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9 The supply chain for organic products from Scotland

9.1 This chapter describes supply chain support and development in Scotland and elsewhere, and raises organic supply chain issues of concern and opportunity.

Existing initiatives in Scotland

9.2 A range of initiatives currently exist that either directly support supply chain development in Scotland's organic market system or indirectly through wider interventions in support of food and drink. Initiatives include Scottish Executive programmes (and those delivered on their behalf by SAC), those of the Enterprise Networks and those of some certification bodies, notably SOPA and the Soil Association. There is evidence of integration through closer working relationships, with the co-sponsorship of some support now emerging.

9.3 The support available to the organic sector from the Scottish Executive includes:

• Support for conversion and existing organic farmers
• Advisory support. Currently provided by SAC this includes a telephone hotline; and information pack; advisory publications; a website providing technical and marketing advice; as well as demonstration farms. Since 1997, SAC has run over 200 organic producer meetings with over 7000 attendees
• Organic Aid Scheme. Funding provided to help with the capital costs of conversion
• Agricultural Business Development Scheme. Available in the Highlands and Islands only this provides support for the investment costs in agricultural holdings.
• Support for marketing and processing. Marketing and processing grant schemes targeted at projects that strengthen the organic food chain.

9.4 In addition, the Scottish Executive has identified in its Organic Action Plan potential for:

• payments for converting to vegetable and fruit production
• funding for advice in producing an organic conversion plan
• funding for capital costs of conversion; fencing, dyking for example
• extending conversion support beyond the conversion period.

9.5 The Enterprise Networks - Scottish Enterprise ( SE) and Highlands & Islands Enterprise ( HIE) - and their respective local enterprise companies are responsible for the delivery of public sector business support across Scotland. The economic development framework provided by the Scottish Executive's A Smart Successful Scotland strategy document informs their priorities and the deployment of their resources.

9.6 Generic business support is available, including support though SE's Business Gateway and through local enterprise companies in the HIE area.

9.7 Support is also available through the co-sponsorship of Scottish Food and Drink by SE and HIE. Both SE and HIE have emphasised food and drink as a key sectors/cluster.

9.8 Scottish Food and Drink activity is informed by the document Scottish Food and Drink Strategy ¹¹. The strategy places the food processing industry at its core but embraces drinks, agriculture, fishing, aquaculture, research and education; conventional products as well as organic.

9.9 The Scottish Food and Drink strategy highlights a number of issues of concern to the wider food and drink industry, but which are equally relevant to the organics sector. Despite the food and drink industry benefiting from a strong Scottish brand and world class food science base, it suffers from low levels of export and fragmentation. Moreover, there is untapped potential in value add elements of the supply chain in Scotland. The strategy also anticipates a number of market trends of relevance to the organic supply chain. These include the following changes:

• consumer profile and demand patterns - consumers becoming more affluent, increasing trend towards 'grazing'
• delivery - with increases in home shopping
• increased supply chain sophistication
• retail consolidation
• alongside shortening product lifecycles, major retailers searching constantly for lower costs, innovation and flexible processes.

9.10 Supplying to major retailers presents opportunities as well as threats. Aspiring suppliers have the opportunity to increase distribution and new product listings. However, failure can lead to delisting, creating hurdles in any subsequent dealings with retailers.

9.11 Aspiring suppliers can expect specific demands. They must manage the expectations of the major retailer - above and beyond more mainstream contractual arrangements. Expectations on the part of the multiples include capacity to supply, but also strict quality standards. They require reliable distribution, product development capabilities and capacity, as well as a tight focus on customer service. Such expectations make demands upon the whole company, challenging organisational capability. For all companies, supplying to a major retailer needs to be a carefully thought through, strategic decision.

9.12 The Scottish Food and Drink strategy seeks to develop a culture of innovation and enhance connections between producers, processing companies and the research-base. It promotes business investment in staff development and marketing. The strategy document sets out a number of goals:

• to develop and grow leading suppliers and processors of food and drink
• to build Scotland's reputation as suppliers to the premium, sophisticated retail and food service markets of the UK and Europe
• to grow advantage through innovation, including exploitation and application of technology
• to build on Scotland's leading standards in quality, service and food safety
• to develop an efficient, responsive infrastructure and enhanced customer service
• to develop the capabilities of people working together, active in local and global networks.

9.13 Achievement of the above goals has been progressed through a range of initiatives to date. Support currently available via Scottish Food and Drink ( www.scottishfoodanddrink.com ) in Scotland is summarised in Table 9.1. In addition to targeted support for the organic sector, there is a range of support on generic issues for the food and drink sector.

Source:www.scottishfoodanddrink.com

9.14 In addition to the organic zone/marketplace on scottishfoodanddrink.com and the Scottish Food & Drink Organic Project Manager who works on behalf of the whole industry in Scotland, (see Table 9.1) there is co-sponsorship by SE and SOPA of an Organic Industry Development Officer.

9.15 The need for a national co-ordination facility for organic producers has been recognised. Action has been taken to establish a producers' co-ordination steering group, with the intention to have an Independent National Co-ordinator (located within SAC) for organic producers. The post holder would co-ordinate information sharing, represent producers and collate and circulate basic market information. We consider this to be a substantial task requiring experience and careful consideration of resource levels.

9.16 One further initiative that is underway to develop the organic supply chain is worthy of mention. Issues around perceived information gaps are being addressed by web enablement of databases held by the Soil Association, the National Organic Livestock Database and the National Organic Forage and Grazing Database. The information will be UK-wide and will provide data disaggregated to the Scotland level.

9.17 Other forms of producer and supply chain support currently available in Scotland are summarised in Table 9.2.

Supplier development activity with major retailers

9.18 Our understanding is that Scottish Food and Drink has developed relationships with a number of major retailers including Asda, Tesco and Sainsbury's. It is our understanding that the relationship with Sainsbury's is the most mature. This relationship has led to the delivery of two supplier development programmes. These are described in more depth here as an illustration of the support available.

9.19 According to Sainsbury's ¹², annual sales of British food (conventional and organic) through their supermarkets is worth £6billion. The company sources from 104 local suppliers in Scotland: this represents 800 lines and is worth around £318million per year. Over 6% of sales in Sainsbury's Scottish stores are from local product sales. Sainsbury's has Regional Development Managers whose role is to link promising local products with buyers, and bridge the supplier-buyer gap.

9.20 Scottish Food & Drink has, in partnership with Sainsbury's and a third party contractor, run two supplier development programmes. The aim has been to develop knowledge and expertise to assist suppliers in the development of a long term trading relationship with Sainsbury's. Table 2.1 shows the objectives that were set out for the companies and for Sainsbury's.

9.21 Development programmes were designed to run for six months and involved group seminars, one-to-one sessions, and hands-on assistance. The programmes also provided liaison with Sainsbury's buyers. They were delivered in 2000 and 2001, and assisted in total 20 companies. We do not know if any of the participants were supplying organic products.

9.22 Expected outputs from the programme were:

• a long term trading relationship with Sainsbury's - measured in terms of increased sales, turnover, new listings and new product offerings
• an ability of make a formal presentation to Sainsbury's
• to present product concepts
• the development of a formal account plan with Sainsbury's
• an understanding of the market and the company's position within it, and
• an understanding of Sainsbury's philosophy and trading requirements.

Examples of supply chain support initiatives elsewhere in the UK

9.23 The Soil Association Organic Food & Farming report (2003) provides a description of regional support activities elsewhere in the UK. Key support initiatives supporting the supply chain include:

• organic support centres: providing dedicated support and with a remit for linking organic businesses in their regions: these include Organic South West, Yorkshire Organic Centre and the Organic Centre Wales. The latter is also engaged in public procurement programmes
• the Organic Supermarket of the Year award: this award sets out to promote best practice in ethical trading and UK/local sourcing on the part of the large retailers
• The Soil Association's national database on Organic Livestock and Organic Forage and Grazing: a clearing database for those supplying and demanding livestock and forage
• the Local Food Works partnership between the Soil Association and the Countryside Agency: this encourages sustainable economies in local food through the development and support of local food networks
• the Organic Advisory Service and the Organic Conversion Information Service in England run through the Elm Farm Research Centre. The conversion information service also provides for a free advisory visit
• the Federation of Organic Livestock Marketing Groups.

9.24 Recent research by the Soil Association, with assistance from Defra, has produced a report ' towards an organic marketing support programme-Jan 2004'. This identifies the market intelligence and marketing support needs of the organic sector. Several strategic themes are identified, with specific actions under each. Examples of actions relevant to the organic supply chain include:

• developing regional and local supply chains and producer groups through:
  • a national umbrella organisations for producer groups
  • collaborative activity focussed on:
    • livestock marketing
    • developing specialised co-operatives for the horticultural sector
  • establishment of local and regional progressing and distribution hubs
• developing secure trading relationships between buyers and suppliers
  • develop the use of contracts between producers and buyers
  • improve relationships between multiple retailers and suppliers through improved forecast of demand and price guidance

Supply chain issues identified in policy for Scotland

9.25 The Scottish Executive's Forward Strategy for Agriculture identifies a number of supply chain challenges and actions for Scottish agriculture in general. The Scottish food and drink sector is perceived to have been characterised in the past by a marked lack of trust to the detriment of long term benefits. There is a perceived need to shorten the supply chain in order to ensure market signals can be seen i.e. to ensure that production is demand led. Suggested actions include:

• benchmarking and peer review to encourage an improvement in standards
• for farmers to become part of the client group of the Enterprise Networks ( SE and HIE)
• for the Scottish Executive and the Enterprise Networks to prioritise marketing and processing activity that demonstrates collaboration.

9.24 The Strategy also identifies actions specifically for the organic sector:

• the organic supply chain must develop processing capability to match organic production
• producers need to be able to identify finishers to whom store lamb producers can sell
• there is a need to ensure the right business and technical advice is available.

Organic action plan

9.26 The Scottish Executive's Organic Action Plan identifies a number of specific supply chain issues:

• upland produced store lambs not always sold on to organic finishers
• imbalance between production and demand has led to gluts - particularly lamb and milk - as well as shortages, which in turn are filled by imports
• labelling has meant consumers have found it difficult to identify Scottish produce.

9.25 A number of constraining issues in the supply chain are also identified in the development of the sector, these include:

• the availability of Scottish produce
• lack of suitable processing facilities
• lack of market information that would inform decisions on supply and demand
• dominant influence of multiples putting pressure on price premium and thwarting new entrants
• low uptake of available marketing and business support, as well as
• intrinsic climatic and technical constraints on guaranteeing supply of premium products such as fruit.

Perspectives of organic supply chain actors

9.27 Our fieldwork revealed a range of issues from the different perspective of a number of supply chain actors. These included producers, processors and retailers.

Producers

9.28 Location in central Scotland is a major advantage; those further north have major difficulties distributing/selling produce. Remote areas mean poor logistics as well as a small market for farm shop businesses and for farmers' markets. In the far north, food and drink distribution is poor and transport chaotic. This makes it expensive to distribute produce but also time-consuming. The latter makes the delivery of fresh produce a challenge.

9.29 Logistics for a small Inverness-based producer involves a 24 hour round trip in order to access the Scottish central belt. Paying someone to undertake this would be a considerable cost. One producer we consulted felt he was a central, albeit unwilling, lynchpin to the distribution of a large proportion of organic products from the Highlands. Such a position suggests supply chain logistics in the Highlands are fragile.

9.30 There are a number of reasons for the logistics issue. One producer argued that access to the conventional logistics infrastructure was thwarted partly because of the dominance of the multiple retailers. For others, the underpinning problem was the lack of volume of organic produce: if volumes increased, economies of scale and cost reductions might be achieved. Instead of having to move a single pallet of produce, it would involve moving a dedicated lorry. This demands collaboration between producers, but according to one consultee the track record of this in the Highlands is not good. For another producer, the underdevelopment of logistics was partly down to the maturity of other sectors. Demand for organic produce from the hotel and catering sector was singled out as being very poor, the consequence of which was logistics for organic was not incentivised.

9.31 A perceived complicating factor is the land capability in Scotland for livestock - the necessary separation between specialist breeders and finishers raises the supply chain costs of transportation.

Processors

9.32 Livestock logistics are affected particularly by the availability of abattoirs. Abattoirs in turn are driven by factors of cost and travel time. For one processor, the cost of running an abattoir is influenced by volume whilst travel time is influenced by animal welfare. Transportation of livestock is restricted to a maximum eight hour journey time. The dominance of the multiple retailers, each of which has its own dedicated abattoir/meat supplier, has led to consolidation of abattoirs, particularly in the rural areas whose economies are especially vulnerable to these factors. Closures and distance to remaining abbatoirs present Highlands livestock producers with supply chain difficulties.

9.33 One abattoir, located in Yorkshire but sourcing livestock from Scotland, is actively considering the idea of a " cattle stop" to mitigate the effect of distance , whilst respecting the travel time restrictions. There is little difficulty in transporting livestock from lowland Scotland, but it becomes an issue for producers located further north. This cattle stop would need a layerage facility on an organic farm. Cattle would stop for 24 hours and be housed and fed. It would need to be state-of-the-art and may yet prove to be impractical because of costs.

Retailers

9.34 For one independent retailer there is a requirement for better transportation for Island producers. However, our consultee was concerned this was not achieved through logistics which are detrimental to the environment and therefore undue the achievements of the organic production.

9.35 From a multiple retailer perspective, supermarkets operate a depot system into which suppliers sell. The depots make up the order for branches and these are shipped out overnight ready for sale in the following morning. The key logistical factor is driving time - currently a maximum of six hours.

9.36 There is a suggestion that smaller actors in the supply chain examine opportunities to collaborate to improve and share logistics facilities.

Responding to the issues

9.37 Our findings in this and previous chapters reflect the systems approach we have adopted to understand the issues. In resolving some of these issues, a similar approach ought to be adopted. Several elements of the system ought to be considered simultaneously to explore potential solutions. The specific example of horticulture in Scotland may help to illustrate how this might be done. Horticulture:

• is viewed by some retailers as a market opportunity (Chapter 5)
• represents a key consumer entry point to organic food (Chapter 4)
• is an area of production that requires an improvement in product quality if import substitution is to occur (Chapter 5)

9.38 The location of horticulture raises logistical issues, particularly one might expect, for producers in the Skye-Inverness corridor (Chapter 7 and Appendix C). However the fieldwork also raises potential solutions: the existing logistics infrastructure for example. The multiple retailer with an outlet in Portree or the Kyle of Lochalsh-Inverness-London rail link may offer potential (Chapter 5). Finally the location also begins to identify the resources available that might be brought to bear, over and above Scottish Food and Drink, to explore the issue and help find a solution. In this example, the resources held by the Local Enterprise Companies might be relevant; Skye and Lochalsh and Inverness and Nairn (Chapter 7 and Appendix C).

Recommendations

9.39 Arising from the various inputs from our desk and primary research on the status of the organics supply chain and its challenges, a number of recommendations can be made concerning the need for new information and knowledge.

• the scope for producer collaboration to develop and share logistics should be explored. Using the locational information on producers and primary processors collated for this study, it is possible to begin to identify geographic clusters of businesses that might be able to form "logistics rings" to mutual benefit. Central point (depots) on appropriate scales to handle pooled farm inputs should also be explored. We acknowledge that fundamental to taking this forward is the willingness of businesses to collaborate - we have been advised throughout this study of the poor track record of the sector in achieving collaboration.
• the business case for innovative uses of existing infrastructure need to be explored - one consultee aspired to an "organic wagon" on the Inverness-London train. There is merit in engaging with multiple retailers to understand more fully their logistics practices in rural areas of Scotland.
• there is a need to research the business and logistical issues concerned with appropriate levels of provision of abattoirs available to organic livestock producers. The feasibility of cattle stop farms should be explored.

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