Sunday, June 24, 2012

64 – Value chains – how they work

Let us now look at how a value chain actually works. 
A value chain is based on market demand. It is based on market demand at each level of the chain. Market demand is based on people willing to buy a product at a given price. We may have a good product but it may be too expensive, or nobody is willing to buy it because there is no need for it. Or there may be too many people already selling similar products or the same product. Or it may not be the right time of the year for that kind of product. All these factors influence market demand. 
Let us take our example of the peanut products value chain as outlined before:
  • someone grows peanuts and sells for food
  • someone buys some of the peanuts and makes cooking oil
  • someone sells cooking oil locally
  • someone sells cooking oil at the city market
  • someone collects ash from fireplaces
  • someone buys cooking oil and ash and sells soap
  • someone buys the soap and runs a clothes washing business
Let us take peanuts as they come out of the ground. There may be a market demand for raw peanuts. And another market demand for cooked peanuts or for roasted peanuts. People who buy raw or roasted peanuts may be different people. And the demand may not be the same every month.
A value chain is formed by a sequence of activities. In this case the activities are selling and buying peanuts that provide revenue to the producer. But the activity may be variable or temporary and in this case the producer does not have a dependable source of income.
In large cities there may be a large demand for peanuts, but in a small community the demand may be small and the producer may need to plant very few peanuts or find buyers from other communities. Finding buyers requires knowing people.

And so an important activity for the producer is to find and maintain reliable buyers.

Another important activity is to produce good quality peanuts and on time for the market.

We want value chains that are dependable. We need to have a marketplace for our product and we need to know the marketplace for our product. And we want to create associations with other producers or with buyers who can help us and on whom we can depend.

In a small community the producer may have to plant peanuts and other produce because the local demand will be limited. But this can be a good thing. The farmer will then plant some peanuts, some potatoes, some corn, some other crop, and with all these products provide, on a regular basis, the community with the produce it needs.
In small communities a farmer may not be able to produce just one crop. The farmer may have to be good at many things.

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