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A STUDY TO ANALYZE THE SUPPLY CHAIN ISSUES OF DAIRY

PRODUCTS IN AUSTRALIA
Table of Contents
1.0 Executive Summary...................................................................................................................2

2.0 Introduction................................................................................................................................3

2.1 Background of the Study.......................................................................................................3

2.2 Research Aim.........................................................................................................................4

2.3 Research Question.................................................................................................................5

2.4 Rationale of the Study...........................................................................................................5

3.0 Research Methodology..............................................................................................................6

4.0 Findings and Discussion............................................................................................................8

4.1 Plastic Packaging within the Australian Restaurant Sector...................................................8

4.2 Factors influencing the usage of Plastic Packaging within the Australian Restaurant Sector
...................................................................................................................................................10

4.3 Adverse effects of Plastic Packaging within the Australian Restaurant Sector...................11

4.3.1 Adverse effects on the health of the consumers...........................................................11

4.3.2 Adverse effects on the environment.............................................................................13

5.0 Conclusion...............................................................................................................................15

6.0 Recommendations....................................................................................................................17

References......................................................................................................................................20
EXECUTIVE SUMMARY
INTRODUCTION
Background of the Study:-

In July 2000, liberation of dairy industry has transformed the dairy food supply-chain in
Australia with agreement of on-going inter-regional relationships. This has led to the use of SCM
(Supply Chain Management) as the model for the examination of the participation of business
processes within a company and amongst distinct supply chain associates. The dairy products
supply chain in Australia are in their early stages of development with issues of arrangement and
relations among key members, processes of chain formation and changing drivers of supreme
performance. In 2002 Australian dairy industry had a farm value of $A3.7 billion rated as the
third largest rural industry in Australia. 80% of milk production in Australia is done in the south-
eastern corner of the country (Victoria, Brisbane), in which 55% of Australia’s milk is exported
to the 16% of the global dairy exports. The domestic market of dairy products move through 3
distribution channels- markets, route trade, and food service suppliers.  A report by agribusiness
banking specialist Rabo bank, says these reframing changes have been set by a number of major
events, which have caused significant issues for the dairy supply chain. The events that are
responsible for supply change are- drop in national milk production to a 20-year low, the internal
challenges facing Australia’s largest dairy cooperative and the reset in farm gate milk prices.
There are also seen changes in dairy products procurement the fall in milk production, along with
slow rebuild is all due to the changing the way milk is produced in Australia’s southern dairy
region. “Milk supply was at its lowest level in two decades, where Victoria has faced the
heaviest drop accounting for 50% of its decline,” Mr. Harvey says. A breakdown in loyalty is
also seen between farmers and processors, where farmers are planning to remove processors
which is causing a fall-out between supply chains of dairy products. The retailer domination in
Australian dairy-food supply chains is consistent with global developments (Banks & Marsden
1997; Fearne & Hughes 1999). Processor need to balance between closeness with the retailers
and the producers. Retailer domination is still challenging, although processors and milk
producers are being realistic and respecting the changing supply change arrangement. Producers
are noted as the “weak” participants in the supply chain with major needs for skill development.
Milk producers need to meet all the requirements like volume, composition, quality, safety and
environmental standards to qualify as reliable suppliers any blunder in these can cause serious
issues, On the other hand the pricing, order fill rate, and delivery requirements of food sector are
some of the critical concerns are concerted by every stakeholder in the supply chain. Most of the
dairy sector focuses on dairy science, raw milk quality, and technological development and does
not consider the procurement practices.

Fonterra Co-operative Group Ltd is the largest exporter of dairy ingredient products in the world.
According to a research, some reasons were shown due to which the supply chain is affected:-
The root cause of the problem is poor implementation of strategies, poor control, and failure to
follow up on the progress. Some of the other reasons are procurement of products the quality of
raw milk was deteriorated during the transportation from the farmer to the factory, milk was
deteriorated because of transit in the location of the industries. The result from the research
stated that the problem came from the procurement and supply chain field. Strategic plans
adopted by the company eliminate and reduce the problem and ensure maximum productivity of
the company by increasing the profitability index as well as the accomplishment of the
company’s objective.

Research Aim
This study aims to analyze the weakness in procurement and supply chain of Dairy Products
within Australia, with their ongoing supply chain issues. And to focus on the main elements that
result in low quality raw material which affect the final product.

Research Question

1. What are the supply chain issues of dairy industry and its impact on consumers in
Australia?

Rationale of the study

The issue of supply chain in the dairy industry is a long time issue now in Australia. Since it is a
perishable product, the supply chain becomes very important in case of dairy products as it
directly impact the health of consumers. Thus, it is an important topic and the supply chain issues
need to be identified and there is a strong need to find out the solutions for the same. The dairy
products needs an efficient supply chain with proper hygiene so that it could reach safely to
consumers.
Research Methodology

Findings and Discussion

 Climate change is predicted to severely disrupt food production in Australia,


exacerbating these issues. Australia does not hold any food in reserve for use in
an emergency; disasters such as an influenza pandemic can cause transitory
food insecurity events to which the Australian food system is particularly
vulnerable. While the current food logistics system is largely efficient and
effective under normal circumstances, its ability to continue operating in the
event of a major disaster is questionable. Australian food transport is built
around the principle of ‘just-in-time’ movement of freight; this reduces
inefficiency under normal circumstances but leaves no margins in the event of a
disaster. Climate change will also increase the frequency and severity of extreme
weather events which may spark transitory food insecurity (Keating).

The volume of milk going into the liquid milk market now accounts for around 17% of Australia’s milk
production. It is the largest segment of the domestic market, accounting for around 40% of total value of
the domestic dairy market (Australian Dairy Corporation 2002). There are six key factors that have
driven the transformation of the dairy industry in recent years: 1. Deregulation 2. Supermarket
strategies 3. Food safety and supply chain integration 4. Innovation 5. Environmental sustainability 6.
Rationalization of supply base.

The completion of the dairy industry deregulation process in June 2000 is transforming the fresh milk
and fresh milk products supply chains in Australia. This transformation is set in an environment where
markets are getting more complex and competitive, consumers more discerning and conscious about
food safety and public policy is more focused on environment related issues. Supply chains are
becoming more integrated, and innovation in product, process and supply chains is revolutionising the
way products are being produced, distributed and marketed.

With increased own label presence on the shelves and increased shelf space for fresh milk dairy
produce, supermarkets are now looking ways to better manage the category in-store in terms of how
the product is handled, placed in stores, quality, presentation and pack size. Own label products,
including milk, are thus no longer competing only on price but on all aspects with major manufacturers’
brands. Own label products are a priority for supermarkets and their aggressive promotion and
marketing will be a predominant feature of the Australian market over the next decade (Retail World
2003a). In the dairy segment, supermarkets are expanding own labels to include reduced fat milk, low
fat milk, flavoured milk, UHT milk and other fresh dairy produce. Supermarkets are now more aware of
the cost structures of the processors and thus have leverage in bargaining. However, they are also
realising that a sustainable and profitable supplier is critical for their survival and they need to be
accommodating in sharing the profits in the supply chains.

A more discerning and food safety aware customer is a major factor behind increasing supply chain
integration. Consumers want to know more about the products they purchase, the composition of the
products, where ingredients come from and the way in which the products are produced throughout the
chain. To ensure traceability throughout the supply chain, from raw material to product on the shelves,
an integrated, transparent supply chain is necessary, which in turn requires standardisation of data and
supporting technologies such as tracking and tracing systems (Retail World 2003b).

To ensure traceability throughout the supply chain, from raw material to product on the shelves, an
integrated, transparent supply chain is necessary, which in turn requires standardisation of data and
supporting technologies such as tracking and tracing systems (Retail World 2003b).

The relationship between retailer and processor is moving from a buyer-supplier relationship to a
partnership approach. Processors now have multi-functional linkages with supermarkets and are gearing
business structure to meet with supermarket demands (Fearne & David 1999). They are restructuring
their distribution and marketing networks to be more proactive and responsive to the customer
requirement. Business unit managers are being put at respective supermarkets to assist/shape
customer’s view of the category and its future development. Supply chains are being streamlined to
facilitate integrity and squeeze out any inefficiency in the system. Processors are investing in
information tracking systems to be up-to-date with the market developments and competitor moves.
Electronic information sharing is being enhanced to create a more responsive, efficient and paperless
transactional environment. However, there are costs associated with bringing about these changes and
how supermarket specific these changes should be is an issue that will need to be addressed by the
processors.

The relationship between retailer and processor is moving from a buyer-supplier relationship to a
partnership approach. Processors now have multi-functional linkages with supermarkets and are gearing
business structure to meet with supermarket demands (Fearne & David 1999). They are restructuring
their distribution and marketing networks to be more proactive and responsive to the customer
requirement. Business unit managers are being put at respective supermarkets to assist/shape
customer’s view of the category and its future development. Supply chains are being streamlined to
facilitate integrity and squeeze out any inefficiency in the system. Processors are investing in
information tracking systems to be up-to-date with the market developments and competitor moves.
Electronic information sharing is being enhanced to create a more responsive, efficient and paperless
transactional environment. However, there are costs associated with bringing about these changes and
how supermarket specific these changes should be is an issue that will need to be addressed by the
processors.
Upon investigation, the researchers found that there existed a weakness in the field of
procurement and supply chain of the company. The researchers found that the quality of raw
milk being poor begun from the main producer who is the farmer. According to Bava et al.,
several reasons results in the poor quality of raw milk, including the animal feed given to the
cows and the milk handling processes (2017).

The procurement department did not take keen precaution in checking the quality of the milk

upon purchase or rather the quality measures used did not reach the required standards.

The raw milk also deteriorated in quality during transportation from the farmer to the factory.

This was caused by the increase in the time taken to transport the milk to the factory from the

farmers. Another cause for quality deterioration in transit is the location of the industries. The

industries are located in the busy town centres where road congestion increased the time taken

before the transporting vessel could reach the factory, lowering the quality of the milk through

the increase in microbial activities.

The storage of the raw milk before processing took a long time which increased the microbial

activities in the milk. This lowered the quality of the milk input which had a great effect on the

final products and the cost of disinfection of the milk rises.

The early evolution of the Australian dairy supply chain was shaped by a number of technical and policy

factors. The technical factors involved the introduction of new technology at the farm level in milk

handling and the separation of milk components. Over time the shift to a factory based system of milk

handling saw the transfer of these technologies from on-farm adaption to milk collection centres.

The policy factors that shaped the evolution of the supply chain involved a mix of measures. From an

efficiency perspective some policy related factors enhanced outcomes and others had a detrimental

effect. There were gains achieved through then introduction of food safety regulations that encouraged
the adoption of new technologies and improved milk handling practises. Industry efficiency gains were

also obtained from government funded extension efforts that focused on post milk harvesting: • farmer

education programs on milk handling practises and demonstration dairies to encourage the adoption of

new technologies were important policy related developments in the evolution of a more efficient

supply chain; • these measures complimented the extension efforts to improve farm production

efficiency – a balanced approach in the use of farm extension assistance was a key factor in improving

supply chain efficiency.

Issues with Fonterra:

According to the investigation, several reasons resulted in the deterioration of the quality

of milk from the farmers and the poor management of the milk stores. The reasons include:

Poor or lack of education for farmers. Most farmers lacked proper knowledge of milk

handling processes which increased the bacterial contamination of the milk. According to Berge,

poor health and production environment, milking procedures, and the sanitation of the equipment

increase microbial contamination of raw milk (2020).

The poor milk transportation system. The insulated transportation tanks contained a

mixture of raw milk from two to three farming centres which increased the colony count of the

milk raising the acidity of the milk.

Distance. Some of the farmers are further away from the company’s premises. Long-

distance increases the time taken to transport milk from the farmers to the factory, deteriorating

the quality of the milk (Ruang, 2016).


Poor storage. It was found that there was a prolonged period of milk storage before

testing and processing. This allowed the bacterial contaminants to multiply increasing microbial

density which deteriorates the quality of milk.

Scope, Location, and Circumstance

The main centers where the problem was evident were the Bayswater manufacturing site,

and the Cobden site, Victoria. These sites are located in the major town centers away from the

activities of the farmers, which increases the distance of milk transportation. Another

circumstance that was likely to affect the transportation in these factories is road traffic

congestions leading to the delay at which the milk reaches the factory for processing.

The Impact and the Affected

According to the investigation, several parties were likely to be affected by this problem. These

include:

The company. There is increased loss to Fonterra company in the process of milk

decontamination before processing due to low quality which is caused by several issues. Low

quality of milk input to the processing company increased the cost of production which lowers

the profitability index.

The customers. Poor quality input results in poor quality output. There is a likelihood of the final

products from the company to be poor despite the decontamination process to improve the

quality of the milk. In this case, the customers of the final products are likely to be affected by

the poor quality of raw milk input.


The supplier. The supplier of the company's raw materials is daily farmers. The company may

lower the price of purchasing the milk depending on the quality. This has a great effect on the

producers for they may encounter losses in such circumstances. Another circumstance is when

the milk reaches the factory and tested only to be confirmed of low quality or be rejected. In this

case, the farmer is the one to suffer the loss or the transporting company if there is any contract.

Conclusion

The Australian fresh milk and milk product industry is in a transformation phase since deregulation and
may take many more years to stabilise. This decade will see a continuation of the process which has led
thus far to a substantial increase in scale, scope, sophistication and strategic importance of the fresh
milk supply chains in Australia. It is clear that the dominance of food retailers in food supply chains in
Australia is growing, however, it is to be seen whether retailers in Australia recognise the opportunities
to drive value and not only volume in the fresh milk category. Milk processors and producers are
realigning themselves along the supply chain to meet the market expectations. Further analysis of data
is expected to look deeper into the strength of drivers of change and the implications of supply chain
integrity on the actors in the supply chain.

Recommendations

The effect of deregulation was felt more in states such as Queensland, NSW and WA, where a higher
proportion of milk was utilised in drinking milk. In Queensland farm numbers were reduced from
1999/00 to 2001/02 by more than 25% and in NSW more than 23% (Australian Dairy Corporation 2002).
Drought and growing concern on environmental issues put further pressure on milk producers. With
decreased profit margins, increased uncertainty in the market place, increased input costs, stricter
water and land use regulations, a number of less efficient producers have left the industry and the
remaining are becoming larger and more efficient.

Economic efficiency Milk producers are increasing efficiency with expanding herd size to achieve
economies of scale and paying more attention to the detail of farm management. They have upgraded
dairy equipment, irrigation systems, and are monitoring their costs more closely with benchmarks. They
are improving their feed conservation systems and in many cases growing their own feed to override
cost fluctuations.

Contractual relationship Milk producers are entering into contracts to have greater security. On the
input side forward contracting on feed is a growing trend. For the milk sales the majority of milk
producers now have supply contracts with their processors. To gain best value from these contracts milk
producers will need to upgrade evaluation and negotiation skills.

Producer activism Milk producers are also trying to redress the perceived power imbalances in the
supply chain through attempts to collective bargain for a sustainable base price, have some say in
retailer-processor milk price negotiations and lobbying with environmental agencies.

Innovation In keeping with the overall trend in the supply chain, milk producers are also innovating in
farming systems as well as trying to find new consumption opportunities. Producing milk to processor
specifications, finding a niche in organic milk production, processing own milk, which finds acceptance in
the local community due to embeddedness and perceived freshness, are some of the examples milk
producers are innovating.

Better communication with processors With relationships becoming critical to long-term sustainability
of all actors along the supply chain, there have been attempts on both sides, milk producers and
processors, to improve communication in terms of market trends forecasting and signaling. In the new
environment, rather than simply delivering a bulk commodity to the processor, milk producers need to
understand the quality specifications, the contractual obligations of both parties, where the risks lie and
who bears those risks (Hobbs & Young 2000).

Environmental sustainability Farmers also need to become more efficient in terms of water and land
use efficiency. With increasing herd sizes and moves towards intensive farming, animal welfare is
becoming an important issue. Even though farmers recognise the importance of these issues, they are
currently in a changeover phase and there is certainly a scope for better communication and exchange
of information between environment protection agencies and the milk producers.

Use of RFID

RFID technology is currently considered as a key enabler of supply chain transformation.


However, very little has been written about the deployment and use of RFID in the dairy
industry.
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