Total quality management of the PDO Prosciutto San Daniele

Franco Rosa1

1 University of Udine - Department of Agricultural and Food Economics, Italy

franco.rosa@uniud.it

Contribution appeared in Sylvander, B., Barjolle, D. and Arfini, F. (1999) (Eds.) “The

Socio-Economics of Origin Labelled Products: Spatial, Institutional and Co-ordination

Aspects”, proceedings of the 67th EAAE Seminar, pp. 36 - 49

October 28-30, 1999

Le Mans, France

Copyright 1997 by Rosa. All rights reserved. Readers may make verbatim copies of this

document for non-commercial purposes by any means, provided that this copyright notice

appears on all such copies.

Total quality management of the PDQ Prosciutto San Daniele

Franco ROSA

University of Udine - Deparlment of Agricultural and Food Economics, Italy

Abstract

A product is a bundle of internal-external attributes concurring to satisfy the consumer's physiological and psychological needs, these last ones growing in the ranking of consumer's preferences for the higher education and better income achieved in the present socio-economic environment. The progresses occurred in the food industry and strategies of the distribution may have affected the perceptions about food products, affecting the preference order. For typical products the question is if they are still appreciated for their intrinsic quality or better perceived for the intangible values of tradition, artisan style, cultural, historical or ethnological values, geographic location and others. Social and cultural changes may have affected the consumer's preferences for safety, hygienic, nutritional, dietetic attributes, achieved by standardised processing of industrial technologies, while the more pragmatic way of living could have increased the cost opportunity for food preparations. However, the growth of San Daniele ham demand shows that, despite these changes in life style and convergence toward the international "fast food "stereotypes, the search for quality of typical food is growing and segmented markets are possible when producers are committed to produce quality and better chain organisation can combine the original product quality with processing technologies and market strategies to improve the consumer perception for typical products.

Keywords : typical products, total quality management, principal-agent

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INTRODUCTION

San Daniele is a nice countryside resort in the region Friuli Venezia Giulia (F. V. G.) and is the brand of the appreciated ham Prosciutto San Daniele. The market success of this brand, the regulations about typical products, the need to offer to the consumer a product with higher standards of quality, maintaining at the same time some traditional manufacturing, has required to approach the problem, by introducing the Total Quality Management (TOM) applied to the San Daniele Ham chain to sequentially co-ordinate the all functions performed by units operating at production, processing and seasoning stages, to stimulate the participants to cooperate at different levels of the chain and to educate the consumer to appreciate the quality of typical regional product.

For the success of the chain, it is required to extend the control of the all functions : physical (production and processing), facilitating and exchange, performed at the production, processing and trading by introducing a centralised management. In this decisional contest, it is possible that objectives, information, costs and returns, could not equally shared among participants ; the consensus for the central management will likely depends on the ability to share profit and responsibilities among participants.

This has suggested considering the following points for our research :

i) To define the functions performed at different levels of the chain ;

ii) To decide who can play the role of central management by attributing task and responsibilities to participants and collecting technical and economic information relevant for decision making, through the all steps of the vertical chain ;

iii) To define the terms of contractual relations among agents, and arbitraging the eventual controversies.

1. THREE CONCEPTS OF QUALITY: INTRIN· SIC, EXTRINSIC AND CREDENCE QUALITY

The quality of typical product has a fundamental role to induce the consumer to perceive the values of the typical product and determine to pay a premium price respect a corresponding product. The quality is also important at industrial level for structuring inter-firm

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relations through the chain. For Lancaster, if the market works efficiently, the quality value would be signalled by price. However, this is not the unique reference market signal because the price determination depends not only on the efficiency of the chain likely determined by the transactions performed at different market levels. Hence some quality conventions are needed, but the quality is a too general and rhetoric concept to be merely identified by a price even when the conditions of market efficiency hold.

Then, some definitions of quality are given with reference to specific targets :

i) A bundle of goods : properties and attributes of a given product or service suitable to fulfil explicit and implicit customer needs and preferences (a general purpose concept) ;

ii) The product fitness to perform a specific function (ad hoc definition) ;

iii) The conformity to technical specifications (minimum requisite for consumer acceptance).

Three other definitions of quality refer to the consumer ability to relate the perception of quality to attributes.

1) The intrinsic (objective) quality value is the sum of costs of separated market transactions for physical attributes. (Lancaster, 1971 ).

This is a measurable quality : the market price is usually a proxy of this quality ; however, it is valid for intermediate markets but it could be too restrictive for final consumption when the demand is also motivated by psychological needs.

The extrinsic quality (out of the product, perceived or exogenous quality) is perceived through sensations­emotions-feelings-impulse-attractiveness, stimulated by out of the product attributes, typically the form, shape, design, material, services. Historical, cultural and environmental values are also considered in this group The consumer's attention for these attributes is stimulated by marketing strategies, then the value of quality is the image linked to a brand/label or other out of the product suggestions. For these reasons the price paid for an extrinsic quality could widely fluctuate according to personal preferences (Monroe and Krishnan, 1985). The consumer surplus is captured with a price margin related to the perceptions.

TOTAL QUALITY MANAGEMENT OF THE PDQ PROSCIUTTO SAN DANIELE

The credence quality has been defined by Darby and Karni (1973) by affording the problem of frauds in foods.

The credence quality is not ascertained before or after the product use : for lack of tracing information the customer is unable to judge about quality, then he will trust the producer's claim for quality as the observance of non coded practices concerning the food preparation, animal welfare, animal nutrition, nature conservation, non use of genetic manipulated feeds, codified religious or moral habits that are out of observation (Becker, 1997).

These considerations suggest the quality, either evaluated objectively or perceived subjectively to generate different quality-price relations. Marketing studies have emphasised the importance of consumer's experience to rank the preferences according with quality attributes reducing the price dispersion. It can be assumed that the trained consumer will select the product price that best fit with his perception of quality. However, the information at different market levels are inherently different : at intermediate markets prevails an

appreciation of objective quality based on standards, while at distribution the quality value greatly depends on consumer education and personal preferences for benefits and values (Grunnert and Steenkamp).

Eymard-Duvernet has defined four generic forms of price co-ordination mechanisms for quality : domestic, industrial, civic and market. Domestic co-ordination occurs when uncertainty about quality is solved with trust i.e., long-term relations between agents or use of private brands, which improves the quality reputation. With the industrial co-ordination, quality is not defined by the agents themselves, but by a third party outside the market, which determines common norms or standards to be enforced to the agents.

In case of market co-ordination, it is assumed a sufficient amount of information about quality, so the market will reveal the related cost of transactions and prices can be assumed as unbiased indicators of quality value. Civic co-ordination occurs when there is a collective commitment to avoid conflicts. In the following table are reported these concepts.

Table 1 : Convention of quality and co-ordination mechanism

Alternative methods Definition of quality for recognising the quality

With uncertainty Without uncertainty

External Industrial Market (standards, norms) co-ordination co-ordination Internal Domestic Civic (trust, authority) co-ordination co-ordination Credence

The industrial market co-ordination deserves a special attention : the third party will enforce a set of rules set up by private agents and/or public institutions to define :

i) The type contractual arrangements ;

ii) The hierarchical organisation that will manage the relations with partners and share of benefits ;

iii) The set of rules as explicit norm of fabrication and standards.

Therefore, the analysis focuses on the way the transaction costs due to quality uncertainty could be reduced. The content of product specification, the

37

a priori belief

nature and genesis of third parties involved, the strategy of product differentiation or labelling and other empirical observations about quality, helping to decode these conventions. The convention theory suggests that quality conventions determine the structuring of the industrial relations. Far from being static or non-compe­titive, the convention belongs to the competitive process and has been widely used in the strategic management approach.

Convention theorists emphasise the hierarchical organisation that affect the degree of cooperation and acceptance of codified rules among the agents that are

F. ROSA

involved in a complex project. Divergent ( 1989) says that there is a similarity between Porter's strategic groups and the co-ordination model. The quality conventions represent a particular category of mobility barriers. Moreover, the convention theory approach shows that the definition of contracts cannot be under­stood merely at the microeconomic level, i.e. between two single parties and the convention is needed to regulate the production system, i.e. a typical regional production by setting the all steps of the production chain and giving specific indication to the production system.

2. THE TYPICAL SAN DANIELE HAM CHAIN

The Total Quality Management (TQM) approach is introduced to frame the typical San Daniele ham chain. The manufacturing procedures described in the "code of production" are a list of coded prescriptions to be translated into action to be performed through the chain working as an integrated production system to achieve an optimal quality and ensure its continuity.

A special attention deserves the seasoning stage considered the most crucial for producing the typical quality. The success in quality achievement will depend both on technical skills of seasoners and specific environmental factors that contribute to give to the product a special flavour.

The chain (with definition of the relations between the first suppliers, pig breeders and pig fatteners) operate as joint profit maximisation. This objective depends on the type of arrangements, co-ordination and information spread to the all agents. In case the collaboration fails, the transaction costs caused by market failure, internal and external costs, appraisal and prevention costs will consistently increase. (Juran, 1992) Co-ordination and arbitraging are required, to avoid the negative impact of individual decisions and opportunistic behaviour.

However, it is difficult to impose a control on all participants. The risk is a crucial factor to be managed effectively to withstand adverse outcomes : the agents have different risk attitudes in relation to the specificity of their assets invested, degree of information available and ability to process them for decision making.1 For instance, pig growers do not have enough market information or for lack of skills ; this will likely cause risk aversion behaviour even when the negative market

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prospects are more than counterbalanced by the positive ones. Different risk attitudes may affect the investment levels and create condition for opportunistic behaviour.

For an effective application of TQM, three types of functions must be managed through the chain :

A) Primary production stage :

i) Physical functions : farrowing, selection, bree­ding, litter procurement, feedstuff procurement, feeding and fattening, weighting, finishing, vete­rinary and sanitary controls, medical treatments, pollution control, delivery, periodic controls to check the health, weights, quality of nutritional ingredients, blood analysis and others ;

ii) Exchange functions : transactions to buy farm inputs : litters, feedstuff, sanitary staff, labour, selling finished products, contractual assess­ment, investments in fixed assets, bargaining. Also in this group are included the processing marketing information for market intelligence, forecasting market prospects and other useful tools for decision making : price reporting, price analysis, market development ;

iii) Facilitating function : planning the logistic functions for production, storage, transportation, storage-retrieval ; execution of administrative tasks, cost analysis, institutional arrangements, consultant, legal assistance, customer relations.

B) Processing stage

i) Physical functions : procurement and transport, weighting and quality control of meat, carcass grading, slaughtering, storage and refrigeration, packaging;

ii) Facilitating functions : merchandising, insu­rance, financing, risk coverage and risk sharing, consulting, representation ; fiscal, legal assis­tance, insurance, legal assistance, intermedia­tion, development of relations with pig growers, wholesalers and distribution agents ;

iii) Exchange functions : transactions and price reporting communication, marketing manage­ment.

C) Seasoning stage

i) Physical functions : storage, salting, curing, pressing, packaging, and controls, marking ;

TOTAL QUALITY MANAGEMENT OF THE PDO PROSCIUTTO SAN DANIELE

ii) Facilitating functions , risk coverage and risk sharing, consulting, representation ; insurance, intermediation, development of relations with pig growers, wholesalers and distribution agents;

iii) Exchange functions : transactions and price reporting, market management.

These variables are performed in a TQM frame to cope the traditional way of production with the more recent development of agribusiness functions to be integrated into the TQM. To do this, it is requested to identify the critical points at production with the HACCP procedures and to define at different levels the strategic problem areas : production, marketing, logistic, transport, finan­ce, environment. This typical production approach is requested to cope with the higher standards of typical quality with the large-scale operations, market transparency and risk.

3. THE THEORETICAL FRAMEWORK

Coase argued that the firm (in form of internal organisation and hierarchies) replace the market when the costs of transactions exceed the costs of internal lorganisationl. Transaction cost theory suggests that the exchanges between independent units could be substituted by the internal organisation to improve the market results. However, the participation can generate conflicts due to profit sharing and risks. The analysis is introduced by shortly examining the peculiar chain feature and considering two aspects : i) The institutional contest that generate the potential

relations tailored to agents : producers and industry, third party etc ;

ii) The decision making within the firm that will be discussed with an example.

The following table illustrates the two points :

Table 2 : Chain description and decision making

First stage Second stage

Point to be considered Production asset Exchange asset

Objective i) Layout, stages and structure of the industrial i) Efficient market condition and exchange organisation mechanism through the chain ii) Emergence of changing asset organisation : ii) Principal-agent relations : behaviour and separation between property and control incentives iii) Definition of strategic objective within the iii) Uncertainty chain organisation

Variables Physical (production) variables Exchange variables Facilitatinq variables

Factor affecting variables Asset specificity Competitive environment

Approaches Industrial organisation Institutional analysis 1-0 analysis LP approach

The neo institutional theory with transaction costs, information asymmetry and principal-agents concepts are introduced to explain the consequences of a hierarchical control to co-ordinate the San Daniele Ham chain.

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i) Transaction dimensions and transaction costs ii) Uncertainty

Transaction co-ordination cost analysis

This frame contributes to explain the potential conflict in transition to the integrated chain using the concepts of industrial organisation and central management. The decision-makers producer and processors are aware of the growing market uncertainty.

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Compared with the corporation model of organisation, where the conflict between the manager and the shareholders is the main topic, in this agribusiness chain, the main problems are to match modern technologies in a rural environment, preserving the peculiar features of traditional production to maintain the image of a typical production with the advantages offered by the better control of the production functions and managing the risk and incentives among participants.

The principal-agent theory offers the frame to understand the decisions making with different assets ownerships. The principal role is played by the agency collecting and processing relevant market information and imposing decision to the participants : producer, slaughter and seasoner, which play the role of the agents and subordinate their decisions to the principal.

The principal-agent problem can be summarised as follows : the principal P, carries a contractual relation with a subordinate named agent A, which carries out some activities on his behalf. Because the information are not symmetric, it is assumed that P is risk neutral and A is risk avoider. The agent is willing to choose a decision variable e, (feeding) to produce an outcome x (weight increase and meat quality) so that x= x (e, 61), where 61 is a random variable associated to the probabilistic distribution of uncontrollable states of nature event affecting the outcome level (i.e. production or marketing events affecting weight and quality). The expected outcome is a weighted average of the values generated by the decision taken in different states associated to the probability of a given state. This will complicate by the number of stages in the chain.

Two types of actions can be predicted according with hierarchical position and information available to the two contractors. The first type performed by the agent is called the ex post contractual opporlunism also defined the moral hazard behaviour. This action is undertaken by the agent A that selects the decision e, ignoring substantially 61. This means that the decision is taken in absence of market information, and will depend on his personal evaluation based on his experience (moral hazard) to select a decision variable whose outcome will be known only "ex post".

The principal Pis not willing to observe either e or 61 but he can judge the result of the Agent's decision by

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observing the level of the outcome x. He is unable to discover if A took the right decision e to produce the best outcome for P. The principal opportunistic behaviour consists in designing a contract to give to A the incentives to make the strongest effort to produce the best expected outcome x, considering the all alternatives available that exclude those values of e non-optimal for P. For pig growers, the crucial step in the chain means to make the best effort to achieve at least the 80% of mature pig passing the PDO evaluation.

The second action undertaken by the agent is the ex ante contractual opporlunism or adverse selection behaviour. It is assumed that A knows the distribution of the events e, before e is chosen. P cannot observe e or 61 but he is aware of the fact that A knows the distribution of the events 61. Then it is convenient for P to set up a contract to induce A to disclose to him the information about 61. This allows the principal to complete the set of information concerning production and marketing and give A directions he needs to produce the best outcome. In this case, the incentive for A is represented by the minor risk in market allocation of the production. Assuming that P is the owner of the enterprise and A is the manager, the principal-agent theory provides an important class of decisional models to take account explicitly the consequences of separation of the ownership of the assets from their control. In condition of symmetric information, and perfect capital markets, this separation would be indiffe­rent for decision making either in case of internal hierar­chical organisation or external market co-ordination.

The increasing uncertainty caused by growing complexity in the organisation and possible market failure, need to increase the financial investments in idiosyncratic assets increasing potential conflicts among partners. The information asymmetry, with separation of ownership from control, may procure relevant consequences, and useful insights for setting contractual relations. The importance of professional management for San Daniele Ham Chain requires growing central authority to avoid opportunistic behaviour. Giving incentives to the pig-growers (agents) to produce better quality pigs to be sold in the primary ham market where the prestige of its image is able to procure more revenues avoid the risk of a secondary market where ham of lower quality pig unmarked but with San Daniele label are sold.

TOTAL QUALITY MANAGEMENT OF THE PDO PROSCIUTTO SAN DANIELE

4. THE HAM INDUSTRY ORGANISATION

The Typical ham Industry in Italy is largely represented by two brand : Parma and San Daniele ; the primary producers are grouped in two Organisations respectively, Consorzio Prosciutto San Daniele (CPSD) and Consorzio Prosciutto Parma (CPP). They represent the two main chain and guarantee for the quality : CPP controls 200 seasoners that supply each year in the domestic market approximately seven million thighs ; CPSD acts on behalf of 26 seasoners that sell approximately 1.5 million thighs ; the San Daniele brand is perceived to be a more artisan product respect to Parma. This allowed SD to receive a higher premium price for quality, now reducing because of the commercial strategies oriented to increase the quantity sold, accelerating the stock rotation. However, the competition between the two brands is settled as an oligopolistic collusive behaviour : a fair agreement consisting in setting the market quotas and total supply control allows maintaining higher prices. This strategy is convenient for both Organisations : the quality requires avoiding deteriorating the brand image when the exceeding supply depresses the market. The seasoners producers, members of the Consortium, are allowed to use their own name under the Consortium brand. The distribution sells the product marked by Consortium at premium price and this produces a catching effect over other commercial ham brands sold at lower price.

The CPSD, born in 1994 and expiring in year 2011, heads the chain with 2822 pig growers, scattered in 50 provinces and 10 regions, 35 processing (slaughtering) plants and 26 producers-seasoners only located in San Daniele area. In two provinces, Brescia and Mantova of Lombardia region, are concentrated 23% of the all certified pig growers and 45% of the certified pigs for San Daniele. Brescia with 3354 pigs per farm has the highest size followed by Mantova with 1564 ; in total, the average is 1104 pigs per farm ; however, excluding the two above provinces, the average size of the rest of the pig growers is 819. The industry is represented by 26 processing plants, 20 of them are classified industrial and 6 artisans ; 4 cutting laboratories and 22 deboning laboratories of which 18 are internal and 4 external.

The Statute authorises the Consortium to perform the following functions :

i) Supervise the all steps of the chain ;

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ii) Certify the pig quality for San Daniele Ham after the controls made by inspectors of Consortium (auto-certification) ;

iii) Set up the external certification ;

iv) Define the rules for programming the functions at farm, slaughtering and seasoning stages ;

v) Give technical assistance and other services to pig growers;

vi) Represent the San Daniele producers in the national convention when quality share is settled ;

vii) Perform administration tasks : prepare the annual balance report to be discussed in the Assembly ;

viii) Market : perform the strategies to promote the PDO brand "San Daniele" and prevent unfair trade practices of competitors. CPSD has invested in promotional activities a sum for a thigh three times higher than CPP ;

ix) Avoid internal competition between first quality and lower quality product having the same San Daniele origin.

The financial resources for the working of CPSD are collected with fixed fee payments, una tantum for membership, and variable cost charged for each thigh marked.

With the recent modifications introduced to the Statute the growers are members of the Administrative Council' they can be represented in the general Assembly. Thi~ facilitates the principal-agent relations taking an active role in planning production and marketing strategies.

In participating to the General Assembly, the pig­growers have the right to vote in proportion of one vote per 1000 heads assigned to the farm.

Since 1994, the internal organisation of CPSD was charged to give more authority to govern the chain :

i) Fixing the supply target in function of the market trend and with the competitors ;

ii) Administration of the prices on behalf of the members by setting the contractual relations ;

iii) Improving the customer relations for quality control and marketing performance.

Other important functions to enforce the control of CPSD are:

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1) Control the entire pig production at farm level; 2) Control the slaughterhouse ; 3) Setting the prices paid for the thighs.

A consultant commission inside the CPSD is in charge to assess the production in function of quality achieve­ments and marketing prospects. Now it acts like an agency that controls the operations through the chain to set the production decisions according to the market trends.

The production plan covers a period not inferior to the year and includes :

i) The maximum quantity per year of fresh product to be certified ;

ii) The production quota assigned to each pig grower. The quota can change according with the producer's ability to offer a product with quality standards set up by the Consortium. The incentives consist for the growers to receive higher than mar­ket prices and the certainty of product allocation.2

The production planning function requires some accurate statistical information concerning :

i) Production trend calculated over the last ten years and the PDO production quota attributed to all producers;

ii) Analysis of the market prospects and demand forecasting for ham, in domestic and international market;

iii) Forecasting animal production in the PDO area ;

iv) Evaluation of the growth in productive capacity at production and processing stages.

5. THE AUTO-REGULATION OF PRODUCTION

This strategy is frequently adopted for typical products to avoid the oversupply that would damage the image of the product. Some authors have demonstrated that the production with deposit will contribute to generate market cycles because the accumulated unsold stock can depress the market prices. Pig cycle is evidence : the producers, being aware of the marketing cycle for pigs, tend to avoid the oversupply caused by la oversized production capacity. In presence of a rigid demand the overproduction will have a negative market impact causing higher price fall with respect to quantity due to rigid demand. The relations between the Consortium and the growers can be represented by a

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principal-agent model : the pig growers are agents aware of the consequences of their decision in terms of exceeding supply. The Consortium checks the market by estimating a food demand that includes all substitutes of the ham product. For this purpose, they compute the direct and cross price elasticity using an econometric model. This information will give to the pig­growers an estimate of the gain-losses in case the supply will exceed the demand.

It may be considered that there is a broad range of farm sizes, so the scale economies could discriminate among the growers by reducing drastically the number of the smaller ones. The CPSD tend to avoid this evolution, beside more convenient for industrial considerations, because the image of quality is positively inftuenced by the presence of smaller producers that use less intensive and more ecological production systems.

There is another rule worth for an opportunistic behaviour : the members must qualify their production by offering at least the 80% of PDO production. This has shown two limits :

i) The production unit is identified with a unique enterprise, when actually the enterprises are organised as multi-plant and multi-product units. It is difficult to certify the production in condition of lower pig production specialisation. Lower quality pigs could be traded through other marketing channels and this weakens the power of the CPSD in discouraging lower quality production ;

ii) The diseconomies of scale increase with the lowering of percentage of PDO production because this implies to reduce the plant use. The growers in this case will sell the unmarked product in secondary market channels using improperly the name of San Daniele ; this parallel channel will damage the image of the higher quality product.

6. THE QUALITY CONTROL

The quality control has been extended to production, processing and seasoning stages. These controls are extensively made at the farm and slaughter levels, and more accurate at the seasoning stage ; the certification is made by controlling thoroughly all steps of the production chain. Analytical parameters are settled to check the quality of the seasoned ham by sampling the stocks every month in the Consortium laboratories.

TOTAL QUALITY MANAGEMENT OF THE PDO PROSCIUTTO SAN DANIELE

6.1. First stage : the pig quality requirements for San Daniele PDQ

The law of 14th of February 1990, n 30, has legally authorised the denomination of origin Prosciutto San Daniele a typical product obtained from the fresh thighs of pigs born, grown and slaughtered in ten regions of Italy. Pigs must be Landrace or Large White breeds pure or derived Duroc (only derived) or other compatible with the standards of the heavy pig recorded in the National Herdbook. Specification about nutritional ingredients and welfare practices are prescribed to normalise the production cycle, a minimum of nine months to accomplish the certification requirements. The pig's origin is clearly indicated by a mark printed during the first 30 days of life, followed by another mark imposed during the fattening period and a third one when the pigs are slaughtered at the final weight of 160 kg (± 10%) and the thighs weight reaching at least 11 kg. Good production practices to reduce the environmental impact are followed by imposing restrictions on the number of heads per Ha and sludge/manure treatment.

6.2. The relations growers-slaughters and the role of third party

The exchange relations between growers and slaughters are regulated by technical parameters and observance of external and internal standards of quality. The external ones concern the weight and shape of the pig. The growers are free to deliver their products to any slaughterhouse member of CPSD. The partnership relations are based on reciprocal confidence : the skills of growers match with the higher prices of the proces­sing plant and their willingness to invest in specific assets. In absence of regulation the growers will adopt an opportunistic behaviour by choosing partners that best fit with their own interests while the slaughters will impose restrictions on thighs especially when the mar­ket prospects are negative. A third party is needed to arbitrage between the two partners in these conditions.

6.3. Strengthen the relations between growers and consortium

The principal-agent relations are dictated by the need to obtain the best production results to achieve market targets. It has been previously said that 80% of the pigs

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reared must satisfy the PDO standards. It could hypothesised that an effort equal to 1 would achieve a target of 70% PDO product and an effort equal to 2 will achieve 80% or more. How these efforts would be induced in terms of skilled labour and investments in dedicated assets?

The experience would suggest that an effort equal to 1 could achieve interesting market target at lower risk for growers competing with the Consortium brand with their own private label that has segmented a secondary but profitable ham market. An effort equal to 2 would be made with a strategy toward highly qualified brand product (PDO) channelled toward most profitable niche markets and higher income consumers. The two actions are not symmetric : the effort 2 can be reversed in an effort 1 with some losses for the higher costs in specific assets but the opposite is not possible. So the producers could decide to reverse from action 2 to action 1 depending on market prospects and incentives : with upward cycle, the strategy based on the sale maximisation drives to a lower quality product, with a downward cycle the PDO quality will be traded more successfully.

This strategy is weaker and would cause negative market effects for these reasons :

i)

ii)

The competition with Prosciutto Parma would produce negative effects because of larger market area and relatively lower prices : the strategy based on price leadership procure more advantage to Parma;

A secondary brand linked to the San Daniele would weaken the image of the top quality product ;

iii) There are other PDO ham brands like Consorzi Berici or Prosciutto Modena with contiguous market areas.

This suggests the Consortium to avoid the adverse selection behaviour to tie up closer relations with growers to avoid the dual brand competition, by offering price incentives to maintain at least 80% of PDO among all producers and strengthen the market strategy to improve the position of the product and to bargain with Parma marketing quotas.

Because, farm size greatly varies in the ten PDO regions, it is very important to differentiate incentives according with production size. Actually, a scheme of

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incentives has been proposed by Consorzio San Daniele to take account of different producer situations and idiosyncratic investments, to disclose their future market prospects. A second cause of risk are the

unexpected external events (climate, diseases, policy measures) affecting the market. In this case, an incentive could be an insurance paid by the principal without affecting the contract price.

Table 3 : Origin of certified pig growers for slaughtering

Provinces Certified pig growers Certified pig heads

Nr % Nr % Alessandria 14 0,52 17.588 0,53 Ancona 15 0.53 1.368 0,04 Ascoli Piceno 4 0,14 2.134 0,06 L' Aquila 2 0,67 1.238 0,00 Arezzo 7 0,24 5.926 0,17 Asti 6 0,21 1.227 0,03 Beroamo 53 1,87 61.789 1,86 Belluno 2 0,07 196 0,00 Boloona 25 0,88 15.248 0,46 Brescia 300 10,63 1.004.848 30,33 Campobasso 2 0,07 385 0,01 Chieti 1 0,03 624 0,01 Cuneo 310 10,98 197.503 5,96 Cremona 169 5,98 189.189 5,71 Ferrara 5 0,17 3.524 0,10 Firenze 2 0,07 244 0.00 Forli 67 2,37 41.093 1,24 Gorizia 4 0,14 11.557 0,34 Grosseto 2 0,07 1.988 0,06 lsernia 1 0,03 111 0,00 Macerata 3 0,10 2.056 0,06 Milano 149 5,28 136.655 4,12 Mantova 325 11,51 508.434 15,3 Modena 215 7,61 189.582 5,72 Novara 13 0,46 2.879 0,38 Piacenza 39 1,38 42.149 1,27 Padova 57 2,01 43.308 1,30 Peruoina 45 1,59 44.127 1,33 Pisa 2 0,07 464 0,01 Pordenone 54 1,91 70.189 2,11 Parma 126 4,46 99.154 2,99 Pesaro 3 0,10 1.799 0,05 Pistoia 4 0,14 759 0,02 Pavia 67 2,37 65.310 1,97 Ravenna 61 2,16 32.307 0,97 Reqqio E. 278 9,85 195.642 5,90 Rieti 1 0,03 80 0,00 Rovioo 17 0,60 10.883 0,32 Siena 9 0,32 4.532 0,13 Teramo 4 0.14 762 0,02 Torino 60 2,12 32.036 0,96 Terni 3 0,10 1.082 0,03 Treviso 75 2,65 60.662 1,83 Udine 58 2,05 53.792 1,62 Varese 1 0,03 155 0,00 Vercelli 14 0,49 12.794 0,38 Venezia 19 0,67 13.511 0,40 Vicenza 36 1,27 29.070 0.87 Verona 97 3,43 84.441 2,54 Viterbo 4 0,14 6.120 0,18

2.822 100,00 3.312.749 100.00

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TOTAL QUALITY MANAGEMENT OF THE PDO PROSCIUTTO SAN DANIELE

The Consortium makes an active control in the production plants by making a distinction between phase 1 (close cycle) and phase 2 (fattening cycle). In 1996, in phase 1, were made the 87% of the total number of controls ; this because the newly introduced system of marking controls required to be tested. In 1997, the number declined to 37% and it was limited to some specific areas.

The phase 2 test was extended to the ten regions of the producing area. The newly introduced control procedures allowed to improve the first quality level monitoring by implementation of the electronic data processing and statistical simulation of the pigs growth functions.

7. THE SLAUGHTER PLANT (SP)

The SP industry is represented by 35 plants that process the entire supply of San Daniele PDO. Also, in this case there are great structural differences represented by : assets, technology, capacity and level of activity. The largest five slaughtering plants, located

in Parma, Reggio Emilia, Modena, Torino and Treviso, process the 40 % of the total PDO slaughtered production. This value did not change greatly in the last three years. The area with highest concentration of pig growers (Brescia and Mantova) does not coincide with the area of slaughter plant concentration. This suggests that the growers deliver their production to slaughter plants unconstrained by the distance varying in a range between 100 and 200 kilometres. Lombardi a is the region with the highest concentration of pig production (59.33% of the total) but only represents the 21.6 of thigh supply ; Emilia supplies only the 18.65% of the pigs but the 38.8% of thighs. The share distribution has a considerable importance for the chain organisation : Lombardia does not have any PDO for the ham, because is more interested in production of salami and dairy products. In fact, in the past, pig production was a production associated with the use of serum, a by­product of cheese processing. Emilia has a strong national brand, the Prosciutto Parma and a secondary brand, the Prosciutto Modena ; nevertheless it offers to the competing region Friuli V.G., a large amount of certified pig production.

Table 4: Distribution of the product delivered to the slaughter plants

Name of slaughter plant Province Quota of the total production PDQ

1995 1996 1997 MONTORSI MO 11,3 8,7 6,1 MONTELLO TV 8,9 8,6 7,3 ITALCARNI MO 7,8 8,5 7,8 SASSI PR 7,4 7,1 5,3 Al MARETTI TO 7,4 8,3 9,6 CONS. LATT. S.M. MN 7,2 5,0 6,1 ANNON I PR 5,9 5,9 7,4 Moreda-GR.IMPERO RE 5,6 6,4 7,6 MECCARNI MN 4,8 4,4 4,4 BERT ANA CR 4,6 3,7 2,4 GHINZELLI MN 4,5 3,4 1,6 MARTI NIAL. RA 4,3 3,7 4,5 Ara-VAL TIBERINO PG 3,6 2,3 4,8 FIORUCCI EN 3,4 2,6 2,6 GEALCARNI NO 2,8 3,3 2,9 NEGRIN I RO 2,7 3-5 4,6 MARTELLI MN 2,0 3,7 3,1 ADDA co 1,1 1,4 1,3 UANETTO UD 0,9 1,0 1,3 Capis-SERENISSIMA PD 0,7 3,1 2,1 SALBETTONA PG nQ. nQ. 1,7 ADDA LO nq. nq. 1,3 Other19 n.q. over 39 2,8 Other12 n.q. over 32 4,5 Other13 n.q. over 35 6,6 TOTAL 100,0 100,0 100,00

45

F. ROSA

Table 5 : Comparison between Parma and San Daniele of the quarterly production balance (units of product)

PARMA SAN DANIELE TOTAL Period

u.p. index u.p.

94 1 tr. 1789000 100 387000

94 2 tr. 2146000 100 427000

94 3 tr. 2214000 100 365000

94 4 tr. 2173000 100 348000

94 TOT. 8413000 100 1528000

95 1 tr. 2152000 120 378000

95 2 tr. 2162000 101 415000

95 3 tr. 1910000 86 409000

95 4 tr. 1830000 84 418000

95 TOT. 8052000 96 1622000

96 1 tr. 1960000 110 440000

96 2 tr. 2113000 98 464000

96 3 tr. 2039000 92 402000

96 4 tr. 2134000 98 427000

96 TOT. 8247000 98 1735000

97 1 tr. 2033000 114 426000

97 2 tr. 2276000 106 443000

97 3 tr. 2275000 106 437000

97 4 tr. 2316000 107 471000

97TOT. 8900000 106 1777000

8. HIERARCHIES AND INFORMATION OF CPSD

The authority means to design a vertically co-ordinated chain with distribution of hierarchies among participating agents. The agents must renounce to some of their property rights and give the residual to the higher organisation that will be able to guarantee better results.

We have already discussed the legal authority given to Consortium to enforce decisions on behalf of their members and against unfair competitors. However, for the good management a question is if the Consortium has the capacity to obtain and process information relevant for better market results at higher level than the

46

index u.p. index

100 2176000 100 I

100 2573000 100 I

100 2579000 100 I

100 2521000 100 I

100 9941000 100 I

98 2530000 116 +16

97 2577000 100 +O

112 2319000 90 -10

120 2248000 89 - 11

106 9674000 97 . 3

114 2400000 110 -5

108 2577000 100 -0

110 2441000 95 +5

123 2561000 101 +14

113 9982000 100 +3

110 2459000 113 +2

104 2719000 106 +5

120 2712000 105 + 11

135 2787000 110 +9

116 10677000 107 +7

single members do. If this is true, members will be discouraged by acting individually and pursuing opportunistic behaviour, not disclosing to the principal some information about specific market prospects. The Consortium has the capacity to achieve a higher level of information compared to any other participant. Here following we indicate at each stage of the chain the information available to the Consortium. Positive considerations about the market information are made assuming the present situation. If for instance it would not be so effective, the dialogue about the market sharing with other national competitors, particularly with CPP, will immediately weaken its hierarchical authority and spoil their relations with the agents.

TOTAL QUALITY MANAGEMENT OF THE PDO PROSCIUTTO SAN DANIELE

Table 6 : Information available to the Consortium San Daniele

One - Pig Growers : production stage Type of cycle used by pig growers : open, close, and number of heads Genetic information : breeding, selection, hybrids, germoplasm, Herdbook Plant size, plant technology, production capacity and capacity actually used, investment value Plant location, logistic advantages, distance from slaughtering plant Quality control results, index of quality performance, % of PDO pigs Pig tracking through the chain Estimated delivery of PDO pigs by members Transport, storage facilities Service available to farmers HACCP procedures and certification Periodic report

2 - Slaughtering plant : processing stage Capacity, technology, scale economies Plant location, distance from pig growers Storage capacity Transport facility Service availability to farmers Test on carcass quality Test on meat quality Periodic report

3 - Seasoning : Test for monitoring quality with analytical parameters (salt, humidity) Timing Environmental variable control Quality control and marking performance evaluation Stock level, thigh turnover Periodical report

4 - Laboratory : Cutting Deboning Periodic report

5 - Marketing: Monitoring the primary market Analysis of supply available at every month : own and competitor's supply Forecast supply, demand and prices for the future n months Analysis of historical data for market analysis Planning investment for brand strategies, image and advertising Testing the consumer demand Developing commercial relation with the LO R&D investments Public relation investments

47

F. ROSA

CONCLUSION

In this work, we have examined the implications of organising the chain for a typical food product and the role of CPSD, to co-ordinate the functions performed in San Daniele Ham Chain. This problem has been examined in the framework of principal-agent theory in order to explore the role of Consortium in organising the chain by playing the principal role contracting with the agents (producer-processor-seasoners) the functions to be performed in a hierarchical organisation, having different information background about production and marketing prospects. Two problems have been discussed. The first, is the hierarchical authority that allows the CPSD to manage the chain by enforcing the rules coded in the "Disciplinary of Production". This implies to examine the consequences of certification the production, avoiding the conflicts with pig growers and processors and possible opportunistic behaviour if the risk is not compensated by profit. The second is the critical level of information to be achieved by the consortium for planning effective and reliable market strategies. The first question has been afforded by describing the chain structure and the authority given to Consortium to control that the functions at the pig­growing stage are correctly performed.

However the Consortium is playing a co-ordinating role as a partner more than a bureaucratic organism, being a general interest to achieve the highest consensus to obtain a good performance represented by the number of pigs certified and traded in the most profitable market channels.

Maintaining good relations and helping pig growers to find a collaborative industrial partner is another function performed by consortium. These relations are mainly developed outside the region Friuli V.G., because most of the producers and processors are located in Lombardia and Emilia regions.

The level of information is the second question : the higher is the capacity to collect and process information, the more strategic will be the planning through the chain and the results obtained will be closer to the planned. The information collected at different chain levels allow the Consortium to monitor the demand supply and consequently to plan the production and manage the stocks. However, the final demand is important to deter­mine the production plans that are made by considering the feature of the production cycle, the seasoning and capacity of producers to change their supply plans. The structural changes are going in direction of growing con­centration and this facilitates the chain decision making.

The institutional role is also important. The main function is to bargain with CPP the market quota. This created some conflict with the antitrust authority that considers the self-regulation restrictive for market competition and against the interest of consumers.

Until now this argument has not been forced given the recurrent risk of oversupply that depress the market prices. The question then is how to set up a complex and expensive chain to manage the quality of Typical Ham without being considered a sort of collusive group which action is considered illegal by the antitrust laws.

NOTES

(1) For example the growth of pig in fattening stage depends on the growth rate of the piglets in the previous breeding stages and the incidence of disease in among the piglets in the breeding stage.

(2) The analytical values the ham must satisfy are : humidity : minimum 57%, maximum 63% ; ratio salt/humidity : minimum 7.8, maximum 11.2 ; proteolytic value : minimum 24, maximum 31.

48

TOTAL QUALITY MANAGEMENT OF THE PDQ PROSCIUTTO SAN DANIELE

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