Milk Operations Organization Ltd. We are ushered into the board room of one of Europes oldest companies.

A very old dairy company, this firm was one of the few remaining firms that still supplied milk to doorsteps in a country in Europe. Extremely short on cash flow, falling milk subscriptions, product inventory and perishability had all been plaguing this firm. In the meeting are present 1. 2. 3. 4. 5. 6. 7. 8. 9. CEO CFO CIO Head of Marketing Head of Manufacturing Head of Milk Division Head of Dairy Products Division Head of Procurement Representative from Product firm XYZ (invited like us)

How can you help us? is the question our team is expecting at the end of this meeting. Our presence in this meeting is at the insistence of the CIO. Milk Operations Organization Ltd. is divided as follows: 1. Milk Division a. Consumer Division b. Industrial Division 2. Dairy Products Division a. Spreads Division (Butter and Other Spreads) b. Cheese Division Interestingly the profitability and revenue percentage share of these divisions is as follows:

Revenue
15 19 66 38

Profit
13

Milk Cheese Spreads

Milk 49 Cheese Spreads

Products manufactured by Milk Operations Organization Ltd. are: Bottled milk, flavored milk, tetra-pack milk, milk powder, butter, lite butter spreads, cheese and cheese spreads. Bottled milk is supplied to residences as well as businesses, hence the industrial sub-division.

The CEO welcomes everyone to the meeting and states that it doesnt look likely that they will meet their profit guidance this time around. He requests the CFO to state the situation for the benefit of all concerned, from a shareholder perspective. The CFO states share-price figures that are disappointing and proceeds to state that unless some hard decisions were taken regarding non-performing areas of the company, the cost structure looked unsustainable. He also says that along with the CEOs office they have conducted an analysis which indicated that they were completely unable to control inventories and in a highly perishable product line that spelt disaster. Also, their manufacturing lines seemed to be less efficient than earlier and it may need a deeper analysis at the plants themselves. This had also been communicated earlier to the manufacturing head as well as head of procurement and it is hoped that they can throw some light on the problem and potential solutions. Also, since most of these problems were seen significantly in the Milk division rather than the Products division, the Milk division head was also expected to outline his plan for tackling this situation. The Milk Division head speaks next. He first shares a page with all showing a set of figures:

Revenue Mn Euros
1400 1200 1000 800 600 400 200 0 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Profit Mn Euros

1140

1231

1034

899

1.01

1.02

1.1

1.25

2013

2012

2011

2010

2013

2012

2011

2010

Residential Customers
2200 1100000 1090000 1050000 1000000 1000000 950000 900000 2013 2012 2011 2010 975000 1040000 2150 2100 2050 2000 1950 1900 2013 2000

Milkmen

2100

2150

2200

2012

2011

2010

The Head of Milk Division went on to say that as visible from the sheet, milk subscriptions have been steadily falling. The cost of fresh milk delivered to your door in the morning is a cost that more and more customers seemed un-willing to pay. They could find cheaper alternatives in the supermarket often from Milk Operations Organization Ltd. themselves. Since long life milk has slightly higher shelf life, it could be cheaper but more importantly the delivery logistics were a drain that supermarket deliveries didnt have to contend with. The primary costs in the logistics chain were from depot maintenance, vehicle maintenance, fuel, and manpower. In fact, reducing manpower had an adverse effect on fuel because the subscription reduction did not always mean route reduction. Earlier there was a force of habit that drove the milk subscriptions in spite of higher pricing. However just like newspaper delivery to the door was becoming scarce so was milk delivery to the door. People were happy to read news on the net or mobile, and similarly buy milk on demand from their nearby stores. In fact there was a generational shift that their company now needed to plan how to address. The Head of Milk division then shared a paper which showed the generational shift of how people shopped for food in the country, showing percentages of food spend by retail type.

100 95 90

1 9

3 8 3

4 6 1

6 4

Web Convenience store Local Mom and Pop Superstore

5 85 80 75 1995 85

86

89

90

2000

2005

2010

With such a large shift in consumer behavior he argued there were two main issues his division faced, and in the given situation, dealt with them the best they could: 1. Falling demand and hence inventories piling to an extent 2. Increased per delivery logistics costs which could not be passed on to the consumer He had tried his best to stem the attrition and control costs by 1. Improving delivery assurance (it was difficult to move the needle here because over the years he has already made it a very reliable delivery system) 2. Increasing supermarket products manufacture i.e. tetra-pack milk, flavored milk as well as milk powder

3. Giving adequate heads up to manufacturing based on trends, but manufacturing still insisted on pushing bottled milk and seemed reticent to change production numbers His conclusion was that he had adequate planning in place in his division but upstream parts of the company needed to heed his planning and change accordingly. The Head of Manufacturing spoke next. He started with a guideline that had been arrived at after just such a meeting in the CEOs office year before last: It has been observed that while we have tried to put forecasting and planning in place, there are inventory problems in 1. Bottled milk, and 2. Powder milk. While bottled milk causes perishability loss, powder milk is very low in margin. Since we are struggling to remain a profitable company, manufacturing planning needs to be based on forecasts from downstream divisions. Any excess production should be pushed downstream on a proportional basis rather than manufacturing excess bottled milk and/or milk powder. Therefore, he said, downstream units may receive excess product based on the production batches that are running and that was just the nature of the business. He assured all present that any excess was allocated based on total forecast ratios. The Product firm XYZ representative spoke up saying that had they been using their forecasting tools well, this would not happen. Why would there be excess production if it is planned. If it is purely for efficiency of the production line, it may make sense to look at the cost-benefit given the margin impact it was having. The Head of Procurement spoke up to explain the nature of the business to the visitors. Milk Operations Organization Ltd. procured milk from thousands of farmers across the country. They had to necessarily procure whatever quantity of milk a farmer brought in to their sourcing centers. That was in the contract. Because a farmer wouldnt sign a limited quantity contract since that meant he would waste some milk if he was in excess. All dairy procurement operated in this way and if Milk Operations Organization Ltd. tried to change that, their competitors would sign on that farmer. Reality was that cows produced more milk in winter than in summer and there was a clear trend. Also year on year milk production techniques and feed were getting more advanced leading to a steady increase in production. Once the milk is procured it is double checked for quality, stored in towers, processed and then either converted to different products or bottled. If there is excess milk than needed based on downstream forecasts, you still needed to use it within that day in production.

Milk procured (Mn litres)

165 160 155 150 145 140 135 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012

With that very useful insight the Head of Procurement begged the pardon of the Head of Manufacturing and requested him to continue. But the Head of Marketing spoke up. Before anyone says that while supply is bound and contracted, it is marketings job to ensure demand keeps pace, let me say that all we ask for is a little heads up. If we know just a month in advance that there will be excess production we can plan promotions or activate channels to food service customers or tie up with supermarkets for complementary promotions. We can even tell manufacturing where the excess should be routed rather than just pushing it across the portfolio but we dont get that heads up. The Head of Procurement stated that it was very difficult for him to forecast the nations cattle mood swings and that elicited a muted chuckle or two. He proceeded to say that he would appreciate any ideas from the consultants present on this aspect. The Head of Manufacturing then continued. He stated that often mid production, the spreads division would call up plants trying to influence the plant managers to move more excess towards cheese production. The spreads folks would complain that the current forecasting did not create accurate enough forecasts and they did not want a problem of over supply especially given the refrigerated storage required. That sometimes led plants to create more cheese and milk powder purely based on the relative ease of storage. The products division head spoke up. He said that he felt that their ability to plan was limited by the fluctuating demand that they saw which was typical in any branded products unit. Promotions, trade incentives, etc. existed for that purpose. To provide levers to adjust demand. Any consumer product business, he maintained, could not be run like an old milk supply business.

The Product firm XYZ representative spoke up. He said that Milk Operations Organization Ltd. was using their product for demand forecasting and it was impossible that their forecasting tool did not give a good forecast provided the right inputs were provided. For the tool, he said, any historical demand was just a number. As long as those numbers showed a trend, the future number could be extrapolated. There were no exceptions to this. He said 70-80% accuracy was delivered by their tool in other clients. The Marketing Head then said if the demand trend could be forecasted to 80% accuracy, he could use media, discounts, retailer push and other techniques to manage some of the problem. But was 80% possible? He looked to us and said, what do you gentlemen think? Youve been pretty quiet so far? So,
1. 2. 3. What are the core issues afflicting Milk Operations Organization Ltd.? Is it possible to address those issues? Can Milk Operations Organization Ltd. remain relevant in todays consumer scenario? What are your initial ideas to turn around Milk Operations Organization Ltd. given the above information?