supply chain management: milk collection & distribution system in pakistan

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Page 1: SUPPLY CHAIN MANAGEMENT: MILK COLLECTION & DISTRIBUTION SYSTEM IN PAKISTAN

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© FRDN Incorporated, 2010 Editor-In-Chief & Managing Editor: Adrian Marcus Steinberg, PhD 117, Orion Mall, Palm Street, P.O. Box 828, Victoria, Mahé, Seychelles Tel: +248 400138344 Fax: +248 400138345 European Journal of Scientific Research ISSN: 1450-216X / 1450-202X Vol. 39 (4): 130-142, January 2010 DOI: http://www.europeanjournalofscientificresearch.com/issues/EJSR_39_4.html

SUPPLY CHAIN MANAGEMENT: MILK COLLECTION &

DISTRIBUTION SYSTEM IN PAKISTAN

AHMED RIZWAN RAHEEM

Tel: +92-300-829-3560

Hamdard Institute of Education and Social Sciences, Hamdard University, Karachi

Abstract: The objective of this study is to define the prevailing Supply Chain Management system in Milk Collection and distribution across Pakistan. Moreover, the study also suggests that how these supply chain management and distribution systems can be improved in order to save cost and enhance the overall productivity of this industry. In this study, economic share of dairy system has also been discussed. The vision 2015 also discussed in this study. Key Words: Supply Chain Management, Milk Collection & distribution, Dairy Industry

1. INTRODUCTION

Pakistan with current estimates is the 4th largest milk producing country in the world with 33 Billion liters of milk produced annually. The potential is huge but the sector operates mostly in the informal economy and needs a consistent effort to formalize and be able to contribute better to the national economy. Out of the total milk produced, 97% is in the informal sector (i.e. loose milk consumed in the villages and or sold in the cities through "Gawallas" in unhygienic conditions and without any quality standards). There are 8 Million farming households in Pakistan with a total herd size of 50 million animals. 97% of these farmers are not linked to formal markets and hence are not progressing in economic terms. Moreover, the overall animal herd of Pakistan is thinly spread across thousands of square kilometers with an average of 2 to 5 animals per household. Dairy farming practices are very old and traditional and need overhauling. To formalize and improve the industry, a private sector led Pakistan Dairy Development Company has emerged with guarantee backup by government of Pakistan [1].

The platform proposes to improve the dairy sector through improved research facilities, training and capacity building of farmers, training veterinarians, improving the cold chain through milk chillers, promoting healthy pasteurized milk, develop model commercial dairy farms, focus on breed improvement, facilitation of credit financing to dairy farmers and linking the rural area based farmer to the market mechanism. This will improve and

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formalize the dairy sector. The White Revolution is targeted to achieve an annual production of 40 billion liters of milk by 2015, it aims to create an additional 3 million jobs in the formal economy and provide an estimated 350 million rupees per day in cash flow to farmers in the sector or to say that an additional formal economy of 3 Billion US$ will be developed for the rural economy. The potential is there but needs technical support from the industry, strategic support from dairy experts, policy and infrastructure from the government and specific projects funding from the international donor agencies. The potential is estimated on the basis of the fact that livestock and agriculture sector contributes over 10% to the GDP, and a milk economy that in value terms is 27.7% of the total agriculture sector. It is an untapped market, expected to grow an additional 3 billion liters in the next few years at a growth rate faster than most sectors, and 30% by 2015 [1].

1.1 THE ECONOMIC BENEFIT (OVER A DECADE)

With an estimated 33 Billion Liters of annual milk production from 50 million animals managed by approximately 8 million farming households, according to latest statistics Pakistan is the 4th largest milk producing country in the world. It has a livestock and agriculture sector contributing over 10% to the GDP, and a milk economy that in value terms is 27.7% of the total agriculture sector. It is an untapped market, expected to grow an additional 3 billion liters in the next few years at a growth rate faster than most sectors. Undeniably, a sector with such credentials can bring about not just a radical change but also a dairy revolution in the country [2, 3].

The annual milk production of 33.6 billion liters in Pakistan is shared between a 71.1% share for the rural economy and a much smaller urban share of 29%. Only 3% of the total production of milk is processed and marketed through formal channels. For the other 97%, a multi-layered distribution system of middlemen has evolved to supply milk. The contribution of the formal sector processed milk to real GDP in Pakistan is 0.43% in 2004-05. Despite only a small percentage (3%) of milk being processed, the (UHT) market is growing at a steady rate of 20% a year. Presently 97% of raw milk produced in the rural economy is not linked to the market mechanism because of a number of reasons (defined ahead in this paper). Due to this reason, the dairy sector in the rural economy is not making a significant impact in the National economy in accordance with its potential and also with the quantity of milk, which is available. The White Revolution is targeted to achieve an annual production of 40 billion liters of milk by 2015; it aims to create an additional 3 million jobs in the formal economy and provide an estimated 350 million rupees per day in cash flow to farmers in the sector [4].

1.2 MILK SUPPLY CHAIN MANAGEMENT

1.2.1 Milk Collection and Distribution system

While the structure of the dairy processing industry has improved dramatically, milk collection and distribution is fragmented compared to systems found in other countries. There is a need to improve the supply chain from farmer to consumer in Pakistan [5].

There is very limited data available on the routes to market or the distribution channels employed in Pakistan. Most of the milk produced in the farms is consumed at the household level. The surplus is marketed at the local markets in form of liquid milk or purchased by milk collectors and transported to urban areas through different distribution channels [6].

The milk supply and marketing chain involves different players such as milk collectors (dodhis), traditional cream manufacturers and "Khoya" (milk concentrate for local sweets) makers and retailers. (The traditional cream and khoya is often very unhygienic and is made in dirty work conditions hence is a danger to human health). Dodhis or milk collectors play an important role in collection and the marketing chain of the dairy sector of Pakistan. The dhodhi community may even reach a million in number. Based on their financial and technical abilities, they can be classified in three groups of small, medium and large-scale milk collectors. The small-scale milk collectors collect

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an amount of 200-400 kg milk per day from different farms, often in remote areas. Some of them make long-term contracts at a predetermined price offering a share of the milk price in advance to the farmers. In small towns, they may directly market the milk, but in larger urban areas, they sell the milk to the large collectors. Medium scale milk collectors collect 400-800 kg milk per day in a manner similar to the small milk collectors, but on a larger scale. This group may carry out door-to-door milk delivery and marketing in some nearby urban markets using different means of transportation. Large-scale milk collectors collect 1.5 to 3 tons of milk/day, purchased often from the small and medium scale collectors and act as middlemen between them and retail shopkeepers. Large-scale milk adulteration is practiced mostly by this group of large-scale milk collectors [7].

The rural supply chain for processed milk industry has three patterns: milk collection through third-party milk collectors; self-collection system of dairy plants and farmer cooperatives. Third party collection and self-collection are the more prevalent collection systems, whereas to date dairy co-operative systems have failed to succeed in Pakistan [8].

Of the total milk sold by the farmers, 15 - 19% is thought to be wasted en route-to-market due to spoilage from a lack of proper cooling, storage, and transport systems. There is an imperative need to prevent the wastage of milk, which is the result of a poor cold chain. Milk being a highly perishable commodity does not give many choices for storage or channels; consequently, the unorganized middlemen as a speedy substitute to a cold chain dominate the supply chain. Both investment and regulation are required to develop the cold chain, which will help consolidate the milk collection system [9].

The cold chain infrastructure is envisaged as a means to create rural entrepreneurs in the rural economy. Improved supply chains may reduce milk collection costs faced by the processing industry, presently averaging around 16% of the factory gate costs (with the remainder being the price paid for the milk). We also believe dairy farmers should be encouraged to become more flexible in collection hours to allow longer hours for collection of milk that will ensure cold chain tankers run as economically as possible.

This brings us to the most complicated issue of Pakistan’s Dairy supply chain namely; achieving a “Level Playing Field” between the middlemen Dhodhis and the processors. At present, middlemen play a critical role in the Pakistan dairy industry: Without them, a far smaller proportion of milk would find its way from the farmer to the consumer. To varying extents, processors rely on dhodhis collecting milk and transporting it to collection centers. It is well known that adulteration of milk occurs in Pakistan on a broad scale. The general view is that much of this adulteration occurs after the farm gate and before processors receive it, i.e. when the milk is in the control of middlemen. Further, it is probable that middlemen do not pay tax as per the more formal sectors of the industry [11].

The above factors create a situation under which middlemen have unfair advantages over the formal sector, and in addition contribute to poor quality milk to the detriment of consumers (especially those who cannot afford the higher quality presentations provided by the processors) and to the medium term development of a robust dairy industry. In this situation Dairy Pakistan as the voice of various stakeholders believes that the role of middlemen should be “regularized”, i.e. middlemen should be encouraged to respect the milk they are handling. Such “encouragement” could take several forms, both direct and indirect:

� Better regulation and enforcement could be established to make adulteration less easy and punished to a greater extent.

� Dairy Pakistan and other industry participants could fund a marketing campaign to educate consumers on the dangers of loose milk.

� Zero rating of the industry will reduce some of the advantages achieved by the tax avoidance thought to be practiced by at least some middlemen.

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� Dairy Pakistan’s Cooling Tank program will result in more collection centers being established, thus improving access for farmers who wish to deliver milk to processors directly.

� Farmers delivering directly need to earn a higher price for their milk than those supplying through middlemen.

1.2.2 Some of these actions will have greater or lesser impact:

� Often in developing countries (and indeed in developed countries), a regulatory approach creates as many problems as it solves. Regulation can be a source of corruption. Adequate regulation is already in place, which should, in theory, protect milk quality. Further regulation is unlikely to change present practices.

� A marketing campaign may be successful over a prolonged period, but within the constraints of present limited funding availability for Dairy Pakistan, it is probable that higher priorities should be met first. Dairy Pakistan will, however, play a co-coordinating role with other industry participants, should they wish to fund such a marketing campaign.

� Zero rating is an important step in achieving a level playing field.

� Dairy Pakistan’s Cooling Tank Program is another important step.

It should be noted that the intent of Dairy Pakistan is not to cut all middlemen out of the industry; however, illegal actions such as adulteration and desirably tax avoidance should be made more difficult to undertake. Middlemen who wish to respect milk, the farmers who provide it and the consumers who drink it, are a welcome part of the industry. However, none of the above or even all of the above steps is likely to succeed in changing the role of middlemen, for there is another important function they provide, and that is the provision of credit. Dairy Pakistan intends to explore with institutions, both national and international, the alignment of the operation of collection centers with the provision of micro-credit. Only with such credit facilitation will genuine alternatives to the middlemen exist. It is probable that present interest rates on credit supplied by middlemen are onerous, so the suggested integration between the operations of collection centers and credit provision could have a major impact on the welfare of especially small farmers [12].

Traditional Milk Supply Chain model

Dairy&Farmer&

Gawala&(Milkman)&

Consumer&Sweet/Milk&Shop&

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2. RESULTS AND DISCUSSIONS

2.1 EXISTING MILK SUPPLY CHAIN

2.1.1 Milk collection

There are two types of milk collection systems adopted by HFL namely self-collection and contract collection.

2.1.2. Self-collection

A system in which HFL purchases and preserves raw milk that meets its quality standards through their staff

members and delivers at PHE is known as self-collection. It may include the following:

i. Milk Collection through Village Milk Collection Centre (VMCC).

Village Milk Collection Centre (VMCC) is a place where the farmers of an area come and give milk and a person

appointed by the company collects milk after testing it. The person who collects milk there from the farmers is

known as VMCC agent. It is provided by all the essential utilities for the milk collection such as collection tub,

testing chemicals, ice and the rent of the place as well as the electricity bill. At VMCC the agent keeps the record of

all the farmers who supply milk at VMCC and takes samples from the milk. The samples are tested and receipt is

given to the farmer and a copy is kept at the VMCC for record. The mode of payment at VMCC is weekly i.e., after

a week, farmers go to bank and receive their cash of all the week from their account [13].

ii. Direct from Farmers (DF).

As the name indicates, it is a collection directly from the farmers. The collection vehicle, when goes to an area for

the milk collection, there are some farmers who don’t supply milk at the VMCC. They are aware of the timings of

the collection vehicle, so they supply milk directly to the people in the vehicle.

iii. Progressive Farmers (PF)

Progressive farmers are those farmers who supply milk directly to the collection vehicle like direct farmers but the

difference is that these people are progressive farmers and they provide higher quantities of milk [14].

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Existing Milk Supply Chain

2.1.3 Contract collection

It is the system in which HFL deals with the different private milk collecting persons and enters into a contract with

them to provide milk to the company. They may include the following:

i. Mini Contractors

Mini contractors are those who provide milk about 1000 liter of milk per day. They collect milk on their own. In

this type of collection, the company identifies personnel who are willing to work and are of good repute with fair

dealings. The contract is mainly verbal and no written type of contract was observed during our survey. The mini

contractor collects milk from the farmers of the area as well as from the other areas. Milkmen from different areas

also supply milk at mini contractor’s place. A company vehicle collects milk from these mini contactors. The MOT

with that vehicle tests the milk according to their quality standards. If it passes the tests, it is accepted and rejected

otherwise [15].

Dairy&Farmer&

Gawala&(Milkman)& VMCC&

Retailer&

Consumer&

PHE&

Company&Milk&Plant&

Sweet/Milk&Shop&

Company&Vehicle&

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ii. Sub-Contractors

Sub Contractors are almost the same as that of mini contractors but the main difference is that milk is collected from

the mini contractor’s place but sub contractor has to transport milk to the PHE of the company.

2.2. Milk procurement

Manager Milk Procurement (MMP) Plant is responsible for all the milk procurement in the milk area. Milk

collection area, which consists of mainly the provinces of Punjab and Sindh, is divided into four regions headed by

an MMP (Region). These regional offices are at Arifwala, Chishtian, Jhang and R. Y. Khan. Each region consists

of 3-4 zones, which is headed by a Zonal Manager. There are 14 zones under these 4 regions. Each zone is headed

by Executive Zonal Manager or an Area Executive depending upon the size of daily collection. Each zone consists

of 2-3 sub-zones. At sub-zonal level, there are PHE (Palate Heat Exchanger). Under these sub-zones come

VMCCs, mini contractors and sub contractors, which are further responsible for the milk collection [16].

2.2.1 Milk collection area

There are 14 zones for self-collection of milk having 28 Main centers (PHE)

Table 5: HFL Milk collection area

Sr. No. Milk Collection Zones 7 Jhang

1 Arifwala 8 Pakpattan

2 Bahawalnagar 9 Okara

3 Bahawalpur 10 Rahim Yar Khan

4 Bhowana 11 Shah Jewna

5 Mian Channu 12 Narowal

6 Haveli 13 Upper Sind

Source: Author’s own survey

2.3. MILK PROCUREMENT TYPES:

Milk Procurement is the starting point of dairy industry supply chain. The procurement process starts on the farm, where producers are advised, quality is monitored and raw milk is collected daily from various Farmers/progressive

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farmers by mini-suppliers and village milk collection centers countrywide and transported to factories in the most cost-effective manner. Raw milk quality is the cornerstone of excellent dairy products. Milk Procurement guards this quality with an eagle eye and ensures that company’s production needs are met. Through teamwork within the supply chain, procurement teams of companies ensure that raw milk losses are kept to the absolute minimum [17].

Milk procurement is basically of two types:

1. Supplier’s collection 2. Self collection

1. Supplier Milk collection system: In this case supplier brings milk with his or her own sources at factory. Quality assurance department of dairy as per their standards scrutinizes the milk. If milk passes the entire quality test then this milk is received otherwise the milk is rejected.

Mini/Hilux contractor: In this type of milk collection local supplier of area collects milk with their own

resources and brings this milk to companies sub center. If milk is according to company’s standard that

milk is received otherwise rejected. All types of collected milk are brought to sub centers, where it is

chilled (by chiller or by ice) and transported to Main center either through 1.7, 5 or 9 tons of tankers

depending upon the quantity of milk, here milk is chilled through chillers and transported to plant [17].

2. Self Milk collection system:

A. Village Milk Collection (VMC): In this case a local community nominated person (VMC agent) collects milk from local farmers on behalf of company by using company facilities. The VMC agent gets commission from company on per litter-collected milk. After collection VMC agent either himself approach the nearby center of company for handing over of collected milk or company vehicle collect milk from that VMC agent as per written agreement. Very good quality milk is collected through the VMCs. No doodhi is involved in this type of collection.

B. Progressive formers: Having 10 adult buffalo or minimum 25 liters milk. C. Direct Farmer: Having one or more milk animal and bring milk directly to sub center or MCC.

> Bulk milk transport: Milk procurement teams of companies ensure that milk is collected and transported to factories daily. Milk cooled on the farm or cooling centre may be transported in bulk tankers. Bulk tankers are insulated, so the milk will remain cold until it reaches the plant (provided the transport is fast, i.e. short distance or good roads enabling milk to be delivered before the temperature of milk rises above 10? C).

> Reception of milk at plant: At reaching plant quality assurance staff of reception lab takes the representative

sample of whole milk tanker and analyses it for various parameters as per standards of company. If milk found as

per quality norms of company the tanker is weighed and production department staff receive the milk for further

processing otherwise the sub standards raw milk tanker is rejected.

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2.4 MILK PROCUREMENT SYSTEM (MPS):

The primary function of any Milk Procurement System (MPS) is to expedite dairy milk producer’s payroll process. This is accomplished using a complex system that documents the pickup, testing, delivery of milk, and issues payment to producers of milk and those responsible for its transport. In addition to tracing the movement of milk as it is picked up, tested, and transported to the plant, the Milk Procurement System issues checks and records financial information for producers, haulers, and vendors. MPS facilitates the dairy’s milk producer payroll process from beginning to end [18].

2.5 ROLE OF MPD OF ANY COMPANY IN MILK PROCUREMENT:

Milk procurement department of any company provides a value-added service to all their milk producers, ensuring that milk of the correct quality is produced and that sufficient raw milk is always available to satisfy company’s needs, through the use of strategies, processes, projects, systems and policy. Procurement teams of companies manage a number of Milk Procurement responsibilities including:

1. Ensuring that the producers are paid promptly and accurately. 2. Purchasing raw milk from producers and transporting it to factories effectively and efficiently. 3. Successful clean milk route development in various new identified areas. 4. Installation of bulk coolers in the area. 5. Milk yield improved. 6. Hygiene practices improvement at all levels of milk production and procurement 7. Reduction of Bacterial Count of milk. 8. Advanced training to drivers in the handling of mass milk in case of emergencies. 9. Trainings to field staff for handling of sample and client.

2.6 QUALITY SYSTEMS IN MILK PROCUREMENTS:

In Pakistani dairy industries following types of quality assurance system exist to assure the procurement of the best quality raw milk.

1. First System: Procurement department is responsible for the procurement of good quality raw milk.

2. Second System:

Quality assurance department support the procurement department for procurement of good quality of raw milk.

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2.6.1 First system:

Procurement department is responsible for the procurement of sufficient quantity of good quality milk. Company develops a lab carrying all the testing facilities of raw milk. A procurement representative is present their to check and receive the quality of raw milk from area as per given standard of company [19].

> Benefits of this system:

1. Fully under control of one department. 2. Less manpower is required. 3. Less cost to company. 4. Under this system the objective of procurement staff become more quantity with the good quality. 5. More amount of volume procured.

> Problems with this system:

1. Monopoly of procurement staff. 2. Sometimes non-calibrated glassware used for measuring and testing of milk. 3. No proper and accurate record maintenance, which results into reduction of mal practices at gross root

level. 4. More rejection of raw milk at plant, this contributes towards losses of the company. 5. Some times in order to avoid the rejection of milk at plant procurement staff himself treat the milk with

some kind of adulterant.

2.6.2 Second system:

Quality assurance department is responsible for the procurement of good quality milk, in this system at each main collection center of company. Company develops a lab carrying all the testing facilities of raw milk. A quality assurance representative is present their to check and receive the quality of raw milk from area as per given standard of company.

> Benefits of this system:

1. Substandard milk is rejected at gross root level. 2. Avoid any un-necessary milk quantity rejection at plant. 3. Monopoly of procurement staff is abolished at center level. 4. As the main centers are under quality assurance department, so all the equipment’s and glassware used for

measuring and testing of milk is properly measured and calibrated so chances of fat loss or SNF loss is reduced this ultimately improve company profitability at gross root level.

5. As all tests are performed at gross root level with accurate glassware, this helps to develop a trust of client on company.

6. Proper and accurate record maintenance, which results into reduction of mal practices at gross root level.

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7. Control of loss at gross root levels. 8. Quick support of QA staff to procurement staff towards any kinds of improvement issues. 9. Better control of Hygienic conditions of raw milk handling at gross root level. 10. This approach gives a relief to procurement staff regarding

> Problems with this system:

1. Expensive as this increase the quality cost. 2. Create miss understanding between procurement and QA staff. 3. Under this system in same organization the objective of procurement staff become more quantity and at the

same time objective of quality staff become good quality of milk. The lake of harmony between the objectives of staff sometimes creates company policy issues.

4. In case of rejection of raw milk at plant, procurement staff will not take the responsibility for its disposal. 5. In meetings some time members of both department has blaming attitude towards each other. 6. Some times company needs more qualified staff to be hired for proper running of this system, this will

increase the staff numbers to be managed. 7. This gross root level quality approach sometimes reduces the volume of raw milk procured by any

company.

3. CONCLUSION AND RECOMMENDATIONS

Given success of the programs discussed in this section, what might the dairy industry look like in the year 2015?

• The formal sector to be 40% of the total dairy industry. • Low cost but good quality pasteurized milk to be available in cities and towns accounting for 70% of

Pakistan’s population. • Pakistan’s dairy industry meets the needs of consumers, thus minimizing imports. • The range of goods offered to consumers is as wide as in say the markets of the Gulf. • The well being of farmers throughout Pakistan is enhanced, and dairying is acknowledged to be a profitable

enterprise. • Dairying will have lifted millions of farmers above subsistence levels of activity. • A thriving commercial dairy farming sector will be in place. • Well-regarded Research Institutes will be active in their chosen fields, with a focus on meeting the needs of

farmers. • Quality of some sectors of the industry will be such that exports are viable. • Dairying will be practiced across Pakistan, in a manner that contributes to balanced regional development. • An integrated rural support economy will be in place, with contractors supplying support services. • Education for professional service providers will be broader than at present, producing qualified experts

capable of proving advice to farmers across a range of farming related matters. • Boosted by a greater contribution to GDP from dairying, rural infrastructure will be much improved from

the present. • Large farms and milk colonies will be generating part of their own energy needs through biogas. • The linkage between the dairy industry and micro-finance providers will enhance the living standards of

millions of smallholder farmers. • An industry with a greater proportion of milk handled by the formal sector, and with consumers more

aware of product quality standards, will be attractive to foreign investors.

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