LECTURE 3
• LECTURE THREE (3)
Dr Clive Mairura (PhD)
PLANNING PRODUCTION IN AGRIBUSINESS
• production management requires careful planning. Among the issues
involved are:-
1) the location of facilities
2) plant size
3) layout,
4) purchasing
5) inventory
6) and production control.
All these issues are part of a total systems overview.
Dr Clive Mairura (PhD)
THE LOCATION OF FACILITIES
❑When agribusiness managers choose a site
for their facilities, they generally consider four
interrelated issues:
1. The source of raw materials or supplies
2. labour availability
3. location of markets
4. Special incentives offered in different areas
Dr Clive Mairura (PhD)
SOURCE MATERIALS
➢Agribusinesses may wish to locate close to their source of
raw materials if the business basically requires only one
raw—material input and that material is costly to ship in its
raw state
➢Livestock should be slaughtered near their source and
shipped long-distance in the more manageable form of
boxed beef. Example: Kenya meat commission
➢Agribusinesses require so many different raw materials from
locations at such great distances to one another that it is not
practical to locate near the source of any one material.
Dr Clive Mairura (PhD)
LABOUR AVAILABILITY
➢Different sections of the country offer different kinds of labour.
➢ Example:-
1. A high density area is not the best place for an agribusiness’s executive
offices. “Kibera slums”
2. Nairobi city centre is not a good place to locate an assembly-line canning
factory; take it to Thika town or industral area.
3. Some areas require higher wage and benefit incentives for workers because
they are expensive areas in which to live.
Examples:- nairobi city council and various municipalities in Kenya
4. Agricultural companies that require a great deal of research may find it
advantageous to locate near a research institute for instance, the Research
and Specialists say in Kitale, Trans Nzoia district in kenya
Dr Clive Mairura (PhD)
LOCATION OF MARKETS
➢In cases where the necessary raw materials are
numerous or easy to ship in their raw state,
locations near a market may give an agribusiness
an advantage.
➢Proximity to markets is especially important to
retailers, since customers will not travel long
distances to buy from a retailer.
Dr Clive Mairura (PhD)
SPECIAL INCENTIVES
• Agricultural industries that require large amounts of water
or power must locate in areas where such supplies are
plentiful.
• Certain areas will even offer special tax, zoning, and water-
power incentives to businesses locating there. Community
taxes on sewer, garbage, and utility uses; state and local
income taxes; real estate taxes; and other kinds of taxes
must all be considered.
• A locality that is anxious to attract agribusinesses will have
to offer a number of lucrative incentives
Dr Clive Mairura (PhD)
SIZE OF PLANT
• No matter what the location, optimal plant size becomes
an important dimension in the agribusiness. In many ways,
larger units are easier to operate, but too large a plant can
be a costly “white elephant” for an agribusiness due to a
combination of factors.
• Eldoret International Airport
• Turkwel project for power generation
Dr Clive Mairura (PhD)
ECONOMICS OF SIZE
•According to the economics-of-scale principle, larger
plants usually result in a lower cost per output unit.
However, several smaller plants might offer more
flexibility in proximity to sources of raw materials or to
market destination, which in turn would result in lower
transportation costs. Other factors help to determine
the true economic value of a large plant operation
Dr Clive Mairura (PhD)
SEASONALITY AND PATTERNS OF PRODUCTION
A highly seasonal agricultural product can produce some
special headaches for a production manager.
A plant that is large enough to handle peak productivity
levels becomes a costly operation when output levels are
significantly reduced. In such cases, it may actually be more
economical to run several smaller plants and to close down
operations that are not needed during the off-season. This
does not reduce the drain of costs associated with an unused
facility, but it does limit expenditures for the day-to-day
running of a totally unnecessary part of the operation.
Dr Clive Mairura (PhD)
IMPACT OF INFLATION
•Agribusinesses committing themselves to large,
expensive operations must consider the spiralling rate
of inflation in the past several years. This may mean
that costs will increase significantly over the next few
years. In addition, the amount of capital available
today will increase in buying power fairly quickly. This
prediction is not intended to discourage expansion and
growth, but rather to encourage in- depth, realistic
financial assessment
Dr Clive Mairura (PhD)
QUANTITY OF OUTPUT NEEDED
•One of the most important determinants of plant size is
the quantity of output required. An agribusiness that is
able to sell millions of units of output on a steady basis
is not likely to invest in small plant facilities. At the
same time, managers must consider long-range factors
and be able to predict continued demand at that high
level to justify the long-term investment of funds in a
mammoth facility
Dr Clive Mairura (PhD)
MULTIPLE VS. SINGLE SHIFTS
• An alternative to the maximum-capacity facility, if the labour is
available, is the multiple shift. Theoretically, it is possible to produce
twice as much in a plant with double shifts, while limiting the need for
space by spreading out the working hours
• However, Research indicates that night-shift workers tend to be less
productive and less alert than day-shift workers, for the simple reason
that the human body does not operate at peak efficiency at night.
• Some agricultural-chemical companies by their very nature may be
involved in ongoing operations that require multiple shifts.
• In plants where this is not the issue, managers must evaluate carefully
the costs of a larger facility as against the costs of increased, less
productive, and possibly more accident—prone labour.
Dr Clive Mairura (PhD)
LAYOUT
•When planning the physical layout of a plant,
consideration must be given to all the processes
and procedures that the plant is engaged in,
including their requirements in terms of quantity
and quality, and any future changes in product
kind, quality, or demand. All this must be
accounted for within the framework of the most
cost-efficient design.
Dr Clive Mairura (PhD)
PROCESS LAYOUT
•There are two basic categories of layout. A process
layout arranges activities by function. Thus, in a
process layout, regardless of the product being created
or assembled, all like functions are grouped in the
same place; that is canning equipment with canning
equipment, inspectors with inspectors etc. Process
layout is related to intermittent production, since each
function is capable of handling different facets of a
variety of products
Dr Clive Mairura (PhD)
PRODUCT LAYOUT
• Product layout is geared specifically to the continuous
production process because it produces one product at a
time, step by step, with one function following another in
sequence as the product assembled, and with few variations
in product. Workers on a conveyor belt grading and packing
peaches, for example, are operating within the framework of
a product layout. One person may remove debris; the next
may be responsible for sorting, while another oversees
packing into crates, and so forth.
Dr Clive Mairura (PhD)
MATERIALS-HANDLING PROBLEMS
• The materials-handling problems experienced by a plant vary
according to whether the layout is process of product oriented.
The main idea with process layouts is to allow for flexibility, since
products will not follow any one unvarying sequence. This
requirement is generally met by means of cranes, mobile trucks,
and tractor trains for heavy loads. Skids, pallets, and forklift trucks
are used for rapid movement of less weighty loads.
•
With product layouts, the communication and transportation
between points on the production line must be direct and
effective. Conveyor belts are often felt to be a better way of
accomplishing this objective, though other arrangements that
allow for a direct flow between points are possible. Gravity chutes
are yet another potential solution.
Dr Clive Mairura (PhD)
SUMMARY
• Production management involves a complex network of decisions that affect
the production process. Four kinds of production processes (analysis,
synthesis, extraction, and fabrication) relate to the number and kind of raw
materials, or number and kind of end products. Production may be either
intermittent or continuous, depending on whether it is handled by function-to-
produce variable outputs or handled as a continuous, step-by-step process to
produce very similar outputs. Production of agricultural products is hampered
by severe problems of seasonality, perishability, bulkiness, and variations in
quantity, quality, or value. Production involves planning, and must be viewed
as a total system involving location, size, and layout of plant; purchasing;
inventory control; and production controls. There are several categories that
affect each of these decisions, and agribusiness managers are urged to
consider all factors and their effect on the total system before making a
decision
Dr Clive Mairura (PhD)
PRODUCTION ACTIVITIES IN AGRIBUSINESS
[Link] Traditional
Basic Activities
[Link] Facility Activities
Dr Clive Mairura (PhD)
EIGHT TRADITIONAL BASIC ACTIVITIES
The eight generally accepted basic activities are:
1) Assembling raw materials
2) Grading raw materials
3) Storing raw materials
4) Processing raw materials into finished products
5) Packaging processed products
6) Storing processed products
7) Distributing products to wholesalers, retailers, and consumers.
8) Transporting products and commodities
Dr Clive Mairura (PhD)
SIX FACILITY ACTIVITIES
Beyond the eight basic production activities lie others that are
highly significant in an advanced society. Among them are these
six:
1) Market research
2) Product research and development
3) Development of demand
4) Exchange services
5) Finance and risk bearing
6) Market information
Dr Clive Mairura (PhD)
PRODUCTION/MARKETING INTERFACE
• A marketing stage may be defined as one of several observable strata of firms
engaged in a common line of business and performing a common group of
functions within the total marketing system. These stages have become so
obvious that they are commonly identified by generic names such as commodity
merchants, brokers, processors, further processors, sales agents, wholesalers and
retailers. How many stages there are for a given product is a function of the
number of groups or clusters into which its marketing functions are placed by its
marketing firms. As students of Agrbusiness management /marketing, we are
interested in the different ways firms separate or combine the 14 marketing
functions. (1) assembly, (2) grading, (3) storage, (4) processing, (5) packaging, (6)
warehousing, (7) distribution, (8) transportation, (9) market research, (10)
product research and development, (11) development of demand, (12) exchange
services (buying and selling), (13) finance and risk bearing, (14) market
information. (Note that not all the marketing functions and stages apply to every
food or fibre product).
Dr Clive Mairura (PhD)
THE FOURTEEN FUNCTIONS LISTED ABOVE ARE USUALLY PERFORMED WITHIN NINE
MARKETING STAGES, AS LISTED BELOW
• 1. Commodity assembling by commodity merchants
• 2. Transportation by specialised transportation firms
• 3. storage by warehouses
• 4. Grading by government agencies or licensed graders
• 5. Processing by manufacturing plants
• 6. Further processing by feed, food, or fabric establishments
• 7. Packaging
• 8. Distribution management by wholesalers
• 9. Sales to consumers by retailers
The grading and packaging stages are somewhat less distinct than the others. Financing and
futures markets are listed as “supplementary” services because they seldom serve
agribusiness alone
Dr Clive Mairura (PhD)
VERTICAL AND HORIZONTAL INTEGRATION
•The nine marketing stages are all characterised by
competitive pressures. Efforts are made to combine
stages and to combine marketing functions within the
same firm. Some of these efforts succeed and others
fail; but all such attempts work to improve marketing
efficiency and services and keep costs at a reasonable
level. These efforts are reflected in different classes of
firms operating at the successive stages and in
horizontal and vertical integration.
Dr Clive Mairura (PhD)
Horizontal integration
• Horizontal integration is the combining of products or firms in the same line or
category of business. A food processor engages in horizontal integration when
it builds or acquires plants making the same or similar products. A firm may (1)
build into a market by opening new plants or stores or (2) buy into new markets
by acquiring or merging with existing firms. (An acquisition is the purchase of
one firm by another; a merger is the combination of two firms to establish a new
one). The milk processing industry underwent considerable horizontal
integration by which companies such as brookside went into dairy farming.
Furthermore, large local-area processors have acquired smaller competitors to
gain more market control and reduce competition.
Horizontal integration is fostered by efforts to achieve economies of size in
marketing, on both the buying side and the selling side. On the buying side,
efforts are directed at efficiencies in the purchase of processing ingredients. On
the selling side, economies can be realised by establishing brand names and
having a broad line of products (rather than only a few), so that advertising costs
can be spread over many products
Dr Clive Mairura (PhD)
VERTICAL INTEGRATION
• Vertical integration is the combining of several marketing stages within the
same firm. (Examples were noted in our discussion of marketing stages,
particularly in the broiler and egg industry). Vertical integration may be
forwards or backwards. Forward integration is the inclusion of marketing
stages between any given stage and the consumer; and backward integration
is the inclusion of additional stages between a given stage and the farmer or
supply source. Broiler processors integrated backwards, setting up their
own poultry assembly and production operations. One of the major
companies, Crest Chickens, has also integrated forwards, becoming, in part,
its own wholesale distributor.
Since marketing stages also represent marketing functions, vertical or
horizontal integration involves a regrouping of the performance of those
functions
Dr Clive Mairura (PhD)
HOW AND WHY FIRMS BECOME BIGGER: INTEGRATION
• Firms can become bigger by expanding from within. This means that they produce more of a
particular good and probably increase the range and variety of the goods that they produce. They
need not amalgamate with any other firm but achieve the economies of large scale production by
internal expansion.
Some firms may form a cartel. This is when a group of firms maintain their own separate identity and
independence but meet (formally or informally) to set prices and output of the good or service
which they are all producing. By doing so they are imitating a monopolist because they are able to fix
prices and output and prevent newcomers from entering the industry.
• Another way in which firms can expand is by amalgamation with another firm or firms by means of a
merger. A merger normally assumes that the firms have joined together to become a single firm. A
merger may involve two previously independent firms of roughly equal size joining together or it
may involve a larger firm completely absorbing a smaller firm which may lose its name and identity
completely. The latter type of merger may be described as a take-over which is usually achieved by
holding companies. A holding company is formed with the purpose of taking over other companies
which are known as subsidiary companies. This can be achieved by purchasing more than 50% of the
ordinary shareholding in the subsidiary.
Dr Clive Mairura (PhD)
clive
• I Horizontal integration: Firms may become bigger by amalgamating with each other are of same
stage of the same production ,process. For instance the National Provincial Bank and the West
Ban amalgamated to become the National Westminster Bank. Also British Leyland consists of
many previously independent car firms, such as Morris, Triumph and Rover.
• 2 Vertical integration: Firms may become bigger by amalgamating with other firms which are at
different stages of the production. For instance a brewery may oii the hop fields and the public
houses. Also a chocolate manufacturer may own a cocoa plantation. There are two types of
vertical integration:
(i) Backward integration This is when a firm amalgamates with the suppliers of its materials or
component parts.
(ii) Forward integration This is when a firm amalgamates with firms which sell and market its
products.
3 Conglomerates: A conglomerate merger is one in which a firm integrates with firms with which,
very often, it has no conceivable direct link. For instance Imperial Tobacco owns Courage
breweries and Ross Frozen Foods. The British Match Corporation owns Wilkinson Sword. However
with some conglomerate mergers there is sometimes a link in that the products may be sold in
common outlets (Cadbury Schweppes) or have common raw materials (the range of Dunlop
products) or are similar goods (vacuum cleaners and washing machines). This is known as lateral
integration because the firms are making similar goods but they are not exactly the same or even
in the same production process Dr Clive Mairura (PhD)
REASONS (MOTIVES) FOR INTEGRATION
1) to achieve the economies of large scale production;
2) to achieve a greater share of the market and if
possible achieve a monopoly position and reduce
competition;
3) to achieve greater security in the market by offering
a greater range and variety of products within a
single range.
•However there are advantages and disadvantages
which may be peculiar to each type of integration.
Dr Clive Mairura (PhD)
ADVANTAGES OF HORIZONTAL INTEGRATION
•(i) Refer to the three motives for integration.
(ii) To achieve rationalization which is the
concentration on the profit making aspects of the
industry and the elimination of the loss making
aspects. This may involve closing down certain
firms and expanding other firms.
Dr Clive Mairura (PhD)
DISADVANTAGES OF HORIZONTAL INTEGRATION
(i) The diseconomies of scale.
(ii) The formation of monopolies may not be in the
interests of the consumer.
The problems of managing and welding together
the previously separate firms into the one large
firm.
The firm is assuming more risks of production.
Dr Clive Mairura (PhD)
ADVANTAGES OF VERTICAL INTEGRATION.
•(i) Vertical integration backwards will ensure that the
firm gets its raw materials at the right time, the right
place, the right quality
and in the right quantity.
(ii) Vertical integration forwards will ensure that the
firm can sell its goods at the right time, the right place,
the right quality and in the right quantity. Moreover,
integration with suppliers and with the sellers of the
good prevents them from adding their profit
margins,.. onto the final price of the good.
Dr Clive Mairura (PhD)
DISADVANTAGES OF VERTICAL INTEGRATION
• (i) As for horizontal integration.
(ii) Each section of the firm needs to be co-operating closely
with the other sections. For instance it would be
uneconomical to have one plant overproducing the raw
material if the manufacturing firm in the group has not got
the capacity to handle a large input of raw materials. This
problem needs to be resolved at each stage of production.
(iii) The firm which now controls the raw materials and
market outlets assumes all of the risks and uncertainties
involved at these stages of production and will have to
absorb any losses made at these stages due to changes in
market conditions.
Dr Clive Mairura (PhD)
ADVANTAGES OF CONGLOMERATES
•As for horizontal integration.
It means that the firm can diversify its products and
not rely on one specific good. This would be
especially the case where the firm has already
absorbed a vast proportion of the market of the
good which it already produces eg Imperial Tobacco
in the tobacco industry. Another reason for Imperial
Tobacco diversifying may be because it fears some
contraction in the use of tobacco products due to
medical advice and government warnings.
Dr Clive Mairura (PhD)