Combining Total Cost of Ownership and Multi-Criteria Decision Analysis to Improve Cost Management in Family Farming

Abstract

Family farming is an important pillar of the global primary food sector and is characterized by a significant local and regional impact. The sustainability of these businesses depends greatly on the use of effective management practices in family farming and smallholder farmer’s activities. However, there is a lack of methodologies to support decision making in this sector related to the recognition of all aspects involved in the acquisition of inputs. Commonly, the existing approaches are focused on cost as the major criterion, which might impact on the agribusiness sustainability in the short or long term. Furthermore, traditional cost-focused approaches should be complemented with multi-criteria aspects within comprehensive and practical methodologies. This paper presents a Cost Management Model (CMM) integrating the concepts of Total Cost of Ownership (TCO) and Multiple Criteria Decision Analysis (MCDA), which includes both monetary and non-monetary attributes. The use of TCO was mostly focused on industrial applications and studies on costs in agribusiness are still scarce and incomplete. The model was applied to a set of agribusiness families in Southern Brazil to support the supplier selection process of the three main inputs (i.e., fertilizer, fungicide, and soybeans). A significant cost reduction of approximately 13% for fertilizers, 7% for fungicides, and 3% for soybeans can be achieved. The CMM can be applied by smallholder farmers in any region of the world, and its flexibility allows changes in weights and criteria at any time by the decision maker. Buyers are more prepared to select the best supplier for each input and the later can recognize how they are more or less competitive when all costs and relevant criteria are taken into consideration. It can be also applied from an industry-level perspective to highlight the industry’s cost structure and value chain, supporting more focused and effective public policies namely the design of subsidies that mitigate relevant context costs and the investment in infrastructures. Both, subsidies and public investment, are of major importance in rural areas of developing countries.

Keywords

• total cost of ownership
• multi-criteria analysis
• family farming