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Department of Agriculture and Food Systems
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Agribusiness Perspectives Papers 1997/98Paper 2 Sanchoku - Supply Chain Management in Japanese Consumer Co-operatives* Ada, R., Kawasaki, H., & Doolan, R. * Rick Ada is the Principal Agricultural Economist with the Department of Primary Industries, Toowoomba, Queensland. Hiroto Kawasaki works for the Iwate Consumers' Co-operative, Morioka, Iwate. Robert Doolan is a Senior Trade Officer with the Department of Economic Development and Trade, Queensland. This paper is based on research conducted by the Queensland Department of Primary Industries and was partially funded by the Rural Industries Research and Development Corporation. For more details see, 'Japanese Consumer Co-operatives and Direct Transactions - Sanchoku' (1997) by Ada, R. & Kawasaki, H., Department of Primary Industries, Queensland. IntroductionThe Japanese Consumer Co-operative Movement is among the largest consumer buying groups in the world. . With more than 19 million members, a 2.7% share of the Japanese retail market and a 7% share of the Japanese food market, the co-ops are the largest retail group in Japan. Based on co-operative philosophies and democratic management principles, the Japanese consumer co-ops have developed a number of unique characteristics and methods of operation, such as the joint buying (Han) groups, Co-op Brand products and a number of consumer movements. These features, including sanchoku, have given the co-ops a special place in the distribution industry in Japan and assisted in their rapid growth. Sanchoku or direct delivery (direct transactions) has become an important competitive feature for Japan's consumer co-operatives. Whilst it is similar in many ways with direct supply contracts developed between commercial supermarkets and agricultural producers, sanchoku has developed a number of unique characteristics which bring consumers and producers together. Begun as a means of reducing the transactional costs between agricultural producers and consumers, sanchoku has become a mainstay of the consumer co-operative movement for the supply of fresh foods including fish, fruit and vegetables, beef and pork. Traditionally only used in developing relationships with Japanese producers, sanchoku is now being extended to international suppliers as the co-operatives seek safe, good quality food products from around the world. In this paper, we aim to:
The Japanese Consumer Co-operative MovementThe Japanese Consumer Co-operative movement is the largest consumer organisation in Japan. In the year ending March 1997 the 646 co-ops/** in the JCCU jointly turned over in excess of ¥3 375 347 million (about $US30 billion) through their membership of 19.2 million (JCCU 1997).*** In the same year the co-ops were responsible for around 2.7 per cent of total Japanese retail sales, compared with 1.6 per cent in 1982. **The individual consumer co-ops are autonomous bodies with their own management structure and rules. The national coordinating body for the co-ops is the Japanese Consumers' Co-operative Union (JCCU), which was established in 1951. The majority of consumer co-ops are members. ***According to Akira Uchidate, Executive Director of JCCU. Some families are members of regional co-ops and medical co-ops or two regional co-ops. There are no accurate data on the actual number of member households. Over the last 15 years, total Co-op membership has more than doubled and the gross turnover has almost tripled. (Figure 1) Despite strong competition from other retailers, the co-ops continue to grow. Now there are some 19 million co-op members representing an estimated 10 million of the 44 million households in Japan. By comparison, there are around 8 million trade union (Rengo) members and around 5 million members of agricultural co-ops (AC's). In some communities almost all the households are members of the regional consumers' co-op. The giant Co-op Kobe has more than 1.2 million members from the 1.8 million households in its region. Figure 1: Japanese Co-ops' Total Turnover, 1982 - 1997 (¥ billion) Source: JCCU (1997) The Japanese consumer co-operative movement has a history dating back to the 19th century, but it has risen to prominence mainly since the early 1980's. The first Japanese consumer co-op was established in 1898 and the number has grown dramatically, particularly during the period following World War II. The Japanese co-ops have developed and grown following the basic principles of the original English Rochedale Co-op. In 1844 a group of 28 weavers, today known as the 'Rochedale Pioneers', started a shop in the small town of Rochedale in England. This group are attributed with the origin of the co-op philosophy (Ross and Langdon 1985, p. 3). The 646 consumer co-op societies in Japan supply a wide range of services to their members including insurance, medical services and housing and include many different types of co-ops. The largest group is the regional co-ops which generate more than 80% of the total ¥3,375 billion annual turnover. These co-operatives operate 1 378 retail outlets throughout regional Japan and primarily supply members with food and other household goods. Over recent years the number of outlets has decreased as the co-ops have increased the number of large stores (over 3000m2), whilst scrapping their smaller stores.(Oguma, 1997) The products carried by the regional co-ops range from highly perishable foods to packaged holiday tours. The emphasis, however, is on the fresh food products. Some 69 per cent of total turnover are food sales, 46 per cent of which is fresh foods. (Figure 2) Around 20 per cent of this fresh food is obtained through direct transactions (sanchoku) with producers, often bypassing wholesale markets. Over 50 per cent of this direct transaction business is conducted with agricultural and fishery co-ops. Figure 2: Co-op retail sales by product type [Source: JCCU (1997)] Around 45% per cent of total regional co-op sales are delivered directly to consumers' doors with the orders being organised through small local community buying groups known as Han (Joint Buying System). Using the joint buying system, members living in the same neighbourhood from a Han which places orders weekly using a catalogue, for delivery in the following week. This system does not involve the large investment required for stores and is seen by many members as very convenient, saving shopping time and contributing to a better household economy through planned purchases of essential household items. Joint buying is at the core of the co-op structure and is widely believed by members to provide a fresher, healthier product. In a country where much of the produce is eaten raw, freshness is a key criterion in the selection of food. Another important feature of the joint buying system is that it provides a weekly meeting for the members, who are mainly women. In the words of the JCCU, joint buying 'fosters and strengthens the spirit of mutual sharing and caring among members' (JCCU 1994). It also provides a powerful feedback mechanism to the co-op, something that must be more deliberately orchestrated where stores are the only options for members. The Han system is efficient and effective, and has been enhanced by the advent of optical character readers and computerisation to handle the weekly order forms and direct debit payment from members' bank accounts. The Han are an original idea of the Japanese co-op movement; one which has become highly developed and played a key role in the growth of the Japanese consumer co-ops. The philosophies of the co-op movement have been an important factor in its development and growth. Unlike other large retail organisations, the consumer co-ops have not set profit maximisation as the primary goal. The philosophies of the co-ops feature democratic management and a desire to further human welfare through peace and democracy, fairness and social justice, freedom and voluntary participation and social and economic liberalisation. It is from this philosophical base, that the sanchoku system has developed. Sanchoku is not well known overseas to date; however it has grown in status over time and is now recognised by co-op staff as 'not only important in the perishable food operations but also the traction engine to rapidly develop the co-ops' (Nakajima 1995, p. 35). Sanchoku - Direct Relationships between consumers and ProducersSanchoku is a movement and co-op business created by co-operation between consumers and producers, to achieve a stable supply of safe, high quality product at a stable and reasonable price. This movement was initiated by the co-ops to overcome the dominance of the public wholesale market in the perishable food distribution system and the control of the processed food distribution system by major food companies. To achieve this outcome, the movement encourages the development of regional agriculture and industry, and promotes sustainable agriculture whilst reforming the distribution system. A clear aim is to 'support the production of local farmers, keep food costs down, and make sure food is safe to eat'. (JCCU, 1996b) Sanchoku (often translated as 'direct transaction') is the supply of fresh food products (mainly meat, fish, fruit and vegetables), directly from producers or agricultural organisations (such as farmer and fishery co-ops) to consumer co-ops, usually without the intervention of wholesalers, markets or other 'middlemen'. Whilst the concept of direct delivery is not unusual and is a feature used by many large commercial retailers, there are a number of conditions applied to sanchoku in the Japanese consumer co-ops which make it unique. There are three basic principles applied to sanchoku:
Information exchange takes place in both direct and indirect ways. For consumers distant from the production centres direct contact is more difficult; however, they are encouraged to write to producers making comments on the products and suggestions for improvements. The consumer co-ops also organise trips for members so they can inspect the places of production. Consumers not only comment on products but also provide encouragement and assistance to producers. Other forms of communication used include visits by producers to co-op stores, where they can discuss issues directly with their customers; newsletter articles for co-op members in co-op publications; indirect feedback from members, through visits by co-op staff to producers; and direct contact with producers by mail or telephone. The aims of this communication are not only to provide feedback on products but also to reduce the widening gap in understanding between city and rural people. The rural areas are the source of much of Japan's cultural heritage and visits to these areas give city-based co-op members the opportunity to revisit their cultural roots. Sanchoku incorporates social and environmental elements in addition to the commercial supply chain issues. Commercially, sanchoku provides the co-ops with a source of fresh, 'safe' food with some savings in the distribution costs and, importantly, a market image, as a retailer of 'safe' foods. Socially, sanchoku is seen as supporting Japanese agriculture, both regionally and nationally. This is particularly important in view of co-op members' desire to improve Japan's self-sufficiency in food. Currently at 42% on a calorie basis. (JCCU 1994). Also, sanchoku provides the opportunity for members to spend time in the country enjoying nature and studying traditional culture. In his 1994 report on sanchoku, Suhara described it as: 'Firstly - a movement of the consumer co-ops and consumer groups who, through concern for regional economic development and agricultural costs and food safety, directly co-operate with producers; operate contracted cultivation with producers; and challenge to solve the above problems. Secondly - in the present society where the trend is to split consumers and producers, and consumers are becoming stronger - a means to strengthen the links between producers and consumers.' (Suhara 1994) History of sanchokuSanchoku was used by consumer co-op for many years without any formal structure or recognition. In the case of some co-ops, sanchoku has been a feature of their operations since their establishment. For example, Co-op Kobe, which was established in 1921, adopted sanchoku from the beginning in order to supply cheaper and better goods to its members. It is now the largest retail co-op in the world and has continued to strengthen its relationships with growers and to develop its sanchoku operations. Individual co-ops developed their own forms of sanchoku, but it was not until the second half of the 1970s that the co-op movement formally recognised sanchoku and saw it as a means of co-op development. Initially it was seen as a means of bypassing the wholesale market system. At this time there were few members in the co-ops and the primary motivation for sanchoku was to save the costs associated with transport and handling through the markets; and to obtain fresher, unadulterated products. Direct delivery of fresh produce, particularly for the regional co-ops, could reduce delivery time from farm to consumer by avoiding the process of transport from farm to central market and then back to the region, hence improving the freshness of product supplied to members whilst reducing the delivery costs. The supply chainFigure 3 illustrates the distribution system used by the retail co-ops. For most products, producers, manufacturers and other suppliers provide the goods to the main distribution centre, where they are repacked for supply directly to stores or to district distribution centres. The district distribution centres then organise the supply of orders to the Han groups. In the case of fresh produce, the bulk of the product is delivered directly to the stores or to the joint buying system distribution centres. Sanchoku products are delivered from the producer to the consumer through the distribution system using three methods:
The choice of system used by producers depends on their distance from the distribution centre and the time schedule for delivery from the distribution centre or public wholesale market. Supply through the wholesale market can be very cost efficient for co-ops, especially for low volume products. The wholesale agent sorts the supply of sanchoku and non-sanchoku products by stores and joint buying centre, for direct delivery by truck. The aim is to get the products from producer to consumer, within 24 hours. Selection of producersProducers supplying sanchoku products are selected directly by the co-op buying staff or by the agricultural or fisheries co-op with which the co-op writes a contract. For example the Nishiwaga AC in Iwate Prefecture, and the Iwate Consumers' Co-op have a contract for delivery of vegetables. The Nishiwaga Agricultural Co-op selects the producers and manages the sanchoku orders, providing advice to producers on suitable production methods and collating orders to meet Iwate Consumer Co-ops' needs. Iwate Consumers Co-op negotiates price and delivery arrangements with the AC in conjunction with the producers. In addition to the service contract with the AC, each individual producer is also contracted to the consumers' co-op, with conditions set for quality and methods of production.
One of the greatest difficulties in managing sanchoku contracts is over- and under-supply of product primarily caused by fluctuations in seasonal conditions. To address these issues, sanchoku contracts are made as flexible as possible. Co-ops have developed a number of strategies to minimise the impact of this problem on their members. The co-ops give first preference to Han members for the supply of sanchoku products. If any additional product is available it will then be sold through the co-op stores. Thus the co-op stores provide a buffer when demand from Han members is exceeded by supply. If they are unable to cope with the excess in this fashion, it is sold through the stores at reduced prices. One of the recent sanchoku initiatives is the development of joint processing centres between consumer co-ops and AC's, to better manage supply. These centres can manipulate the supply of sanchoku product, using the public wholesale markets and other co-ops to handle surpluses. If producers are unable to supply the contracted quantity, the co-ops must obtain supplies from other co-ops. The co-op will explain the change to their members. Selection of sanchoku productsDecisions on merchandising policy and selection of sanchoku and Co-op Brand products are made by co-op members. Members expect the provision of a stable supply of safe and reliable products to be the first priority for the co-op and through their participation in decision-making they ensure that the co-op adheres to the wishes of their members. Faced with tough competition in the distribution industry, decreasing self-sufficiency in foods and ever-increasing food imports, the co-ops regard the merchandise activities as the pillar of co-op activities, and member participation in it as an important part of operational management. Constraints on sanchokuSanchoku began, was developed, and is maintained by the enthusiasm and strength of the relationship between consumers and producers. Nevertheless, a number of constraints on this activity have been encountered and identified in national surveys. JCCU have conducted national surveys of sanchoku in the regional co-ops every five years since 1982. Most notably these include impediments to increasing the supply and range of products; problems with setting prices; larger co-op stores leading to greater dependence on the public wholesale markets; and revaluation of the yen making imported products much cheaper than Japanese products. The Future for SanchokuThe greatest problem facing co-ops with sanchoku is consistent supply of good quality safe product. With only 20% of fresh produce supplied to the regional co-ops by this method, there is considerable room for expansion. However, Japan has an ageing farming population and a steady decline in agricultural production which is restricting its ability to increase agricultural production. Post-harvest handling methods and farm-to-market transport in exporting countries have improved markedly, making it possible to land fresh products in Japan which can match the local products for taste and freshness (for example, broccoli and asparagus from Australia). Exporters and Japanese importers are working together to improve the quality of imported products for Japanese consumers which is placing greater pressure on local production. However, the Japanese co-operatives are strongly committed to the principles of sanchoku and support for Japanese agriculture. This form of supply chain management has given the co-ops a competitive advantage at a time when retail competition has never been stronger in Japan. The co-ops have been able to offer their members locally produced fresh produce which is 'low chemical' and produced according to the co-ops' specifications. Other retailers have seen the advantages and established sanchoku arrangements of their own. To meet this challenge and the challenges of increasing imports, the co-ops have had to change their sanchoku policies and look to new types of sanchoku relationships. Some of the changes have included;
Other measures also being adopted to promote sanchoku products include improved systems to check the quality and safety of produce; setting new standards for production (including national standards) and further promotion of sanchoku to members. (Matsumura, 1997) International sanchokuUnder the current definition used by most co-ops, products given the sanchoku label must be produced in Japan. However contracts similar in nature to sanchoku can, and have been, established with international producers. Currently the co-ops have contracts for products such as bananas, pumpkins, lemons, salmon, and bamboo with producers in the US, Canada, Australia, New Zealand, China and the Philippines. These contracts specify the production methods, chemical use and quality standards meeting most of the conditions set for sanchoku producers. Given the pressure of the rising value of the yen, the difficulties in obtaining product from within Japan and the need to meet members' requirements for safe, quality foods, it is difficult to imagine that this aspect of sanchoku will not grow in the near future. With co-ops having to meet the shortfalls in sanchoku supply from the public wholesale markets, which cannot guarantee the safety or freshness of the product, nor, in many cases, identify its source, international sanchoku contracts offer a clear alternative. According to an in-market survey conducted by QDPI in 1997 of the nine largest consumer co-operatives, the rate of usage of imported products by the co-ops is around 5 to 10% for vegetables and 10 to 20% for fruit. Currently most imported produce is obtained through the wholesale markets or from the importer/trading companies. There is clearly considerable scope for both domestic and international producers and the co-ops to further develop close linkages across the supply chain using the principles of sanchoku. International sanchoku poses some difficulties for the co-operatives in having to deal across national and cultural boundaries. The most important of these are ensuring the safety of the products; establishing regular exchanges between producers and consumers and minimising competition with domestic producers. To overcome these difficulties, some of the co-ops have established guidelines for imported products which include
These guidelines have been important in reassuring co-op members of the safety of the imported sanchoku products. In addition, the imported products are clearly identified in co-op stores and in joint buying brochures, with information provided to consumers on the methods of production and the testing procedures used by the co-ops. SummaryThe Japanese consumer co-operatives, the largest group of food retailers in Japan, have developed a unique and interesting form of supply chain management they call sanchoku, to ensure a supply of safe fresh food products for their members. Sanchoku or direct transactions has become an important part of the co-operatives' marketing strategy and assisted in their growth and development. Co-ops have identified sanchoku as one of the keys to their continued growth and ability to compete against the other supermarket companies. Combined with direct sales to members through the Han groups, sanchoku provides a means of direct communication between consumers and producers and controlling product quality, particularly safety. The key features of sanchoku are that the name of the producer; the place of production and the methods of production must be known by the consumer. The co-operatives see the primary advantages of sanchoku being product safety, freshness, stable supply, communication between consumer and producer and providing assistance to Japanese agriculture. From the producers' viewpoint, sanchoku enables direct feedback from the consumers; more stable pricing and promotion of their products to consumers. Consumer co-operatives are continuing to expand their use of sanchoku with domestic suppliers however the declining agricultural base in Japan and competition from other imported products is encouraging the co-operatives to also look for suitable suppliers in exporting countries. There is considerable scope for expansion of this form of supply chain management as only 20% of fresh food products are currently supplied to the co-ops via sanchoku. ReferencesAda, R. & Kawasaki, H (1997) Japanese Consumer Co-operatives and Direct Transactions Sanchoku Queensland Department of Primary Industries, Brisbane, Australia. JCCU (1994), Co-op For a Better Tomorrow, Japanese Consumers Co-operative Union, Tokyo. JCCU (1996a), Co-op Facts and Figures 1995 (April 1995 to March 1996), Japanese Consumers Co-operative Union, Tokyo. JCCU (1996b), Japan's Co-operatives Direct Transactions with Farmers. Co-op Japan Information No. 25, June 1996. Japanese Consumers Co-operative Union, Tokyo JCCU (1997), Co-op Facts and Figures 1996 (April 1996 to March 1997), Japanese Consumers Co-operative Union, Tokyo. Oguma, Takehiko (1997) Changing to Serious Management of Japanese Co-ops Address to the Co-op Workers Conference, Hotel Aishin, Shizukuishi, Iwate, Japan. November 7, 1997 (in Japanese) Matsumura, T. (1996) The Future of Co-op Sanchoku in 'Co-op Sanchoku for 18.6 Million Co-op Members'. Japanese Consumers Co-operative Union, Tokyo July, 1996 (in Japanese) Nakajima, N. (1995), 'Steps and remaining issues in Co-op sanchoku' from Co-op Sanchoku Seminar, February, JCCU, Tokyo. Ross, D.K. & Langdon, D. (1985), 'Business as Usual: Consumer Co-operatives in England', Making Change? Learning from Europe's Consumer Co-operatives, The Ralph Nader Task Force on European Co-operatives, Center for Study of Responsive Law, Washington D.C. Suhara, K. (1994), Co-op Sanchoku in Japan, Food Program Section, Business Planning Office, Japanese Consumers Co-operative, Tokyo (unpublished monograph). Further ReadingFurther informtion on sanchoku and the Japanese Consumer Co-operatives is available from the following sources: Ada, R. & Pullar, S. (1996) "Japanese Consumer Co-operatives" Marketing Research Snapshot. Queensland Department of Primary Industries, December. Ada, R. (1997) "The Market for Horticultural Products in Japanese Consumer Co-operatives" Marketing Research Snapshot. Queensland Department of Primary Industries, July 1997. Nomura, H. (1993) "SEIKYO - A Comprehensive Analysis of Consumer Co-operatives in Japan" Otsuki Shoten Publishers, Tokyo, Japan. QDPI (1997) "Japanese Consumer and Agricultural Co-operatives: A Japanese Perspective on Contracting Opportunities". Queensland Department of Primary Industries, Brisbane. July. Reithmuller, P. (1994) "Consumer Co-operatives: A Neglected Part of the Japanese Distribution Industry", Review of Marketing and Agricultural Economics, Vol. 62, No.3, December. The Japanese Consumer Co-operatives Union website: http://www.co-op.or.jp/jccu/internat/coop-e01.htm |
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