Olam: sustaining supply-chain competitive advantage in agribusiness through digitalization
Olam has created an amazing success story based on state-of-the-art management of agricultural supply chains. What are its key challenges going forward and why is digitalization a crucial strategic imperative for this company and its industry in general?
Olam’s success story and key challenges going forward
Olam started in 1989 sourcing cashews from Nigeria to Europe. Nowadays, after decades of sustained 25% annual growth, it plays in 47 agricultural chains in 70 countries and has revenues of over U$15B (1) (2). How did Olam manage to create such a success story? The answer lies in state-of-the-art management of the full supply chains in which it plays. Its repeatable business model is based on strong relationships with a very fragmented base of growers, trading and price management capabilities, robust risk management, and operational excellence and efficiency in its lean and vast logistical footprint (2).
Nevertheless, Olam will need to keep reinventing itself in order to sustain its edge in the years to come. Total shareholder returns show huge variation within each segment of the agribusiness value chain (3). This, together with external macro trends, will drive competitors to innovate and constantly pursue further profitability gains. What are the key strategic imperatives for Olam as a leading global agribusiness player?
- Increase yields substantially and relentlessly. A growing global population, paired with a sustained increase in per-capita income and dietary shifts, will require agricultural and protein production to grow by at least 30% and 45% through 2050, respectively (4). At the same time, available arable land per person will continue to decline (5). Thus, 80% of the required production growth will need to be driven by yield increase (3).
- Capitalize strengths and continue to drive constant operational efficiency (3).
- Enhance supply and price volatility hedging, as commodities prices are expected to remain highly variable (6).
- Double-down on transparency, safety and sustainability, following demands from consumers in developed markets (7).
Digitalization and connectivity will be fundamental enablers, both for Olam and for the global agribusiness industry (3). But how is Olam capturing the opportunities that digitalization opens up to address its key challenges?
Olam’s current digital strategy: taking interaction with farmers to the next level
In 2016, Olam launched the Olam Farmer information System (OFIS), a proprietary tool for collecting and analyzing data gathered at the farm level, and for connecting its complex network of growers. Through an App designed to operate with low network data requirements, growers can collect farm-gate, geo-localized data that before was registered using pen and paper. The App also manages the farmers’ training programs, and digitally supports farm-level transactions and operations including purchases, distribution, financing and stock management. In addition, Olam is prototyping the delivery of Customized Farm Development Plans through its OFIS, which recommends customized practices for growers to boost yields and margins based on collected information (8).
The successful implementation of OFIS, which by 2017 has 100,000 users and expects to reach 500,000 users by 2020, will be crucial to address Olam’s key strategic challenges:
- Firstly, it will reduce yield variability by providing data-supported, customized agricultural practices. Addressing yield variability alone can lead to yield increases of 30 to 40% in some crops (3).
- Secondly, it will help achieve significant operational efficiencies. Increased responsiveness of the value chain and communication with growers will facilitate better planning and inventory and transactions management (9).
- Thirdly, it will allow Olam to enhance its “smart view” of the supply chains, which in turn will allow for better risk management and price volatility hedging.
- Lastly, this increased transparency will enable Olam to better manage supply chain traceability and sustainability.
Untapped digital opportunities for Olam
Even when OFIS will definitely strengthen Olam’s supply chain-related core capabilities in the short and medium term, there is significant room for the company to further rely on digital in the long term.
OFIS currently relies on manually inputted data. In a next stage, Olam could explore embracing Internet of Things (IOT) and implement the use of sensors and drones to take data collection to the next level. For instance, drone imagery is being piloted in oil palm plantations in Indonesia and Malaysia (10).
Additionally, Olam could further leverage the value it gets out of the data it collects by integrating it with other sources of information. Other industry players, like Monsanto, integrate information collected at the farm level with climate, soil-moisture and other data pulled from satellites, weather stations and sensors in order to make highly tailored and specific recommendations to boost farmer’s productivity (11).
Some key questions for discussion
- Olam’s traditional competitive edge has been based on its expert management of fragmented and complex value chains. To what extent does digitalization erode Olam’s competitive advantage, by allowing other players to have greater value chain visibility and control more easily?
- Many large, non-digitally centered organizations like Olam need to embrace digitalization in order to remain competitive. What trade-offs should they consider when deciding on their approach to the digital transformation of their organizations? (i.e. invest heavily to develop in-house technologies, acquire early-stage companies with interesting innovations, other approaches)
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Citations:
(1) Chris Zook, James Allen, “Repeatability: Building Businesses for a World of Constant Change”, Bain & Company and Harvard Business Review Press, 2012
(2) Olam’s 2016 Annual report, http://49tmko49h46b4e0czy3rlqaye1b.wpengine.netdna-cdn.com/wp-content/uploads/2017/04/Olam_Annual_Report_FY16.pdf
(3) Satish Shankar, François van Raemdonck and Dalton Maine, “Can Agribusiness Reinvent Itself to Capture the Future?”, Bain & Company, March 24, 2016, http://www.bain.com/publications/articles/can-agribusiness-reinvent-itself-to-capture-the-future.aspx
(4) “How to Feed the World in 2050: the 2012 revision”, FAO, 2012, http://www.fao.org/fileadmin/templates/wsfs/docs/expert_paper/How_to_Feed_the_World_in_2050.pdf
(5) “Achieving Sustainable Gains in Agriculture”, FAO, 2014, http://www.fao.org/docrep/014/am859e/am859e01.pdf
(6) Lutz Goedde, Maya Horii, Sunil Sanghvi, “Pursuing the Global Opportunity in Food and Agribusiness”, McKinsey & Company, July 2015, https://www.mckinsey.com/industries/chemicals/our-insights/pursuing-the-global-opportunity-in-food-and-agribusiness
(7) Anja Strothkämper, “Farm to Fork Goes Digital: How Agribusiness Digitalization can Feed the World”, SAP Digitalist Magazine, September 2016, http://www.digitalistmag.com/digital-supply-networks/2016/09/07/farm-to-fork-agribusiness-digitization-can-feed-world-04446745
(8) Olam’s 2017 OFIS report, http://49tmko49h46b4e0czy3rlqaye1b.wpengine.netdna-cdn.com/wp-content/uploads/2017/06/OFIS-brochure-June-2017.pdf
(9) Stefan Schrauf, Philipp Berttram, “Industry 4.0: How Digitalization makes the Supply Chain more efficient, agile, and customer-focused”, PWC-Strategy&, 2016, file:///C:/Users/MBAUser/AppData/Local/Microsoft/Windows/INetCache/IE/DG524HC6/Industry4.0%20-%20PWC.pdf
(10) Anja Strothkämper, “A New Agricultural Revolution, Courtesy of the Internet of Things and Machine Learning”, SAP Digitalist Magazine, November 2017, http://www.digitalistmag.com/iot/2017/11/10/new-agricultural-revolution-courtesy-of-internet-of-things-machine-learning-05512717
(11) “Monsanto & Climate Corp: Big Data Transforming the Agriculture Industry”, Harvard’s Digital Innovation and Transformation Course Blog, 2015, https://d3.harvard.edu/platform-digit/submission/monsanto-climate-corp-big-data-transforming-the-agriculture-industry/
Regarding ‘untapped opportunities’ for digital innovations in the company’s supply chain — particularly at the smallholder farmer level — I think there may be far more low-hanging fruit to grab before moving onto more ambitious technologies like drones and sensors. Yield productivity, for example, is in part about variability and a paucity of actionable data for growers. But for smallholder farmers, who tend to be both poorer and at higher-risk to adverse events (e.g., a drought), productivity is also an issue of financial stability and local resiliency — both of which are in part addressed through digital solutions. Successful social enterprises (see: MyAgro) are demonstrating how digital tools can help farmers to save more money over long periods time, which creates critical buffers against adverse events (i.e., the ability to rebuild a farm after a storm), as well as enables farmers to invest more in the farms themselves, leading to greater yields. I would be curious to see how a company like Olam might experiment with and scale digital tools that more creatively empower the smallholders they rely so heavily upon.
It’s a huge opportunity for traditional industry like agriculture to go digital. It can significantly raise supply chain efficiency. Moreover, leveraging on digital tools, the company can control inventory effectively. Besides, the company can utilize the digital tools to respond to customers needs by predicting demand and managing supply. It will be an competitive edge for the company to grow sustainable.
Although a digital strategy like this one Olam is utilizing for smallholder farmers might improve data collection, I fear that benefits for Olam might outweigh benefits for the farmer. I think Olam’s digitization efforts will without a doubt foster better predictive models and faster reaction times to changes in supply from their producers. However, it might not have the desired impact to raise the efficiency of the system as a whole. I would argue that farmers in rural areas face other more significant problems such as access to financing, warehousing & logistics, and sales & payment mechanisms which may have a much larger impact on the livelihood of the farmers. Problems in agriculture remain mostly inherent in the logistical aspects of the supply chain. Although digitization will give Olam a competitive advantage in pricing and allocation of resources in it’s role as a global trading powerhouse, I question whether it would be enough to push forward the boundary of the agricultural supply chain.
Another thought that struck me as I read this piece was whether Olam could potentially leverage OFIS as an additional income stream, aggregating and selling anonymous grower and yield information to other agribusiness companies and upstream actors, to supplement their core business. There is obviously a risk in Olam providing access to proprietary grower data if doing so disadvantages Olam in competing with other major agribusiness players, but if Olam could successfully communicate the value to all parties involved in establishing a centralized grower database, this could be a substantial supplementary income stream and potential competitive advantage with Olam’s core business in the future.
Although I wholeheartedly agree that greater digitization holds tremendous potential for Olam at maximum scale, similar to JS’s contention, I do think that the benefits for this tip the scale too far in Olam’s favor and less for the smallholder farmers. This, in turn, could have adverse ramifications on Olam’s supply chain later down the line. In African countries with expansive arable land, and especially in Nigeria, similar technological/digital initiatives that foster more intimate interactions between these smallholder farmers and large-scale agribusiness enterprises have not always been well received and in some cases, been summarily dismissed on arrival. Most of the farmers in these markets are either un- or under-educated and as a result, are very susceptible to exploitation by these corporations. Consequently, some governments view such schemes as encroaching on their regulatory purview of the agricultural space in those regions. My question to Juan is: although the merits for digitization are readily apparently for Olam, how does Olam ensure that it secures adequate commercial buy-in from all stakeholders (farmers, regulators, government, and the local community)?
Really nice piece about agribusiness and digitalization! After reading it, the first thing that came to my mind is that Olam really needs to find how to leverage its current first mover advantage before digitalization becomes largely available not only to them but to its competitors, producers and customers. Olam’s success has relied on being the first to increase information access and foster information sharing across the different actors in the agribusiness supply chain. Now, Olam’s future challenge is to differentiate itself from the new competitors that will surely challenge its dominance in the industry. To address that, I would suggest that Olam 1) continues investing in digitalization via new technologies such as Internet of Things and drone imagery and 2) increases its customer base to benefit from the network effect, as more customers would increase its OFIS database value. To finance those investments and customer growth, Olam could look for outside “ethical” investment by leveraging its contributions to Africa’s communities and sustainable agricultural product growth.