is used in the food industry(meat, fish, dairy, juice and seafood in the USA to identify potential food safety hazards, so that key measures, known as Critical Control Points (CCPs) can be taken to reduce or eliminate the risk of the hazards occurring. The system is implemented at all levels of food production and preparation processes including packaging, distribution/25/. The seven main principles of HACCP are highlighted in Figure 8. Figure 8: HACCP Seven Principles

Source: http://mdiproduct.files.wordpress.com/2007/12/haccp_seven_principles.png/26/ 4. Summary Production systems can be defined as the methods used for the production of goods and services in an industry (example, the food industry) which is created from multiple resources (factors of production). Four basic types of production system are highlighted which includes the batch system, the continuous system, the project system/one-off production and mass production. Besides this, three main factors need to be considered which are the technology to be utilized, the capacity of the system and the production volume. The supply chain can be defined as a network of organizations that are involved through upstream and downstream linkages which have different processes and activities that produce value in the form of products and services for the final consumer. Value chain is directed to imply the value that the product obtains from the process of its birth to the stage where it reaches the final consumer. The value chain concept can be achieved through a three step concept which begins with no optimization, supply chain optimization and lastly achieving value

chain optimization. An example was given of the banana trade whereby the value and supply chain of the banana trade was highlighted. Emphasis was given on the role of retailers and suppliers especially big multinational companies. Currently, international and national public and private standards are increasing. Production systems and the Value Chain concept needs to comply with these standards. The three main standards that are most popular in the perishable food market are the International Organizations for Standardization (ISO), GLOBALGAP/EurepGAP and Hazard Analysis and Critical Control Points (HACCP). /1/Britanica Online. production system. (2009). In Encyclopædia Britannica. Retrieved July 22, 2009, from Encyclopædia Britannica Online: http://www.britannica.com/ebchecked/topic/478032/production-system<script src="http://eb.adbureau.net/jnserver/acc_random=7760977989/site=darwin_c/area=articles/source=technol ogy/aamsz=468x60/topicid=null/pos=bb/pageid=62431"></script> /2/Lean-Manufacturing-Japan Official Website. Production Management and Planning: Interview Tomoichi Sato(Part 1): http://www.lean-manufacturing-japan.com/interviews/production-management-planning-part1.html /3/ Foxstone Education Economics Wallchart: http://foxstone.com.au/images/economics/hires/e5_big.jpg /4/BBC. GCSE Bitsize. Design and Technology: Systems and Production Method http://www.bbc.co.uk/schools/gscebitesize/design/graphics/productionsystemrev5.shtml /5/BBC. GCSE Bitsize. Design and Technology: Systems and Practices http://www.bbc.co.uk/schools/gcsebitesize/design/foodtech/systemspracticesrev_print.shtml /6/ Raturi, A. S.,& Subramani, J. Upstream vs. Downstream Flexibility in a Production-Distribution Supply Chain. http://www.business.uc.edu/pdf/supplychainfiles/raturi/raturi_supply%20chain%20flexibility.pdf /7/Wikipedia Official Website: Value Chain http://en.wikipedia.org/wiki/file:valuechain.png /8/ Christopher, M. 2005. Logistic and supply chain management: creating value-adding networks 3 rd Edition Pearson Education. /9/Feller, A., Shunk, D. & Callarman, T. 2006. Value Chains Versus Supply Chains www.bptrends.com /10/Kannegiesser, M., Entrup, M. L., Martin, A. Performance Management in the Value Chain.In: Ijioui, R., Emmerich, H. & Ceyp, M. (eds) 2008. Strategies and Tactics in Supply Chain Event Management. Springer /11/ Ijioui, R., Emmerich, H. & Ceyp, M. (eds) 2008. Strategies and Tactics in Supply Chain Event Management. Springer. pg 120 /12/ United Nations Conference on Trade and Development Secretariat- Official Webpage http://www.unctad.org/infocomm/anglais/banana/chain.htm /13/ http://farm1.static.flickr.com/83/213512500_f38f9ee201.jpg /14/ United Nations Conference on Trade and Development Official Website. Marketing Chain. http://www.unctad.org/infocomm/anglais/banana/chain.htm /15/ Reardon, T., Codron, J. & Harris, L. B. J. B. C. 2001. Global Change in Agrifood Grades and Standards: Agribusiness Strategic Responses in Developing Countries. International Food and Agribusiness Management Review, 2(3/4): 421 435

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