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Governance: a broader supply chain view
Governance structures are not generic and differ between different market forms and industries. Coordination within markets is not simply a matter of transactional price negotiation or contract design. A variety of factors are present that affect the way in which governance contributes to the coordination of transactional activities. These are in some cases more social/relational in nature than formal rules. As an example, Menard (2004) in approaching market structures in the construction industry, lists subcontracting combined with strong relationships as a better coordinating method than purely market forces of supply and demand. Menard (2004) also lists agri-food supply chains as a particular example of networks (hybrid market structures) where recurrent contractual ties between autonomous parties characterises the relationships, rather than just the abstract intersection of spot market supply and demand (Casson & Lee, 2011).
At first the spot markets for produce reflects the characteristics of a market where supply and demand dictates all activities, but as one unpacks the relationships, the dynamics of the trade environment that supports the transactional dynamics emerges. The coordination of activities through reputation, transaction costs, quality, quantity and various contract types form key drivers within these chains (Menard, 2004), not just price. Specifically quantity and quality of the product is an important element in daily decision-making within the fresh produce supply chain (Vasileiou & Morris, 2006). Good Manufacturing Processes (GMP), Sanitation Standard Operation Procedures (SSOP), Hazard Analysis Critical Control Points (HACCP) are some of the measures that ensure and create assurance of the quality of the products to stakeholders within the supply chain. The ability to communicate this via electronic exchange as part of the transaction compliments trust. This point is illustrated in chapter 5 where the role of third party assurance emerged as part of trust models. Trust cannot be divorced from its economic and managerial roots (Figure 6.43) as the underlying activities that fuel economic activity, all have a trust component attached to it. Agency theory (See 6.6) is a good example of how key elements of hidden action and hidden information affect the trust relationship and how these elements form part of a broader institutional drive to ensure transparency in fresh produce markets.
If the intention is to supply SST then the broader institutional elements have to be incorporated into the provision of SST. Electronic environments have to provide legal, technical and social context within which the customer operates (Schultz, 2006).
The evolution of food system research as presented by Cook Klein & Iliopoulos (2008) offers us an overview of how the integration within supply chains has intensified and raised in prominence within the literature. This is important in light of the fact that these dynamics also influenced the underlying governance structures. Getting commodity systems right emerged from Davis and Goldberg (1957) who investigated why the inter-firm agreements took on the form of individual agreements. Market structure performance approaches focussed the sub-sectors on the various supply demand conditions, price management and government roles.
Impersonal exchange
An historical example from early trade illustrates the dynamics of the broader institutional environment and how this supports faceless relationships. The fact that people transacted with others without an established personal relationship, is illustrated by the history of impersonal exchanges.
“In such exchanges, a trader’s decision to transact is independent of his partner’s personal reputation. It is made without knowledge of that partner’s past conduct, or the expectation of future trade with him, or the ability to report misconduct to future trading partners.” (Greif, 2006b:222, own emphasis) In the year 1323, the goods of a London merchant, John de Grantham, were travelling through the port of Dover (Greif, 2006b, cf.). There a certain William Virgil laid claim to the goods with the backing of the local Dover court. There was no legal action pending between William Virgil and John de Grantham that would initiate an action. John de Grantham approached the court of London who in turn requested the Dover court to release the goods or face retaliation from London where all Dover merchants’ goods would also be confiscated. The Dover mayor explained that the reason for this action was the fact that London did not act on a previous separate debt matter between William Virgil and a Henry Nasard. The matter was subsequently resolved and the goods released to John de Grantham. When William Virgil of Dover transacted with Henry Nasard, he had the expectation that the court of London would support and enforce this agreement. The mayor of London was an official of the “Corporation of the City of London” and thus was partial to local trade interest. But not acting on the request would have led to the port of Dover being closed to London merchants, which would have had a much graver consequence than the actions against a local London merchant. The action “… was not despite the court’s partiality, but because of it.” (Greif, 2006). Greif refers to this as the communal responsibility system. Greif makes the claim that this self-governed community-based institution facilitated trade through action and reactions to other community’s ability to sanction and retaliate. This was similar to the structures from the Baltic Sea to the Adriatic Sea, for instance, countries such as Germany, Italy, France, Poland and Flanders.
“The evolution of impersonal markets and effective polities in Europe therefore highlights the need to consider the developmental ramifications of social structures that, like the communes, fall into a grey area between states and communities … In Europe, the community responsibility system constituted an intermediary institution that was neither purely law-based nor purely reputation-based. It enabled intercommunity impersonal exchange based on the partial legal systems and reputational considerations of communities.” (Greif, 2006b:234)
During the early trade, over and above the strong regional nature and loyalty of the local courts, commercial interest on a broader scale was advanced by the merchant and trade fraternity. These would set the rules. As long as a trader transacted with another in another community was “underwritten” by the power structures to protect the goods and agreements in another port, the trader would transact, without necessarily knowing or trusting a particular individual. “His main concern was whether the other community considered the continuation of intercommunity trade valuable enough for its court to enforce intercommunal contracts.” (Greif, 2006b:224)
These structures were characterised by:
Establishment of structures to allow for the identifying of community members by both the community and non-community members,
The cost of joining the community was increased to avoid merchants joining that would abuse the structures and dent the reputation of other members,
The cost of joining and exiting were such that it motivated the retention of the membership and the conformation to the court’s rules.
Greif (2006b) indicated that these formalised intercommunity structures did in fact influence behaviours and assisted in prolonged relationships.
“… in such a setting with imperfect monitoring, mutually costly conflicts of finite durations are necessary to sustain cooperation. The costs of such conflicts deter each court from misrepresenting its private information.” (Greif, 2006b:226)
In time though, as the size of communities grew and other legal solutions were introduced, the ability of the community system lost its value but not its dynamics. Structures that are more formal were required to uphold these informal institutional structures across a broader geographical spread and were used to strengthen relationships.
“By fostering impersonal exchange and institutional development, the community responsibility system laid the basis for its own replacement by overarching systems of law-based exchange. Long-distance trade led to institutional change that further fostered growth. More generally, the system had lasting implications on the European trajectory of contractual, organizational, legal and political developments.” (Greif, 2006b:222)
The cost associated with non-affiliation decreased and other ways were sought to support trade agreements across ports. Misrepresentation of alliances meant that the jurisdiction of these agreements had to be extended to the country borders. The treaties between smaller regional towns, ports, or provinces were replaced by treaties between countries. Different countries used the agreements to service their own trading agendas. Italian towns grew faster than English towns, thereby affecting the ability of these towns to function under community-based systems. Internal merchants tended to serve their own agendas; bigger merchants did not want the local constraints of the cost of participation but only wanted the protection it offers. Bigger merchants also had their own reputations that were high enough but feared retaliation and this required the support and input from other merchants. Smaller merchants in turn sought the local protection and rules that it would bring to level the playing field with bigger local traders.
1.1 INTRODUCTION AND BACKGROUND
1.2 BACKGROUND AND PROBLEM STATEMENT
1.2.1 FOOD PRODUCTION (2050)
1.2.2 CASE ENVIRONMENT: FRESH PRODUCE MARKETS
1.2.3 INTRODUCTION TO KEY ROLE PLAYERS
1.3 MOTIVATION FOR STUDY
1.3.1 SELF-SERVICE TECHNOLOGY
1.4 RESEARCH QUESTIONS
1.5 STRUCTURE OF THE THESIS
1.6 CONCLUDING SUMMARY
