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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(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://digital.hbs.edu/platform-digit/submission/monsanto-climate-corp-big-data-transforming-the-agriculture-industry/