Agroindustrial project analysi

THE PROCUREMENT FACTOR 109tion. Increased control improves the likelihood of the firm's obtainingthe desired quantity and quality of raw material. Centralizingthe decisionmaking should also improve product coordinationand increase the dependability of supply.CAPITAL REQUIREMENTS. Integration can significantly increase thefixed and working capital requirements cf the agroindustrial project,which in turn increase the project's costs and capital exposure.FLEXIBILITY. Backward integration tends to lock the agroindustryinto fixed investments and a predetermined structure. This limitationreduces multiple source options.COSTS. An integrated system permits efficiencies and economiesof scale that are not otherwise attainable and therefore allows thefirm to achieve lower variable costs. But integration also impliesgreater fixed costs for the project: if market prices fall, these increasedfixed costs can represent a significant expense to the project.Although definitive guidelines for backward vertical integrationare impossible, it is a more appropriate strategy than operatingsolely through existing channels when a firm is introducing a newcrop or opening new production areas. This opening of new groundis what led Central American banana firms to develop from thestart totally integrated structures for cultivation, packing, and export.There were no existing supply systems. A more commonpattern of organizing sources, currently used by the banana industry,is to obtain a portion of the raw material from the factory'sown farms and a portion from outside producers. Backward verticalintegration may not be feasible because political constraints orblockages in channels may resist the concentration of power or becausethe possible labor displacement from integration may not bedeemed socially desirable. Alternatively, the firm can use producerorganizations, a strategy which has its own advantages.Producer organizationsRecently, agroindustries have frequently served as catalysts forthe collective organization of farmers. In the past, producers oftenfailed to organize because they lacked a strong focal point around