T HE SUPPLY CHAIN ROLE OF A MODERN AUCTION IN THE FLORICULTURE SECTOR
MSc. Thesis
I.H. Sonneveld
December 13
T HE SUPPLY CHAIN ROLE OF A MODERN AUCTION IN THE FLORICULTURE SECTOR
02-‐12-‐2013
Dual Degree MSc. Supply Chain Operations Management & MSc.
Technology and Operations Management.
Faculty of Economics and Business | University of Groningen &
Newcastle University Business School
Name Isabella Helena Sonneveld
Details Lumeijstraat 8-‐3
1056 VW, Amsterdam
+31 (0)6 44 722 518
i.h.sonneveld@student.rug.nl
i.h.sonneveld@newcastle.ac.uk
Student number (NL) S1782878
Student number (UK) B2050766
Preface
In the summer of 2013 I started my internship at FloraHolland to finalise my Dual Degree MSc. Technology Operations Management & Supply Chain Operations Management and graduate at the Universities of Groningen and Newcastle.
After five months of hard work, I am happy to present the findings of my research in this report. Writing this thesis was a great experience both personally and professionally. I found it interesting, insightful and very challenging to research this present relevant topic for a large dynamic organisation as FloraHolland.
The opportunity to interview a variety of interesting people was a valuable experience to me and provided me with new insights and interpretations. I would like to thank all the interviewees for their time, expertise sharing, and interest in this research.
I would like to thank my supervisor Prof. dr. ir. J.C. Wortmann for your constructive feedback and input during our Skype and personal meetings. I appreciate your practical and structured approach in providing me feedback and advice for the successful completion of this thesis.
Also Dr. Ying Yang I would like to thank for being a thoughtful second reader. During my study period in Newcastle you where a wonderful mentor, coordinator and teacher, of which I will like to use this opportunity for to thank you.
And finally, I would like to thank my supervisor from FloraHolland: Eline van den Berg.
Without your support I would not have been able to finalise this research. I very much appreciate your interest in my findings and proceedings to guide me in the right direction of a successful completion. Thank you for your time, knowledge and sharing of experience.
December, 2013
Helen Sonneveld
Abstract
The activities of the Dutch Flower auction are increasingly being put under pressure.
The current business model will not be robust enough to face the foreseeable market changes of 2020. The increasing virtualisation, globalisation and the shift towards a demand-‐driven market, are influencing the floriculture supply chain (SC) and the role of FloraHolland in it. This thesis conducts the first three phases of the new project development process of Crawford & Di Benedetto (2011) for the development of a new SC role in the floriculture sector. This thesis outlines four possible SC roles for FloraHolland, increasing in the level of complexity and coordination. A case study was done to investigate the foreseeable market changes and the concepts of the core activities of FloraHolland. A SWOT analysis was derived from the analysis on the market influences on the core activities and their concepts and served as the main input for the concept generation phase where four possible SC roles where determined: initiator, facilitator, orchestrator and composer. Interviews with experts in supply chain management or the floriculture sector, where conducted to validate the conclusions.
Keywords: Supply Chain Management, Floriculture, Supply Chain Coordination, Logistics Service Provider.
Management Summary
Through the years FloraHolland generates revenue from charges and commissions on clock-‐ and direct transactions, as well as additional logistical, commercial and financial services. This was a profitable business model for years. With the rise of the Internet the floriculture market is changing, which threatens the profitability of FloraHolland.
This research outlines three foreseeable market changes (increased globalisation;
increased virtualisation; and the shift from a supply-‐driven market towards a demand-‐
driven market) for the floriculture sector in 2020 and proposes four supply chain roles for FloraHolland in order to remain a profitable company in the future.
Currently, FloraHolland facilitates a marketplace where suppliers and buyers meet for the trade of flowers. To support this marketplace, FloraHolland serves as a third party logistics organisation facilitating local services such as break-‐bulk, cross-‐docking and other value added logistics in a hub and spoke network.
This thesis proposes four possible roles FloraHolland can take in the floriculture supply chain (see Figure a). They increase in the level of coordination and SC complexity as the roles grow in maturity.
Facilitator
Initiator
Coordinator
Composer
Level of SC complexity
Level of coordination
Figure a: Four supply chain roles for FloraHolland according to the level of complexity and coordination.
The role of a facilitator put the emphasis on site logistics in the Netherlands and the
development of a virtual marketplace, the role of a composer implies a mediator
function including the total international supply chain network, the logistics service providers (LSPs), growers and buyers. One party taking control results in a more efficient and value adding supply chain, where growers receive the highest possible value for their products.
An opportunity for FloraHolland to remain competitive in this changing environment is to take more control in the logistics activities within the international supply chain. It is suggested for FloraHolland to invest in a virtual marketplace for the collection of valuable information to take control in logistics.
This report advises FloraHolland to start with the first role as Facilitator with the development of a solid virtual marketplace with the vision to grow towards the role of a coordinator.
Table of Contents
LIST OF ABBREVIATIONS ... 9
LIST OF FIGURES ... 10
LIST OF TABLES ... 10
1. INTRODUCTION ... 11
1.1. R
ESEARCH CONTEXT... 11
1.2. I
NTRODUCTION OF RELEVANT LITERATURE... 11
1.2.1. Supply chain management ... 11
1.3. I
NTRODUCTION TO THE FLORICULTURE SUPPLY CHAIN... 12
2. RESEARCH DESIGN ... 14
2.1. R
ESEARCH OBJECTIVE... 14
2.2. R
ESEARCH QUESTIONS... 14
2.3. R
ESEARCH SCOPE... 15
2.4. M
ETHODOLOGY... 16
2.4.1. Data collection ... 17
2.4.2. Thesis outline ... 18
3. THE CURRENT ROLE OF FLORAHOLLAND ... 19
3.1. T
HE CORE ACTIVITIES OFF
LORAH
OLLAND... 19
3.2. T
HE COMMERCIAL ACTIVITIES... 19
3.3. L
OGISTICS... 20
3.4. I
NFORMATION... 21
3.5. F
INANCE... 21
3.6. P
RODUCTQ
UALITY... 21
4. THE FORESEEABLE MARKET CHANGES IN 2020 ... 23
4.1. D
EMAND-‐
DRIVEN SUPPLY CHAIN... 23
4.2. G
LOBALISATION... 25
4.3. V
IRTUALISATION... 25
4.4. C
ONCLUSION... 26
5. CONCEPTUALISATION OF THE CORE ACTIVITIES ... 28
5.1. T
HE TRADE OF FLOWERS... 28
5.2. T
HE CONCEPTS OF LOGISTICS... 29
5.2.1. Bundling and transportation ... 30
5.2.2. Cross docking ... 31
5.2.3. Logistics service provider ... 33
5.3. I
NFORMATION... 35
5.4. F
INANCIAL SERVICES... 36
5.5. Q
UALITY... 36
5.6. C
ONCLUSION... 37
6. ANALYSIS ... 38
6.1. D
EMAND-‐
DRIVEN SUPPLY CHAIN... 38
6.2. G
LOBALISATION... 39
6.3. V
IRTUALISATION... 39
6.4. C
ONCLUSION... 40
7. POTENTIAL SUPPLY CHAIN ROLES FOR FLORAHOLLAND ... 42
7.1. F
ACILITATOR... 43
7.2. I
NITIATOR(3PL) ... 43
7.3. O
RCHESTRATOR(4PL) ... 44
7.4. C
OMPOSER(5PL) ... 44
7.5. C
ONCLUSION... 45
8. EVALUATION OF THE PROPOSED SUPPLY CHAIN ROLES FOR FLORAHOLLAND ... 47
9. CONCLUSION ... 49
9.1. R
ECOMMENDATION TOF
LORAH
OLLAND... 50
9.2. T
HEORETIC CONTRIBUTION... 51
9.3. R
EFLECTION... 51
9.4. F
URTHER RESEARCH... 52
REFERENCES ... 53
W
EB-‐
PAGES... 58
APPENDICES ... I
I. ADDITIONAL INFORMATION ON THE FLORICULTURE SUPPLY CHAIN ... I
A. F
LORAH
OLLAND... I
B. G
ROWERS... III
C. B
UYERS... IV
D. L
OGISTICS SERVICE PROVIDERS... IV
E. L
OGISTICS SERVICES... V
F. D
ETAILED EXPLANATION OF THE AUCTION PROCESS... V
G. S
UPPLY CHAIN DEVELOPMENT PROJECTS... VIII
II. ADDITIONAL CASE STUDY ... IX
A. L
ESSONS LEARNED FROMT
HEG
REENERY... IX
III. INTERVIEWS ... X
A. L
IST OF PEOPLE COLLABORATED IN THIS RESEARCH... X
B. I
NTERVIEW PROTOCOL... XI
List of abbreviations
Abbreviation Explanation
2PL Second Party Logistics 3PL Third Party Logistics 4PL Fourth Party Logistics 5PL Fifth Party Logistics
ATO Assemble-‐to-‐order
CLIFQ Commerce, Logistics, Information, Finance and Quality CODP Customer Order Decoupling Point
EAL Electronic arrival letter EDI Electronic Data Indicator ETO Engineer-‐to-‐order
FHS Flower Handling Service FTL Full truckload
GPS Global Positioning Point IAT Inter Auction Transport
ICT Information Communication Technology
IT Information Technology
KOA Remote buying (Dutch: Kopen op afstand) LSP Logistics Service Provider
LTL Less than truck load MTO Make-‐to-‐stock MTS Make-‐to-‐order
RFID Radio Frequency Identification
SC Supply Chain
SCM Supply Chain Management
SWOT Strengths, Weaknesses, Opportunities, Threats
VGB Sector organisation for wholesale trade of flowers and pot plants (Dutch:
Vereniging Groothandel Bloemen en Planten)
List of figures
FIGURE 1-‐1: BASIC REPRESENTATION OF THE FLORICULTURE SUPPLY CHAIN. ... 13
FIGURE 2-‐1: THE BASIC NEW PRODUCTS OR PROJECTS PROCESS. SOURCE: CRAWFORD & DI BENEDETTO (2011) ... 16
FIGURE 2-‐2: METHODOLOGY ... 17
FIGURE 3-‐1: BASIC OVERVIEW OF THE ACTIVITY AREAS OF FLORAHOLLAND. ... 19
FIGURE 4-‐1: CLOCK VERSUS CONNECT TURNOVER. SOURCE: FACTS & FIGURES 2010 -‐2012. ... 24
FIGURE 5-‐1: ILLUSTRATION OF CROSS-‐DOCK FACILITY. SOURCE: VGB (2009). ... 32
FIGURE 5-‐2: DIFFERENT LEVELS OF LOGISTICS SERVICE PROVIDERS. ... 33
FIGURE 7-‐1: THE FOUR PROPOSED SC ROLES FOR FLORAHOLLAND ACCORDING TO THE LEVEL OF COMPLEXITY AND COORDINATION. . 42
FIGURE I-‐2: CHRONOLOGICAL MERGES OF FLORAHOLLAND. ... II
FIGURE I-‐3: AUCTION THEATRE OF FLOWERS. ... VII
FIGURE I-‐4: A REPLICATION OF THE AUCTION CLOCK OF FLOWERS CURRENTLY USED AT FLORAHOLLAND. SOURCE: FLORAHOLLAND (N.D.), EXPLANATION CLOCK. ... VII
List of tables
TABLE 4-‐1: FOUR DIFFERENT PRODUCT-‐MARKET COMBINATIONS WITH DIFFERENT CUSTOMER ORDER DECOUPLING POINTS. ... 24TABLE 4-‐2: THE MAIN DIFFERENCES BETWEEN TRADITIONAL LOGISTICS AND VIRTUAL LOGISTICS. SOURCE: (GHIANI ET AL., 2004, P.17). ... 26
TABLE 4-‐3: SUMMARY OF THE FORESEEABLE MARKET CHANGES IN 2020. ... 27
TABLE 5-‐1: OVERVIEW OF THREE MAIN NETWORK DESIGNS (VORST ET AL. 2007). ... 30
TABLE 5-‐2: SUMMARY OF THE IMPORTANT CONCEPTUALISED CLIFQ ELEMENTS. ... 37
TABLE 6-‐1: SWOT ANALYSIS OF SUPPLY CHAIN SERVICES FOR THE FLOWER SC OF FLORAHOLLAND. ... 41
TABLE 7-‐1: POSSIBLE FLORAHOLLAND ROLES PER ACTIVITY ACCORDING TO THE LEVEL OF VIRTUALISATION AND GLOBALISATION. ... 46
TABLE I-‐1: FLORAHOLLAND FACILITIES. SOURCE: FACTS & FIGURES (2012). ... VI
TABLE I-‐2: LIST OF RECENT SUPPLY CHAIN DEVELOPMENT PROJECTS AT FLORAHOLLAND. ... VIII
TABLE III-‐1: LIST OF PEOPLE THAT COLLABORATED IN THIS RESEARCH. ... X
1. Introduction
1.1. Research context
Globally, the Netherlands is the leading supplier of cut flowers and the third largest exporter of agricultural products. The floriculture market is centralised in Europe of which The Netherlands is the artery of supplies. Next to the port of Rotterdam and Schiphol, FloraHolland is the third biggest main port of the Netherlands. On a daily basis 44 million cut flowers and 4,8 million pot plants are traded with a turnover of €4 billion a year (FloraHolland, 2012). Through the years the supply chain has grown (partly as a consequence from multiple merges) from a national auction ‘café’ towards an international complex supply chain of which FloraHolland owns 95,7% market share (Kenlog B.V., 2012).
Currently, FloraHollands’ revenue is derived from charges and commissions on clock-‐
and direct transactions, as well as services on logistics, commerce, and finance and the rental of real estate. The floriculture market changes for which the current business model has been developed will no longer be profitable. The increasing virtualisation and globalisation results in more direct transport routes from grower to buyer in which the Dutch floriculture cluster is increasingly ignored. Through the whole sector it is widely accepted that virtualisation provides new opportunities and challenges for the operations of the floriculture supply chain; new business models are required and new roles on supply chain coordination will occur (Verdouw et al. 2013).
Being a cooperation the aim of FloraHolland is to realise maximum revenue for its growers. With this mission in mind, multiple supply chain (SC) improvement projects have been developed in national and international scale. However, a clear logistics and SC strategy is neglecting. FloraHollands’ role within this supply chain is put under pressure that makes its current business model no longer suitable; the need for innovation is high.
1.2. Introduction of relevant literature
1.2.1. Supply chain management
Within the supply chain management (SCM) literature multiple strategies have been
studied to improve supply chain competitiveness, which results in more than a single
definition (Cooper et al. 1997; Tan 2001). Verdouw et al. (2011) mentions that SCM
includes the coordination of the different flow dependencies because each chain partner depends on the output of the previous process. These flows include: product flows, order flows and demand and supply information. Of which the order flows refers to the order agreements and financial settlements. Managing a SC implies the coordination and integration of these different chains with the aim of maximising the total value (Lummus
& Vokurka 1999). Christopher (1998) also mentions that the goal of SCM is to serve the customers at the highest possible service at the lowest possible costs by linking the marketplace, the operations activities, the transportation and the purchasing activities in a correct way. The scope of SCM is somewhat larger compared to logistics, by covering also issues related to purchase, partnerships, SC finance, SC information and customer satisfaction. Logistics includes basically the movement of material, storage and inventory management (Varma et al. 2006). A challenging element within the floriculture SC is that FloraHolland never obtains ownership of the flowers in contrast to the other parties in the chain.
For a SC to be competitive, Stadtler and Kilger (2005) quoted two important elements:
first, close integration of chain partners and second coordination of material, information and the financial flows. Collaboration between chain partners becomes increasingly important since companies cannot be competitive in isolation (Lummus &
Vokurka 1999). Companies and chain partners use collaboration mainly as an internal or external strategy to improve co-‐operation in mutual benefit (Spekman et al. 1998).
But collaboration becomes increasingly important since competition within a supply chain has made place for competition between supply chains (Cooper et al. 1997;
Christiaanse & Kumar 2000; Cousins & Spekman 2003).
1.3. Introduction to the floriculture supply chain
The SC of flowers includes the flow of cut flowers, information and funds from the grower, via FloraHolland, to the buyer and finally to the end customer (see Figure 1-‐1).
Because the cultivation of flowers takes a certain period, the breeder is considered as a
different process and exclude these from our supply chain study. Also the final customer
Figure 1-‐1: Basic representation of the floriculture supply chain.
The growers are responsible for the transport of the goods to one of the six auctions, which is in most of the time outsourced to a logistics service provider. The total supply chain leads in general to a consumer price of 2.5 times the production value. Of all the trade within the sector, around 75% is passing FloraHolland physically, only 5% is commercially settled by FloraHolland, and for 20% no revenue can be calculated for the cooperation. This last one implies the direct sales ignoring FloraHolland at all points.
This sector can be characterised by high fluctuation in demand and supply which are never balanced (Verdouw et al. 2010). Fashion trends, special events and customer prosperity are some factors influencing demand. Flowers are vulnerable goods and sensitive to the weather, temperature and other external factors influencing the supply uncertainty. This results in complex SC demand requirements and variable supply capabilities regarding to quantity, lead time, product specifications and quality (Vorst et al. 2012). In addition, the sector operations have to be flexible to provide either order-‐
driven demand as well as supply-‐driven demand, which are caused by the auction sales as well as the direct sales. A more detailed introduction of FloraHolland and the other floriculture chain parties as represented in Figure 1-‐1 can be found in Appendix I.
Flowers can be sold through different channels: retail, detail or e-‐tail (DaVinc3i, 2012).
With retail, the bigger chains such as supermarkets and garden centres are meant, whereas with detail the smaller flower stores and markets are intended. E-‐ tail can be seen as web-‐shops or other Internet based sales. Currently 70% of all the products (flowers and plants) are sold through the detail trade. The smaller flower shops are characterised by the large variety, specialisation and personal services.
Now the floriculture supply chain is introduced, the research problem and the main research question can be described.
Grower FloraHolland Buyer Retail/
Detail/ e-‐tail
2. Research Design
This chapter explains the research design including the research question, goal and the methodology.
2.1. Research objective
The size of the supply chain activities originated from the floricultural sector in the Netherlands and Europe is enormous. FloraHolland is an important stakeholder within the floriculture supply chain by being the main port and biggest hub of flowers and plants to the Netherlands and Europe.
The floriculture sector is changing which has a wide influence on the way transport is organised. This change in the trade of flowers forces FloraHolland to rethink their future supply chain activities to remain value added in the floriculture chain. The year 2020 is chosen as focal point partly because of the interest of FloraHolland and partly because of previous reports using the same focal point.
Therefore, the goal of this research is:
To explore a new role for FloraHolland within the floriculture supply chain facing the market changes as expected in 2020, with the aim to generate the highest possible revenue for its growers, aligned with its mission.
2.2. Research questions
After establishing the goal of this research project, the following central research question can be formulated as:
What role should FloraHolland take in the floriculture supply chain in 2020 to facilitate an
efficient supply chain for the benefit of the cooperative members?
Sub-‐questions:
a) What are the current core activities of FloraHolland within the floriculture supply chain?
b) What are the foreseeable market challenges towards FloraHolland for the logistics flows in the floriculture SC of 2020?
c) What are the main concepts that constitute to the core activities of FloraHolland?
d) What differences may be expected in 2020 in these concepts and how would they interplay?
e) What possible roles can be applicable for FloraHolland in the floriculture supply chain in 2020?
f) What can be the competitive edge of FloraHollands’ logistics in 2020?
2.3. Research scope
To reduce the complexity of this research, the scope is limited by only considering the streams of flowers from grower to buyer. The other streams, such as plants and flower bulbs, will be left aside. This thesis will mainly focus on the core activities of FloraHolland with the emphasis on logistics (as described in the next chapter). A role description according to human resources, marketing, communication and other supportive activities will therefore not be a part of this thesis.
A supply chain strategy requires an understanding of pressures on the company and how the organisation responds to these. The main consideration imply whether supply can design the structure of the supply chain to meet the foreseeable market changes (Cousins & Spekman 2003). The explanation of the SC role of FloraHolland concerns a long-‐term strategic decision; the medium-‐term tactical level and the short-‐term operations planning level are not taken into account. According to Crawford & Di Benedetto (2011, p.19) the design of a new product or project involves five phases as represented in Figure 2-‐1: 1) Opportunity Identification and Selection, 2) Concept Generation, 3) Concept Evaluation, 4) Development and 5) Launch. This theory is used for the development of a new SC role. The emphasis is put on the phases one, two and three. FloraHolland can decide whether to continue to with the phases four and five afterwards.
Figure 2-‐1: The basic new products or projects process. Source: Crawford & Di Benedetto (2011)
2.4. Methodology
For this research a single case study was conducted at the flower auction FloraHolland.
A case study allows us to receive a full understanding of the nature and complexity of the complete phenomenon. According to Voss, Tsikriktsis, & Frohlich (2002) and Yin (1994), a case study is particularly suitable for studying ‘how’ and ‘why’ questions and for the collection of the rich available data. In comparison to data gathered by surveys, this data is more likely to reflect the concepts which are influencing the phenomenon (Voss et al. 2002). A drawback from a single study is the risk of limited generalizability of the conclusions.
The model represented in Figure 2-‐2, provides an overview of the method used for this research. The elements on the left side of the figure represents the different steps taken to conduct this research and the blue right blocks represent the first three phases from Figure 2-‐1 of Crawford & Di Benedetto (2011, p.19).
Phase one implied an initial case study including observations and interviews. During this phase an understanding of the floriculture sector, the activities of FloraHolland and the foreseeable market changes in 2020 became clear. Opportunities for the second phase followed from this concept identification phase. Possible SC roles where designed and proposed during the second phase and finally evaluated during the third phase with the use of interviews with experts of FloraHolland and external experts. The comments of the experts where directly incorporated into the final design of the role descriptions and lead to the final conclusion and recommendations.
Opportunity
IdenZficaZon Concept
GeneraZon Concept
evaluaZon Development Launch
Initial case study
Observations Interviews
Conceptualisation of the case
Analyses of the case
Design of roles
Validation by experts
Conclusion &
Recommendation Literature
Steps Phases
Phase 1: Concept identification
Phase 2: Concept Generation
Phase 3: Concept Evaluation
Figure 2-‐2: Methodology
2.4.1. Data collection
This research was conducted during an intern period of five months at the Supply Chain
Development department of FloraHolland in Naaldwijk and Aalsmeer. The data was
collected through semi-‐structured interviews and observations. The observations refer
to personal interactions, attendance of meetings, informal conversations and the study
of branch reports. Two rounds of interviews were conducted; the first set of interviews
were held with 14 people from multiple departments of FloraHolland and served as an
input for the initial case study, the second round of interviews was used to validate the
proposed roles for FloraHolland. In total nine experts from FloraHolland and externally
were interviewed during round two one by one. Their field of expertise varied from
supply chain management, information management to the floriculture sector. The
interview protocol used can be found in Appendix I.B and the detailed list of the
interviewees and their background can be found in Appendix I.A. There was explicitly
chosen for interviews with people intern from FloraHolland and neutral experts from
outside FloraHolland because of the strategic character of this thesis. If other chain partners where asked about their opinion on the possible SC role of FloraHolland, the results were probably biased by their own benefits. In addition to that, the experts where interviewed individually to avoid the influence of one another through interaction.
2.4.2. Thesis outline
This paper is structured according to the sub-‐questions and the phases proposed in the
methodology. It first outlines the core activities of FloraHolland in order to generate an
understanding of the current role of FloraHolland. Next, the foreseeable market changes
of 2020 are outlined. Subsequently, chapter five conceptualises the core activities of
FloraHolland in theoretic concepts. The conceptualisation of these activities helps to
provide a solid analysis of the foreseeable market changes in 2020, which is discussed in
chapter six. This chapter finishes with a SWOT analysis, which serves as an input for the
SC role descriptions of chapter seven. Chapter eight evaluates the proposed roles
according to predefined assessment criteria. Then, this thesis will end with a conclusion,
recommendations and suggestions for further research.
3. The current role of FloraHolland
This section is the beginning of the concept identification phase as described in section 2.4. This chapter reveals a more detailed introduction of FloraHolland and its main activities within the floriculture supply chain.
3.1. The core activities of FloraHolland
Prahalad & Hamel (1990) and Javidan (1998) state that core competences of a business or a business unit lie at the basis of their core business and activities. A company’s capabilities and resources form in turn the basis of these core competences. Mapping all these capabilities and resources is an intensive study on itself and lies beyond the scope of this research. Nevertheless, with the information gathered from the interviews a complete description of the core activities of FloraHolland is provided. The core activities of FloraHolland can be distinguished into five elements: commerce, logistics, information, finance and quality. In addition to the core activities, FloraHolland provides secondary activities, both are summarised in Figure 3-‐1. This chapter will be used to introduce the current activities of FloraHolland.
Figure 3-‐1: Basic overview of the activity areas of FloraHolland.
3.2. The commercial activities
The commercial activities mainly consist of the creation of a marketplace, market advice and marketing and promotion. Currently flowers can be purchased via FloraHolland in
FloraHolland
Core acZviZes
Commerce LogisZcs InformaZon Finance Quality
Secondary acZviZes
Branch organisaZon
two different ways; by the auction or by the intermediary service ‘FloraHolland Connect’. In the case of an auction, buyers can make biddings on flowers to be taken home with around two hours later. With the software application called ‘remote buying’, buyers do not have to attend at the auction site physically to be able to join the bidding and can therefor buy at different clocks or auction locations at the same time. The auction mechanism, of which FloraHolland gains 8% from each transaction, is used for the daily trade by an accurate sales price. With the auction mechanism, growers almost always receive a price for their cultivated flowers; there is always a market for it. A more detailed explanation of the sales by the auction can be found in Appendix I.F.
FloraHolland developed the intermediate service ‘FloraHolland Connect’ as a reaction to the increased direct sales agreements between grower and buyer. The intermediate service, charges 2% for the mediation between a buyers desire and a growers capacity and capability. Direct trade results in a fixed and secure income for the grower and buyers can make better forecasts on prices and assortment.
3.3. Logistics
The logistics services of FloraHolland involve all the logistics within the building. This implies the distribution of the flowers to the buyers’ boxes and other operations such as:
the rental and maintenance of the logistics resources (e.g. trolley’s, barrels), import handling and sorting and delivery of products to the buyer’s box (see Appendix I.E for the additional services) (FloraHolland, n.d.). During all these activities FloraHolland only facilitates but never obtains ownership of the products.
Moreover, the supply chain development department of FloraHolland functions as an
initiator of international supply chain improvements. The projects vary in motivation,
coordination and profitability as well as the contribution to what area in the SC. The
projects often contain bundling of flowers among several modalities such as cool chain
management and container transport. An overview of the most recent FloraHolland
supply chain projects can be found in Appendix I.G. Despite the success of many projects,
a clear strategy of where these individual projects lead to is somewhat neglecting.
3.4. Information
The electronic arrival letter (EAL) is a standardised message and is sent from the grower to FloraHolland. This message contains information about logistics, commerce and finance, but is traditionally used by a grower to announce the specifications of the shipped flowers to FloraHolland. Only after reception of this letter FloraHolland is aware of the expected goods; generally these letters are sent half a day up to half an hour in advance. Besides the EAL, limited information is exchanged between FloraHolland and the logistics service providers and growers. FloraHolland provides only general reports on the market developments but information on an individual level is limitedly used.
3.5. Finance
The cooperation FloraHolland returns profit on capital invested to its cooperative growers every four years. In addition, the financial services consists of invoicing and administration services in the interest of both the growers and the buyers. In order to guarantee financial security for the cooperative growers, the buyers need to be registered with FloraHolland and a Dutch bank account is therefore required. This bank account enables FloraHolland to unlimitedly collect payments of buyers to ensure direct payments. This requirement limits the participation of foreign buyers and other payment security solutions have to be thought of. For growers the direct payment security is often a trigger for being a member.
3.6. Product Quality
One of the most critical elements within the supply chain of flowers is the maintenance of the product quality. Growers are required to add a by FloraHolland defined quality label to their products, including comments on insufficiencies. FloraHolland is not responsible for the quality of the products; the grower will be held responsible for that.
The role of FloraHolland according to quality is to ensure growers and buyers both
deliver a certain quality (play by the rules). If the quality is disappointing, FloraHolland
serves as a mediator between grower and buyer. In collaboration with growers or
buyers, FloraHolland often provides studies on cool chain management. The current
auction system does not honour super product quality improvements. Growers receive
limited to no feedback from the buyers via the auction mechanism; therefore large quality improvements are not stimulated. Moreover, too many varieties in quality occur for the same quality label. It is therefore not feasible for a grower to put extra effort in the cultivation of superior quality products when at the same time a colleague provides cheaper flowers with the same quality label.
4. The foreseeable market changes in 2020
Several market changes are widely discussed in the floriculture sector by various institutions. A change in consumer behaviour, globalisation and virtualisation are the three main topics and trends. These section outlines these three trends.
4.1. Demand-‐driven supply chain
Where traditionally the growers produced their products for the auction and the market, the grower is increasingly requested to produce on order. Predictions for 2020 state that customers will require more custom-‐made products whereby the production chain will move towards a demand-‐driven SC (DaVinc3i, 2012; Kenlog B.V., 2009). In a demand-‐driven SC, organisations need to manage the production of high variety and variability products in order to meet the many configurations at the market (Verdouw et al. 2011). A consequence of the change towards a demand-‐driven SC is the shift of the customer order decoupling point (CODP), also called order penetration point (Wortmann et al. 1997). And the grower becomes more responsible for the delivery of a
‘complete’ product. The CODP is originated in the manufacturing industry and can be described as the point from where in the value chain the customer is involved (Olhager 2003). The CODP is the point where the upstream supply side (push) meets the downstream demand side (pull). Different control strategies from a manufacturing point of view are proposed in literature depending on the position of the CODP (see Table 4-‐1): make-‐to-‐stock (MTS), assemble-‐to-‐order (ATO), make-‐to-‐order (MTO) and engineer-‐to-‐order (ETO), where ETO refers to cultivation on order (Olhager 2003;
Verdouw et al. 2011; Wortmann et al. 1997). The grower becomes more and more responsible for the delivery of a complete product to serve multiple product-‐market combinations, which implies the CODP to move more towards the grower.
Table 4-‐1: Four different product-‐market combinations with different customer order decoupling points.
An increase in direct trade at the expense of the auction sales can already be detected.
The revenues for direct trade are in most cases higher than the price on the auction clock. The direct sales is expected to exceed the auction sales price in the near future as can be seen in Figure 4-‐1. Despite the decrease of the auction trade, it remains a powerful tool to guarantee value for the products of the growers. Where growers increasingly gain more revenue from direct trade, there will always be a market for the fluctuating rest production.
Appendix II.A describes some lessons learned from the change of the fruit and vegetable auction; The Greenery.
4.2. Globalisation
In addition to the increased pull production, increased globalisation of the floriculture sector is a fact. The production of flowers is shifting more towards other parts of the world. Countries where labour, light and energy are favourable for a good price/quality ratio attract more growers. The total import of 22% is expected to increase towards 30% in 2020 (Kenlog B.V., 2009). A report of the ING Economic Bureau (2012) about the shifting floriculture market, noticed that a reduction of the total floriculture suppliers is very plausible due to up scaling. Smaller growers merge together or loose profitability, up scaling might be the solution for smaller growers to remain competitive. Moreover, growers are increasingly operating in consortia to serve large buyers. ING Economic Bureau (2012) states that the amount of growers in the complete horticulture will be reduced in 2020 from over 4.000 at the moment to at least 3.000, of which no more than 1.100 flower growers will remain.
On the other side of the chain, sales areas are expanding further from the Dutch boarders. Upcoming markets are East Europe with the main focus on Russia, with a sales increase of approximately 30% each year from 2010 till 2012 (Facts & Figures, 2011;
Facts & Figures, 2012). It is expected that the amount of foreign buyers increases in 2020 and so will the number of remote buying connections (VGB, 2009). Together with the increased distance of sales and origin, buyers and growers are increasingly scanning the possibilities of direct transport from origin to destination. Developments in cool chain management enable flexible transport since the perishability of the products can be extended.
4.3. Virtualisation
Since the rise of the Internet, gradually the traditional activities become virtual.
Growers, buyers as well as FloraHolland itself have made several initiatives to support and stimulate this virtualisation; image auctioning, remote buying and e-‐Trade.
According to Turban et al. (2008) is virtualisation the virtual representation of
operating systems, hardware platform, storage device, or network resources. Grieger
(2003) mentions that a virtual marketplace facilitates the same functions as traditional
marketplaces, but due to more sophisticated information technology (IT) the location
and time restrictions are of less importance. One can talk of the concept ‘virtual
logistics’, when the commercial and logistics activities can be done separately (Clarke, 1998). According to Kenlog B.V. (2009) and EVO Bedrijfsadvies (2009), fully virtualisation of the floriculture commercial pricing mechanisms is likely, for which the products are no longer obligated to pass the auction location prior to the trade. This trend is currently happening and cannot only be assigned to the market changes of 2020. According to Pinker et al., (2003) virtual marketplaces have the following effects on the traditional ones: reduced transaction costs, improved accessibility, managing complexity and information gathering and the possibility of a different time element.
Cunden & Heck (2004) highlight cost reduction and the establishment of complex relationships as the most important changes of the rise of Internet in doing business. A virtual marketplace enables faster and cheaper logistics and reduced inventories due to the improvement of information sharing between buyers and sellers (Bakos 1998). The Internet makes it possible for buyers from all over the world to join the virtual marketplace and it makes the integration of the different chain partners easier for good SC relationships (Overby & Min 2001).
In addition, the use of the Internet makes trading more transparent; customers are able to see non-‐value adding costs and are very likely no longer willing to pay these. The margins for logistics will become smaller and no room will be left for the non-‐value-‐
added logistics and services. Ghiani G, Laporte G, Musmanno R. (2004) described the implications of virtual logistics versus traditional logistics and are summarised in Table 4-‐2.
Table 4-‐2: The main differences between traditional logistics and virtual logistics. Source: (Ghiani et al., 2004, p.17).
