SUPPLY CHAINS, QUALITY ASSURANCE AND TRACEABILITY USING ISO 9000-2000 IN AGRICULTURE

SUPPLY CHAINS, QUALITY ASSURANCE AND TRACEABILITY
USING ISO 9000-2000 IN AGRICULTURE

Reg Clause
Iowa State University-CIRAS












paper presented at the

Symposium

Product Differentiation and Market Segmentation in Grains and Oilseeds:
Implications for Industry in Transitionܢ

Sponsored by
Economic Research Service, USDA
and
The Farm Foundation


Washington, DC

January 27-28, 2003

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SUPPLY CHAINS, QUALITY ASSURANCE AND TRACEABILITY
USING ISO 9000-2000 IN AGRICULTURE

Reg Clause

THE SITUATION

Trends in the market must be respected and several established trends challenge the U.S.
agriculture industry today. These challenges offer opportunity for those businesses
focused on being competitive. This paper will discuss these challenges, offer challenge
points and discuss solutions being implemented now.

Globalization has challenged the competitiveness of U.S. agriculture in fundamental
ways. There are no boundaries to technology or capital and this is allowing growth to
emerge where resistance is low and economic opportunity is compelling. For example,
Brazil is now on a track for dominance in the world soy market. Dominance in other
commodities is well within their reach, particularly cotton. The primary constraint is
infrastructure and this is a solvable problem for them.

Most developed nations are producing in excess of need in many commodity categories.
This generates competitive pressures on the world market inevitably pressuring the U.S.
U.S. policy response has been ever-higher le vels of subsidy to keep the existing
production sectors solvent. This response has at least two very negative outcomes:
1) U.S. positioning in WTO is increasingly strained and this is generating
protectionist pressures within the U.S. Longer term, the outcome of this reality
will be erosion of market share for U.S. production.
2) Farmers, in particular, are insulated from market signals and are not responsive to
changes in the competitive marketplace for their goods. Nearly all profit for corn
comes from subsidies in recent years, for example.

Foreign production of food commodities is becoming more competitive in the U.S.
market. The conundrum faced by policymakers is an economic one. The U.S. relies on a
policy of low cost food as a pillar of economic growth. However, agriculture in all its
manifestations remains the nation’s largest industry. Therefore the overall health of this
industry is vital as well. Will bigger farm programs and protectionist measures be the
outcome? Or should the corn industry look to improvements to its own competitiveness?

U.S. agriculture is becoming uncompetitive in export markets. For example, the U.S. is
not even considered as a supplier in certain markets today because we lack of process
control. We will be increasingly threatened by overseas competitors seeking market share
in the U.S. New demands on shippers have emerged in the past 24 months.

Significant drivers of change in food production supply chains are these:
1) Foreign market consumer preferences
2) Foreign competition

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3) Food Retail consolidation/globalization
4) Domestic consumer issues regarding food safety and informed choice
5) Political activism on technology, animal welfare and environment


THE PROBLEM

Increasingly markets are signaling demand for differentiated products. Differentiation
can happen at the product level through product attributes for which we can test.
However, there are things like “credence attributes” or “process attributes” that relate to
the process by which the products are produced. These too are value factors and can
often only be measured through certified and auditable systems that accredit the process.

U.S. agriculture is dominantly geared to mass movement of undifferentiated
commodities. Blend and Send. Price trends for this sort of production point consistently
down, which serves to drive consolidation and increased production of mass
commodities. The embedded costs of current infrastructure are substantial and constrain
change to a more dynamic segregated system. Therefore the current systems remain out
of step with markets that are increasingly segmented.

Some movement to these certified processes has begun in the U.S. but we tend to lag
other countries. For example, Australia has developed a system called Cattle Care which
links all the major aspects of a beef production supply chain to gain process control for
traceability, food safety, residues, animal welfare and environment. This is a modular
system built on ISO 9000 principles and being applied industry wide. No such system
exists in U.S. beef production. The Australian cotton industry is adopting ISO 14000
environmental management systems to adequately manage an industry that can have
collateral impacts on food supply chains due to residues. All of this is a competitive
concern for the corn industry. Where does the corn go, after all?

The EU has substantial traceability applied to production supply chains with national ID
programs and documentation requirements. The EU has defined traceability and the
U.S. is still arguing the matter to the extent that the National Corn Growers don’t want
me to say traceability out loud. Canada has implemented systems that are gaining
markets in grain and meat. Companies such as Cargill in Brazil have applied ISO 9000
certification widely but most interesting is its use in port loading facilities such as Santos.
Managing shipment of soy to the EU has become more critical for this company with the
ban on GM soybeans. Cargill apparently saw process control as an important investment.

Linked supply chains are not the normal way of thinking in U.S. agriculture and food
systems. Historically, even though our systems really are supply chains, they tend to
operate more as isolated links with adversarial handoffs, trading very little information.
Such information could improve efficiency and support end product differentiation.
Beef, pork, corn, soybeans, etc. are all production/processing supply chains that have
operated with the classic “island mentality.”

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INDUSTRY IMPLICATIONS

The corn industry supplies meat production, food ingredient production and industrial
products. Even the industrial products result in co-products that go mainly into livestock
feed. The industry will need to operate with a “food” production mindset, throughout the
supply chain. Traceability must be perfected and standardized. Process management
must be standardized and implemented.

This will require the following changes in behavior by shippers and processors :

1) Better information flow back to producers and plant genetics companies
2) Substantial movement to contracted supplies with specifications applied
3) Demand process management requirements for producers
4) Premiums/discounts relative to process management as well as product spec


WHAT’S NEEDED?

Shippers and processors can assume the lead in anticipating consumer value factors. To
achieve competitive efficiencies while controlling for product specs the company will
have to create efficient information systems that coordinate with the producer/suppliers
dynamically. A focus on “Information Communication Technology” at the supply chain
level may offer a competitive advantage to leading companies. Those companies that opt
out will tend to suffer from higher transaction cost, risk of failings, reduced ability to
continually improve outcomes and ultimately supplying a residual market.

The corn production sector needs clear market signals to make significant change. The
current supply system for corn needs to substantially link the segments for true process
control, traceability and transparency. The industry must become more responsive to the
markets, better manage the risk of failings and gain significant transaction efficiencies
that are necessary in a low margin industry. Access to markets will require the three
elements of process control, traceability and transparency.

Starlink demonstrated that a disconnected supply chain will fail at every opportunity and
the ability to contain the problem is limited or impossible. The next “event” is likely, the
only question is when and what.

Much has been made of the cost of changing the current shipping, storage and handling
systems for segregation. But, I would argue the primary change focus should be on
organization. By taking a true supply chain mentality to the problem one can see the
need is in information management and clear market signals.

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A SOLUTION

The international process standard is ISO 9000-2000. This standard is a quality
management system for establishing process control, maintaining a customer orientation
and achieving continual improvement. This latest iteration of the standard was adopted
in December 2000. It has evolved from a history of manufacturing standards such as Mil
Q 9858 and BS 5750. These were U.S and British standards respectively. Until this
revision was made, ISO 9000 was difficult to apply to Ag related businesses and was
viewed as inadequate for food safety issues. These complaints no longer apply. And,
since customer satisfaction must be measured for to be in compliance, a company can no
longer reasonably expect to produce bad quality and still maintain ISO certification.

Today, Iowa State University is a leading player in utilization of this advanced
management concept in production agriculture. We are currently implementing with
producer groups, feed milling companies and cooperative elevators. Interest was zero,
three years ago, but today it is burgeoning.

Over the past three years, the Center for Industrial Research and Service (CIRAS) at
Iowa State University, has studied the application of quality management systems to
agriculture. We’ve observed how these ideas have worked/not worked in the E.U.
We’ve looked at these systems applied to meat production in Australia and New Zealand.
We’ve also looked at these systems in South America. By applying these studies to
application of quality management systems in the U.S. agriculture arena, we are trying to
offer a refined knowledge that can build on the mistakes and successes of others around
the globe. We have established training and education materials to support
implementation of ISO for Ag.

CIRAS has a decade of experience with the ISO 9000 quality management system
standard. Most of this experience is with manufacturing clients, many of whom are
suppliers to larger entities such as Ford, John Deere or Rockwell. The behavior of
manufacturing supply chains is different than agriculture for many reasons, but the issues
are the same. The customer needs for quality must be expressed throughout the supply
chain. There must be process control to meet those specifications. Sufficient
transparency must exist to achieve these ends. Continual improvement of value must be
achieved through improvement in productivity and improvement to the actual product
quality.


A PROCESS APPROACH

ISO 9000-2000 is a systematic way to manage all the processes that link together to
generate product or service. Each aspect of a business is analyzed as a process model.
This analysis establishes procedures, documentation and records necessary for true
process control. A simple diagram is shown below:

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P r o c e s s M o d e l
Resources
Inputs
Process
Output
Inputs
Controls

The ISO 9000-2000 system can be characterized with the continual improvement model
shown in the following diagram. The four key elements of the Quality Management
System are shown in the center circle. The customer brackets the whole process.
Emphasis is placed on total company involvement. The basic “Plan, Do, Check, Act”
principles are embedded. Customer satisfaction must be measured. Continual
improvement must be demonstrated.

Continual Improvement of the
Quality Management System
C
R
S
Management
C
E
A
Responsibility
U
T
U
Q
S
U
I
S
I
S
Resource
Measurement,
T
F
T
R
Management
Analysis,
O
E
A
Improvement
O
M
C
M
E
T
M
E
N
I
E
Product
T
O
R
Realization
S
N
R
Product


An example of the basic top- level flow chart of a total supply chain is shown below. This
model demonstrates the linkage and flow of the total chain with numbered callouts that
would link to high level critical control points.

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Top Level Process Flow Chart
Genetics/Seed
1 Seed Purchase
3
Crop
4 Harvest
Production
2
Planting
Growth
On-Farm Storage
5
10
6
9
Food
Processor
Company
7 Local Elevator
Terminal
8 Elevator
11 Transportation
Identity Preserved System
Segregated System
Bulk System
Numbers are critical control points

The chart below shows a normal top- level flow diagram for a grain farming operation.
This chart demonstrates the flow and linkages between activities, controls and records
that support a Quality Management System such as ISO 9000-2000. Management review
is referenced. Each functional area links to next levels of documentation. The ISU Crop
Management Database program can support the record keeping.

P r o c e s s F l o w C h a r t
I S O 9 0 0 1 -2 0 0 0 Q u a l i t y S y s t e m M a n u a l Q M -1 ©
R e v : A
O r i g i n a t o r : Q u a l i t y A s s u r a n c e
P a g e _ _ _ o f _ _ _
M a n a g e m e n t R e v i e w
M e e t i n g s
P r e /
P r e /
P r e /
Pre/
P o s t
P o s t
P o s t
P o s t
L e v e l O n e
P r o c e s s e s
Crop
S e e d
G r o w i n g
P l a n t i n g
H a r v e s t
S t o r a g e
P l a n n i n g
p u r c h .
C r o p
link
Transportation
link
link
link
l i n k
link
l i n k
L e v e l T w o
Operating
P r o c e d u r e s
T r a n s &
D e l
Planning
S e e d P u r c h
Planting
Crop
H a r v e s t
O n F a r m
P r o c e d u r e s
P r o c e d u r e s
P r o c e d u r e s
M o n i t o r i n g
P r o c e s s
S t o r a g e
M a r k e t
L e v e l T h r e e W o r k
Instructions
W I
W I
W I
W I
W I
W I
W I
L e v e l F o u r
R e c o r d s
R e c o r d s
R e c o r d s
R e c o r d s
R e c o r d s
R e c o r d s
R e c o r d s
R e c o r d s
Master Records List
( F o r m R 1 )

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CONCLUSION

Quality management systems offer a way to manage for the market. A QMS can help a
business manage for risk. Under such a system you identify all requirements either
regulatory, legal or customer, and manage for these requirements as efficiently as
possible. The application of these methods on an industry wide basis may offer some
salvation for U.S. agriculture in the future. The price trend is down, the competition level
is up and costs are the only thing the industry can manage for its own account. The U.S.
corn industry is highly subsidized and marginally profitable. All things being equal the
application of quality management systems with a true supply chain orientation offers an
offensive strategy that is long overdue.


CHALLENGE POIN TS

What level of crisis will it take for ag industry to clean up its act?
What will the marketplace pay for traceability and quality assurance?
What levels of sophistication are needed to adequately document for traceability?
What is the balance of regula tory and private industry response necessary to standardize
process control and traceability in this industry?
Will traceability be defined in the U.S. or will we continue to argue the concept?
Is there a failure of the marketplace to signal and motivate change?
How much time do you think we have to get this right?

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