Collaboration is needed to save the meat industry from bankruptcies after the buyout of Silver Fern Farms, says University of Auckland Professor Tava Olsen.
Shareholders of New Zealand's largest meat company voted for a 50/50 partnership with China's leading meat processor Shanghai Maling last month.
Professor Olsen, Director of the University's Centre for Supply Chain Management, says the deal was logical for Silver Fern Farms as it faced the possibility of banks withdrawing its debt facility - but will put further pressure on an already struggling meat industry.
"Shanghai Maling will be able to offer New Zealand farmers slightly higher prices, which is good for them and why the farmers voted in favour, but there will be fewer lambs for processors outside this arrangement," she says.
"This will put further pressure on an industry already with too much capacity. While farmers are likely to get slightly higher prices, the real money is in converting the lamb to retail items; Shanghai Maling will capture most of that value."
The 16,000 sheep, cattle and deer farmer shareholders represented by Silver Fern Farms will obtain an integrated end-to-end supply chain, cutting out various middle men.
"Currently, processors are trucking livestock up and down the country at significant cost because they are all competing for a decreasing supply of lambs; farmers go for the best price," Olsen says.
"This is a classic example of Kiwi companies competing in their own backyards when they should be focused on international competition."
A recent study commissioned by the Meat Industry Excellence Group, Pathwaysto Long-Term Sustainability , found savings of hundreds of millions of dollars, potentially billions, could be made through industry rationalisation and consolidation.
Olsen says that can occur painfully though bankruptcies or softly through collaboration and forward planning.
"To get more revenue, you can either grow your piece of the pie or grow the pie. Growing your piece involves stealing market share from others - all too often the mind-set of New Zealand companies."
To grow the pie, the meat industry and companies need to partner and collaborate strategically.
While it makes sense for farmers to choose the best price for their meat, especially as transport costs are usually covered by processors, it is highly inefficient for the supply chain as a whole, Olsen says.
"Clever contracting, like revenue-sharing, can result in increased profits for both parties. Such contracts establish incentives for supply chain partners to improve performance of the entire chain. Imagine the transportation savings possible in the red meat industry if contracts were set up to incentivise sending lambs to the nearest processor."
Olsen says the red meat industry is not alone in having an uncoordinated supply chain with large inefficiencies: "Kiwi organisations frequently underestimate the money left behind by not having the correct metrics and incentives in place for supply chain co-ordination and alignment."
"It is true coordination and cooperation is often difficult to start but collaboration is word on the lips of the supply chain industry and New Zealanders need to be up with the play."
Professor Tava Olsen teaches on the University of Auckland Strategic Supply Chain Management Programme, designed to develop the next generation of strategic supply chain leaders.