Commodity Chain Analysis

Author: Dr. Jean-Paul Rodrigue

1. The Structure of Commodity Chains

Commodity chains reveal much about the global structure of production, the global economy and thus represent a notable field of investigation that has yet to be fully considered by transport geographers (see commodity chains). Understanding the significance of commodity chains requires a comprehensive approach since they include much more than a simple transport consideration; a multitude of activities are involved.

Commodity chain analysis. The identification of the actors and processes that contribute to the origination of a product that is consumed by a market, such as raw materials, produces or consumption goods. Thus, a commodity chain includes a sequence of operations ranging from the extraction of raw materials, the assembly of intermediate goods, to the distribution to consumption markets. Commodity chain analysis can also consider only a specific segment related to a single product (or group of products).

The analysis of such a complex chain of agents and processes considers several perspectives:

• Transactional perspective: Identification of the flows and of the transactions that create them. This particularly concerns the decision making process in the establishment and management of commodity chains.
• Comparative perspective: Assess the relative competitiveness of the elements of the commodity chains in terms of added value.
• Functional perspective: Identify the physical processes involved in the circulation of goods, including the capacity constraints in distribution, namely modal, intermodal and terminal effectiveness.

The analysis of commodity chains, depending on the perspective, can consider several factors:

• Origin and destination. A basic issue of supply and demand which reveals comparative advantages, locational preferences and market size. A commodity chain is commonly organized as a sequence of origin / destination pairs until a destination is considered to be the location of final consumption. For complex products, a multitude of origins, intermediary stages and destinations imply the concept of global commodity chains. Intermediary locations where activities such as warehousing need also to be considered.
• Cost function. Evaluates the costs incurred to the set of activities taking place along the commodity chain such as procurement costs, manufacturing costs, distribution costs and retailing costs.
• Load unit. Considers how the material flows in the commodity chain are circulating, often related to how fragile, perishable (see the Cold Chain) or valuable a product is. It is more than simply an issue of containerization, but also in which way the containerized load unit is used.
• Modal and intermodal use. A matter of the nature of the transport chains used to accommodate the commodity chains in terms of modes, terminals and freight forwarders.
• Regulation and ownership. The set of rules and regulations related to the circulation of goods within the commodity chain, including compliance. Also considers the nature and the level of control shipping companies have over the commodity chains they use through agreements, mergers and alliances.
• Distribution channel. Relationships with logistical service providers, particularly with manufacturers and retailers. In many cases, distribution activities are subcontracted.
• Added value. The consideration of which parts of the commodity chain contributes the most to added value. This is an important strategic goal as added value is linked with profit margins. The organization of commodity chain thus seeks to increase added value through locational and organizational strategies.

2. The China Connection

China has become a crucial element in the emergence of global commodity chains. After more than 20 years of export oriented industrialization, China has captured a whole range of manufacturing activities, from the most simple and labor intensive to those with a growing level of sophistication. The footwear commodity chain is a notable example of a mature industry heavily dependent on low production costs and efficient distribution channels. Products tend to be relatively simple and success is commonly based on design, brand name and costs. It is thus a manufacturing sector that has achieved a high level of fragmentation due to globalization. From modest beginnings in the 1980s, footwear manufacturing has boomed in China, which now accounts for about 50% the world's shoe production. A brief commodity chain analysis reveals for this sector the following:

• Origin and destination. The Pearl River Delta has become one of the most intensive manufacturing clusters in the world, the outcome of more than two decades of foreign investments (from the mid 1980s), initially in special economic zones like Shenzhen. Mainly due to poor inland transportation, most of the manufacturing activities are clustered in the delta along main road corridors and close to port facilities. The production is exported to the rest of the world. In particular, 95% of the shoes sold in the United States are manufactured in China, which in itself represents a significant commodity chain. The nature of production commonly reveals a "platform" structure where large fashion companies (American, European and Japanese) controlling brand names are subcontracting their production. In many cases, a brand name designer is directly interacting with a retailer.
• Cost function. A typical cost structure in shoe manufacturing reveals that because of the low Chinese labor costs, labor became a marginal component of the production costs. Transport costs are low because of a significant value (at retail)-to-volume ratio. There are however significant pressures on the cost structure particularly due to rising energy prices. The most important costs are actually related to retailing and marketing, underlining the level of maturity this industry has achieved.
• Load unit. The typical factory output is a completed product including the wrapping and packaging (often including the price tag), ready to be put on a store shelf. Orders are placed on pallets, which are then assembled in container loads. A growing trend to maximize the usage of the container unit is to forego the usage of pallets at the expense of additional loading and unloading costs. The products are put on pallets close to their destination. The load units are containerized but the assembly can include a variety of goods bound for the same distribution center, particularly if the retailer is diversified. At the distribution center, these loads will be broken down, often in LTL bound to specific retailing stores.
• Modal and intermodal use. Since the export market is global, the commodity chain involves a variety of modes. The first step is commonly truck deliveries at a distribution center where loads are assembled in containers. Those containers are then delivered to a port facility. Since the shoe commodity chain is globally oriented with a multitude of markets being serviced by a fairly centralized production structure, a set of complex activities are performed at the port. A particular problem is linked with containerized trade imbalances and the loading of containerships considering that each services different markets and has a set of port calls. In 2004, about 160,000 TEUs of containers carrying shoes were imported in the United States through west coast ports. Then, the inland freight distribution system carries these containers to their destinations.
• Regulation and ownership. This commodity chain takes place in a context where the global apparel industry operates in a free trade environment. Since shoes are simple and labor intensive products, few countries maintain duties for this type of product, which can circulate with relative ease from a regulatory perspective. The ownership of global commodity chains is increasingly concentrated since many international logistics providers have vested interests in physical distribution activities, notably in distribution centers.
• Distribution channel. In the case of shoe manufacturing in China, like many manufacturing activities, locational issues are simple as manufacturers choose sites close to port facilities. The challenge resides in the distribution of shoe production to a multitude of customers in a multitude of countries. Many logistics and distribution firms (3PL) have started offering comprehensive freight services in China, particularly around its export oriented zones. There is thus a setting of more efficient distribution channels within China, which helps cope with the surge of exports.
• Added value. It is typical in this commodity chain that the designer and the retailer capture the great majority of the added value (25% and 50% respectively).

The sequence provided here has focused more specifically on the transportation and distribution aspects of the commodity chain. It reveals a globalized and fragmented industry seeking to extract as much added value as possible from a mature product being the object of intense competition for its production and retailing.