Protable growth and value

creation in the dairy industry

A view from Deloitte and SAP
Consumer Business

Table of Contents
1. Introduction . .......................................................................................................................................... 1
2. Background . ........................................................................................................................................... 1
The business environment for the dairy industry ..................................................................................... 1
Business performance improvement priorities the path to value ......................................................... 2
3. Market trends and industry challenges ............................................................................................. 2
Changing consumer tastes and requirements ......................................................................................... 3
Food safety and security legislation ......................................................................................................... 4
Milk procurement and payment ............................................................................................................. 5
Accurate production planning ................................................................................................................ 6
Tracking material costs, usage, and losses .............................................................................................. 6
Tank management .................................................................................................................................. 6
Inventory management issues ................................................................................................................. 7
Increased costs in the sales and distribution process ............................................................................... 7
4. Dairy industry process improvement opportunities ....................................................................... 8
Increase speed to market with effective new product development ....................................................... 8
Improve manufacturing control through enhanced traceability ............................................................ 8
Reduce costs with integrated procurement and payment systems and processes .................................. 9
Increase efficiencies throughout the dairy production process ............................................................... 10
Planning and scheduling ........................................................................................................................ 10
Raw material separation and valuation .................................................................................................. 10
Free up working capital with improved inventory levels ...................................................................... 11
Improve customer retention levels with integrated sales and distribution capabilities ......................... 12
5. Solutions for the industry what can dairy companies expect? ................................................... 12
6. Conclusion ... .......................................................................................................................................... 13
1
1. Introduction
Over the next few years, the once conservative and
slow-moving food industry will undergo a global
transformation. Dairy companies, which operate in this
arena, face ever-changing consumer tastes, increasing
emphasis on food safety, and growing pressure to
boost supply chain efciency. At the same time,
however, recent technological advances in milk-based
manufacturing are creating opportunities for process
improvement. This paper provides insights on the market
trends and challenges facing the dairy industry. It also
explores the opportunities and cites specic solutions
that can enable dairy companies to meet current and
future industry challenges and drive protability and
growth.
2. Background
The business environment for the dairy
industry
There are over 6 billion consumers to feed around the
world. Middle-class consumers comprise an increasing
portion of this market, representing the primary
growth opportunity for food companies. Collectively
and individually, food companies today face a host of
challenges and opportunities in meeting this demand.
In addition, industry participants are experiencing
competitive and margin pressures from all sides a
situation that has been exacerbated by increasingly
brutal retail competition and a weak global economy
over the last several years. Against this general
backdrop, several trends have emerged that are shaping
the business environment for the dairy industry:
1) Deation is affecting most agribusinesses. Retailers
are negotiating lower prices with major manufacturers,
who in turn are demanding reduced prices and
improved performance from their own suppliers. In this
difcult operating environment, rms must concentrate
with laser-like precision on increasing efciency,
especially within their supply chains.
2) Power is shifting from manufacturers to retailers, who
have been gaining brand equity. The dominant retail
players such as Wal-Mart, Metro, Tesco and others are
rewriting the rules, both for retailers and manufacturers.
Their innovative business practices, including Every Day
Low Price (EDLP) strategies and a willingness to share
demand and inventory data, have driven suppliers to
improve their supply chains. There is a lesson here.
Suppliers and retailers across the industry need to work
together more closely to exchange more relevant and
timely consumption data. This will help reduce the
enormous costs, estimated to be $25 to $50 billion
USD, associated with incorrect information in the supply
chain, particularly at the invoice and SKU levels. Firms
will need to retool to take advantage of this information,
which will increasingly become available. They will
also need to exploit new technological advances that
promise the improved inventory control and reduced
order cycle-times necessary to drive top-line revenue
growth while minimizing costs.
3) Consumer tastes and requirements are evolving
due to rising concerns over safety and health issues,
more diverse populations, and changing lifestyles.
Encouraged by vigorous competition among retailers
and an environment where, in mature markets, there
is excess retail capacity, consumer expectations for
quality, availability and value continue to grow always
expecting more for less and generally getting it.
4) Effective innovation is the key to achieving the elusive
goal of protable growth for producers/processors.
Companies that want to stay in the forefront need to
apply both technology and biotechnology to their fullest
potentials to bring a constant stream of exciting new
products to market, while actively managing their overall
brand and product portfolios.
5) Merger and acquisition activity should increase over
the next few years as industry consolidation gathers
momentum. As the global economy strengthens
and corporate balance sheets improve, the desire to
2
consolidate and achieve category leadership will re-
emerge. Companies need to achieve economies of
scale and expand their product lines. Moreover, leading
retailers are encouraging consolidation within their
supply base as a means of driving complexity and cost
out of their own businesses. Food manufacturers will
therefore continue to acquire smaller competitors and/or
merge with larger ones. Among the worlds major
players Nestle has, for example, spent approximately
$20 billion on acquisitions over the last several years.
Similarly, many mid-market companies in dairy and other
food categories are actively pursuing growth strategies
based on acquisition of underperforming competitors
that offer real opportunities for value creation.
Business performance improvement priorities
the path to value
Considering these market challenges, how can dairy
businesses drive protable growth and create value for
their shareholders?
In practical terms, there are four areas on which
companies in the dairy business need to focus:
Revenue protection and enhancement for
example, as driven by product and packaging
innovation, differentiated quality, improved product
availability and better management of customer
relationships
Cost reduction/margin improvement for example,
through improved operational efciency, lower labor
costs, reduced waste and the capture of operational
benets from acquisitions
Improved asset utilization for example, through
reduced inventory levels of inbound dairy products
held in cold store and faster turnaround of re-usable
transit packaging in the supply chain

Regulatory/assurance for example, through

demonstrating quality by participating in retailer
assurance schemes; assisting trade customers in
achieving full compliance with new traceability
legislation; and, of course, improving food safety
and managing business risks
3. Market trends and industry challenges
The food industry generally, and the dairy industry
specically, are for the most part low-margin businesses.
They are also extremely competitive. Smaller companies
tend to specialize in producing category products (i.e.
meat, dairy or bakery goods). A few of the worlds
food giants produce many brands crossing multiple
categories, but those brands fall into self-contained
categories as well. Thus, the food market is not really
one market; it is a collection of markets focused on
different types of products, processes and requirements.
Each category has unique issues and needs.
Recent dairy industry trends center on food safety,
differentiation through quality, rigorous cost
containment, careful inventory management, change
management, and channel complexity (including the
growing inuence of retailers on the supply chain).
These trends have impacted the food industry in general
and the dairy industry in particular.
The dairy segment is possibly one of the most diverse
food categories, producing both bulk and consumer
goods. Dairy products can have vastly different
characteristics, ranging from beverage to powder, solid
to viscous, canned, bagged and boxed. Furthermore,
each type of product has a unique set of requirements
for successful manufacturing and supply. The common
denominator among them is that they all start from the
same source raw milk.

3
Changing consumer tastes and requirements
Today, about two-thirds of Americans and an increasing
number of Europeans are overweight or obese. Due
to health concerns and social pressures, many of these
people have started to manage their weight and change
their lifestyles. Consequently, consumers are increasingly
looking for lower-carb and higher-protein products.
Savvy producers are rapidly responding to these
demands. For example, a low-carb chocolate bar has
recently been launched in the UK market.
In addition, the latest research suggests that three
servings of milk, cheese or yogurt a day can aid weight
loss, which is terric news for the dairy industry,
especially in light of growing consumer health concerns.
The healthy image of dairy products can especially be
maximized in the snack category, where companies can
emphasize the convenience and nutritional aspects of
snacks containing milk, cheese and yogurt.
Demand is also increasing for functional foods, or
those designed to address specic health and tness
issues, such as maintaining a high energy level or
controlling blood pressure or high cholesterol. Examples
of new functional-food products include aloe-vera-
fortied yogurt in Germany, beauty yogurt in China, and
a fermented milk beverage from Finland, which helps
lower blood pressure.
These health-oriented trends translate into tremendous
opportunities for the dairy industry. Dairy products
already have a healthy image, and milk naturally
contains many nutrients, such as calcium and protein.
Recent advances in technologies, such as ultra-
ltration, allow producers to offer products that are
low in carbohydrates and that contain little or no
lactose. VALIO, the leading dairy company in Finland,
is pushing the worldwide sales of lactose-free milk
together with Tetra Pak. Also, the Swiss dairy, Emmi,
will begin production of lactose-free milk using the
VALIO technology. (Source: Milch-Marketing Online,
26.08.2004)
Today, consumers require not only healthier products,
but also highly differentiated and convenient ones.
Accordingly, demand for standard products, such as
homogenized milk, is declining as consumers gravitate
toward a variety of partial-skim and niche branded
products. This has led to a proliferation of nished
goods lines, particularly in the area of low-fat, UHT and
cheeses.
The increased production of specialty cheeses in the
consumer sector has been accompanied by increases
in the production of products with longer shelf lives,
particularly in the Middle Eastern markets. In recent
years, the dairy processing industry has made signicant
investments in ultra-high-temperature technologies that
extend shelf life. This, in combination with aseptic and
multi-layer packages, enables producers to ship their
products over greater distances, to store milk at ambient
temperatures, and to ensure product integrity for longer
periods of time. These advances have helped producers
to meet consumer demand for highly differentiated
products.
The consumer sector, however, isnt the only one
experiencing change. Demand for more specialized food
ingredients in the industrial sector has risen as well. This
demand for variety on both the consumer and industrial
fronts has led to shorter product runs, often with
multiple packaging requirements, in order to maximize
use of the plant.

















4
Another trend that is inuencing dairy production is the
evolution of genetically altered foods. Consumers and
farmers in the U.S, generally accept genetically modied
foods. In Europe, however, consumers are much more
critical of these scientic advances, although a recent
European Parliament vote to require strict labeling of
genetically altered foods should pave the way for limited
acceptance.
Accurate labeling is a particularly important issue for
consumers with food allergies. Due to liability concerns,
manufacturers are being more vigilant about their
ingredient lists. In addition, changes in manufacturing
and demand patterns mean that some producers may
now be servicing a larger and more geographically
dispersed customer base, creating a need for language-
specic labeling. This requirement, combined with a
heightened demand for brand variety and nutritional
and content information, has dramatically increased
the number of unique packaging congurations that
producers must manage.
Manufacturers must be able to meet the challenges
posed by these fast-moving consumer trends and
rapidly adapt to changes in products, recipes,
packaging strategies and other parts of the total
product offering. New brands and even line extensions
(product variations) launch every day. According to
Food Technology Magazine, over 32 million Americans
are following a low-carb regime. MINTELs Global New
Product Database reported that 357 new products
featuring statements about carbohydrate reductions
were launched in the U.S. during the rst seven weeks
of 2004 alone. Adding to this complexity are the many
brand variations that occur on a daily basis, requiring
new formulas, new production methods, and new
packaging characteristics.
In most markets, especially consumer-related ones,
the number of new product introductions per annum
has increased dramatically. For example, a study of the
consumer-packaged-goods markets revealed that new
product introductions had increased almost tenfold over
an 18-year period:
Figure 2: Number of Product Launches
Source: University of Nottingham; Cox WM, Alm R (1998), The right stuff:
Americas move to mass customization, Federal Reserve Bank of Dallas,
Annual Report 1998, Dallas
Dairy industry participants are not only being challenged
to quickly develop and introduce new products but
they must also ensure that a prot is made on them. An
AMR study from 2001 reported that over 95% of the
new consumer products launched between 1996 and
2001 lost money or broke even. Nonetheless, if done
successfully, innovation and product introduction can be
the single most important driver of protable growth
and value creation.
Dairy companies also must respond to pressures to
change the way business is conducted, which are often
driven by retailers desire to remove cost and complexity
from their own businesses. For example, Efcient
Consumer Response (ECR) philosophies dictate
new ways of doing business, requiring substantial
changes in how demand and supply are planned and
managed. Meeting these demands requires a high
level of responsiveness on the part of a dairy processing
business, but responding effectively is crucial to
developing successful long-term relationships with key
customers.
Food safety and security legislation
Governments, manufacturers, retailers and consumers
around the world are all concerned about the safety
and security of our food supply. Food safety failures
make big news around the world. Amid this growing





5
concern, industry regulators are cracking down on
sanitation, batch segregation and a variety of sector-
specic food-safety requirements. Compliance is crucial
for all types of food businesses, but especially for dairy
companies due to the perishable nature both of the raw
materials and the nal products. Any food manufacturer
or agribusiness that fails to address growing food-
safety concerns will nd that, once consumer trust has
been lost, it is extraordinarily difcult to regain. The
intensied focus on food safety is driving the industry to
respond by upgrading the integrity and accountability of
the supply chain.
While food safety is the major focus in Europe, the
emphasis in the US is more on bio-terrorism and
food security. However, the provisions in the 2005
traceability legislation in the US, which stemmed from
the Bioterrorism Act of 2002, and those in the EU
Directive 178, Articles 18 and 19, are very similar. The
U.S. Food and Drug Administration (FDA) is proposing
the registration and tracking of almost all domestic and
imported food articles, but some are concerned that the
complexity of the rules will overwhelm both the food
industry and the FDA.
Most modern food law is based on a set of principles
known as HACCP (Hazard Analysis and Critical Control
Points) a methodology originally developed for the
US space program. HACCP is a system for analyzing
production or product handling processes to detect
hazards and risks of contamination within those
processes. HACCP is increasingly being recognized as
the most reputable and effective vehicle for ensuring
food safety. HACCPs application covers the entire food
production process, from the purchase of raw materials
through end usage by the consumer. Dairy companies,
in light of the vulnerability of their products to
contamination, need to comply with HACCP standards
as they apply to their businesses, and to consistently
strive to improve quality/sanitation-control systems.
Dairy companies, therefore, must invest substantial
resources in ensuring the safety and quality of their
products. They must invest in compliance, inspection
and insurance and quality assurance at every step of
the production process. Those businesses that invest
well will be able to improve efciency and decrease
waste, as well as reduce risk and provide high levels of
batch segregation and traceability.
The capability to trace products at the batch and
sub-batch level is growing in importance. Just one
tainted package or container can breed negative
publicity in addition to the underlying health and
safety issues. Failure to manage quality is a catastrophic
mistake. A food scare may follow a company for years,
causing sales and/or market share to plummet. Many
companies do not survive such problems becoming
easy acquisition targets.
Milk procurement and payment
Standard procurement agreements typically involve
a dairy accepting the complete amount of raw milk
produced by a farmer (producer). The farmer is
compensated using exible payment terms based on
quantity and quality of the raw milk, which is gauged
by criteria such as fat and protein content. Dairy
manufacturers must also cope with seasonal uctuations
and changing demands regarding the buying and selling
of other raw-milk materials, such as cream, skimmed
milk, concentrates, and standardized milk.
Dairies often struggle to pay multiple farmers and
transport service providers for a variety of reasons. These
include: the high cost of the raw material compared
with total production costs; the ever-changing quality of
the raw material; and the high costs of collecting it.
The challenge here is for manufacturers to efciently
manage and control the variances in the quality and
quantity of the raw milk collected. Lack of access to
real-time data about the milk can lead to inefcient raw
material utilization and inaccurate demand planning and
forecasting further down the supply chain.
6
Accurate production planning
As distribution processes become streamlined, a
shorter supply chain eventually pushes back into the
manufacturing plant. This phenomenon is usually
accompanied by the assumption that the supply chain
will be more responsive. Plant executives need adequate
systems in order to meet customer expectations for
shorter response times and greater exibility. Variable
customer requirements, reduced inventory levels, ever-
changing schedules and shorter production runs also
impact plant operations and necessitate the use of
automation to ensure peak efciency.
A living animal produces milk and, as such, there are
certain constraints on when and how much can be
produced. Consequently, there are dry periods, and milk
quality and quantity will vary as feed supply and season/
temperature changes. Effective production planning
and processing must be able to accommodate variations
both in the available quantity, and in the available
quality, of the raw material and its components.
The challenge lies in how to plan for the variations that
occur when using a non-standardized raw material and
how to cope with yields that will change over time.
Product mix, packaging materials with long lead times,
and even product content must be balanced in order
to optimize the utilization of available resources, model
the cost effects of changes, and, ultimately, to maximize
protability.
Tracking of material costs, usage, and losses
For any food company, cost is a constant focus. Margins
are slim. This is an industry that celebrates saving
one-hundredth of a penny per unit -- let alone a whole
penny! Each unit generates revenue and each dairy
company has to control the nal selling price of its
product. Each organization also tries to offer the best
price-quality ratio. To control losses, successful dairy
companies monitor operations at the most detailed
level. Plants must keep a close watch on yields and
labor, using techniques such as tracking material usage
and varying shift operations to maximize capacity. As
one food company executive put it, we have invested
heavily to be able to know our margins throughout the
process, and this gives us a competitive advantage.
Many dairy companies face very real challenges
associated with streamlining/combining operations
and then coordinating information with integrated
systems. Many large organizations have invested in
recent technological innovations in automation and
control, which have resulted in drastic reductions
in labor, and the widespread use of process control
instruments. However, it is difcult to make decisions
regarding when, where, and how much to invest in
these new systems. For mid-market organizations, these
decisions are even more critical because they typically
represent a large portion of the companys capital
allocation. If the investments do not pay off, it can
threaten the viability of the business.
Tank management
In a dairy plant, the raw milk and the many intermediate
products from the various production stages are stored
in tanks, silos and vats. The status of these vessels,
whether they are full, partially full, or empty, must be
tracked and managed along with the attributes of the
product, such as expiration date, batch number, and
quality characteristics. Checks are necessary to prevent
contamination or unauthorized mixing of products or
batches, and stringent management practices must be
respected and adhered to when mixing two batches
together.
The physical attributes and dimensions of these vessels
are also important when tracking and managing the
tank lling levels. For instance, a typical check involves
taking a measurement in feet or meters, which in turn
needs to be converted into liters and gallons. To add to
the complexity, a reading of three meters in one tank
7
can result in a different ll-quantity than three meters in
another (based on physical dimensions).
Because bulk deliveries are commonplace for both
incoming and outgoing raw materials and products,
the ability to record the actual quantities moved within
the production stages becomes important. This is
especially true if a multi-site and multi-line process, such
as scheduling, planning or monitoring, is required. The
challenge is to be able handle the complexity. Managing
the tank-lling levels, by-product ow, cleaning time,
waste or possible contaminations requires efcient
tank management capabilities, as well as exible batch
management ones, for all manufacturing operations.
Inventory management issues
The high perishability of fresh dairy products creates
specic inventory management challenges for dairy
manufacturers. Given the agreements between the
farmers and the dairy, there is a continuous ow of raw
milk supply coming into the dairy value chain. However,
the demand side is more uncertain due to seasonal
uctuations, competitive activity, and retailer price
pressures.
Cold storage constraints make it necessary to carefully
plan for the receipt and quick usage of raw milk and
nished products. Accordingly, there is constant
pressure to keep inventory levels to a minimum.
Inaccurate sales forecasting can cause products kept in
stock to over-run their shelf-lives and, therefore, to lose
value.
Since the quality of incoming raw materials may vary
considerably with respect to fat content and solids,
dairies must be able to adjust their manufacturing ratios
in real-time to account for uctuations. They must
also be able to track the quality characteristics of the
inventory throughout the manufacturing process.
According to a 2003 Grocery Manufacturers of America
(GMA) Logistics study, which investigated supply chain
performance of CPG companies, overall inventory levels
have decreased from 46.1 days in 1999 to 44.7 days in
2003. However, this is far behind the 27 days predicted
in the Efcient Consumer Response Initiative of 1993.
Some possible reasons for the lower-than-expected
reduction in inventory levels of nished goods include:
Increased number of new products
More slow-turn items
Shorter order-to-delivery cycles
Forecasting inaccuracies
Other supply chain issues, such as out-of-stocks,
unsaleables and invoice deductions, continue to
create costly inefciencies for manufacturers and their
customers.
Increased costs in the sales and distribution
process
Retailers are increasingly inuencing the entire dairy
supply chain. The growth of superstores, shifts in
trading partner organizations and networks, retailer
demands, the SKU explosion, modications in sales-
order processing, and more, all mean that dairy industry
participants must change to stay competitive. As
retailers become larger and more powerful through
consolidation, they are not timid in making demands
on their suppliers. Companies must be able to react
to these demands. To do this, they must have exible
systems that can be adjusted quickly to adapt to
changing needs.

8
The overall costs of logistics have continued to increase
for food manufacturers. According to the 2003 GMA
Logistics Study, logistic-related costs have increased 12
percent, from 6.6 percent of net sales in 1999 to 7.4
percent in 2002. Some possible reasons for this increase
include:
Retailer demands for faster delivery times
Higher service-level expectations in terms of on-
time, in-full delivery and order completeness
Conflicting incentives and insufficient and
inaccurate information between trading partners
More customized supply chain services provided
to retailers by manufacturers, e.g. delivering to
actual store locations rather than to a centralized
warehouse facility
Responding to pressure from retailers has also created
a need for better order-processing capabilities. Many
manufacturers today are investing in exible and
responsive systems to meet the growing sophistication
of customer-specic requirements.
4. Dairy industry process improvement
opportunities
Increase speed to market with effective new
product development
Current product development processes are generally
too slow and inefcient, which is reected in the
aforementioned 95% failure rate for new product
launches. The following benchmark study further
illustrates the long development cycle of the consumer
products industry in comparison to others:
Figure 3: New Product Development Cycle time in months
(Source: AMR Benchmark Analytix, 2003)

The companies best able to execute the whole product

development cycle will clearly have an advantage. This
involves not only reducing time to market but also
making effective use of scarce internal resources.

The dairy industry is struggling with a plethora of recipes
and processing variants that are based on a few raw
materials and ingredients. Recipe management systems
support faster development by structuring product
specications and enabling adoption of company-wide
recipe denitions down to the line-specic level. The
key to success is the integration, consolidation and re-
use of knowledge from all involved parties from R &
D, through production, and down to sales, marketing,
and nancials. Enterprise systems that are congured to
work together enable this knowledge-sharing, allowing
information to ow smoothly throughout the product
development process and giving the company the ability
to quickly react to changes.
Improve manufacturing control through
enhanced traceability
As recent history has shown, the ability to track
inventory accurately and to perform a timely and cost-
effective product recall is critical in the food industry,
especially regarding the dairy sub-sector. Inventory
items need to be tracked, monitored, and controlled
in different ways and at very detailed levels. In each
individual plant or warehouse, each resource requires a
different level of control/analysis.
Food safety legislation, such as EU Directive 178,
impacts the whole process ow. Traceability is a goal
that must be achieved throughout the whole value
chain, requiring a batch control system that is able to
track and document all milk characteristics.





9
A track and trace capability that is integrated into
the overall supply chain process can help address the
following activities and questions:
Advances in technology now enable inventory to be
tracked and traced at the batch and sub-batch levels.
It is now possible to assign different product attributes
when searching for the product including:
Quality characteristics such as fat and protein
Manufacturing expiration dates
Shelf-life date
Inventory batch/sub-batches enable companies to
identify specic inventory and automatically record its
history, including the history of the raw materials used
in its production. In other words, it allows full recall
of the materials that have been involved in the overall
manufacturing process. These improvements reduce the
companys exposure in relation to food safety.
In addition, track and trace improvements help
companies to maintain high quality standards, which is
often a selling point that differentiates one brand from
another and that can command a price premium with
the consumer. Recording and tracking that quality is
critical. In the nal analysis, certain dairy companies, for
example, those in the baby food business, must strive
for the highest quality standards they can achieve ones
that are superior to those of their competitors.

Reduce costs with integrated procurement and

payment systems and processes
As mentioned previously, the dairy pays the farmer.
Payments for raw milk are usually based on exible
conditions, which are not only contingent upon quantity,
but also quality. These quality measures usually include
analyzed characteristics, such as fat and protein content.
Dairies must also deal with a large number of farmers
and complex milk transportation arrangements. A broad
range of reliable data is required to accurately manage
these complicated and frequently changing conditions.
Many companies in the dairy industry still operate milk
procurement and payment processes based on different
applications and multiple databases. The maintenance
costs for interfaces and conversions among these
different data structures are high. A fragmented system
environment also results in batch-driven applications and
a lack of real-time data.
System and application consolidation, including data
integration, offers a huge improvement opportunity for
many dairy companies, enabling them to achieve cost
efciencies as well as more useful data.












10
Increase efficiencies throughout the dairy
production process
During the production process, dairy companies
encounter issues involving by-products, recycles, waste,
multiple-stage processes, product variations, yield
losses/gains and many more business issues. Despite this
complexity, the production process begins in the same
way for all dairy products.
Figure 4: Initial Dairy Process
Planning and scheduling
Many elements must be factored into making a dairy
product, including those that affect cost, planning and
scheduling (machinery and labor, utilities, etc.) Capacity
constraints and bottlenecks must be considered as well.
To add to the complexity of the production process, the
ever-changing whims of customer demand must always
be taken into account, which can result in hundreds of
end products.
That is why the production and demand-planning
process is one of the most promising improvement areas
for dairies today, with the goal of optimizing the usage
of raw materials and other components.
Systems are now available with new production and
demand-planning capabilities that enable companies to
manage the production of multiple nished products.
These systems typically allow companies to examine the
volume-to-cost ratio of different production outputs,
such as not for human consumption by-products
versus consumable goods. What if simulation
capabilities further enable companies to determine the
Least Cost Formulation, the best and most economical
way of manufacturing a particular product.
Raw material separation and valuation
The rst step in the actual process of manufacturing
dairy products involves separating the components of
the raw milk, which are typically cream and skim milk.
These products may then be reconstituted to provide
standardized products for further manufacturing or
packaging. Typically, bill-of-materials systems have
difculties mapping this process because they usually
rely on phantom materials or negative quantities
within the bill, which then cause difculties in planning,
scheduling or costing the re-constituted products.
It is essential to create process models that can track
work in progress throughout the multiple production
stages of many items simultaneously. These models
must also be able to track the by-products or co-
products that occur within the process, such as whey
or buttermilk, which need to be accurately planned,
scheduled and costed as well in order to maximize
utilization and minimize costs. Ultimately, the model
must be able to accurately measure yield and cost
against each and every nished product.

11
Accurate raw-materials controlling and product costing
are critical to improving the efciency and productivity
of the overall production process, particularly due to
the high proportion of raw material costs in the total
production cost.
A production model should form the heart of a
companys costing hierarchy, where the costing of
products, processes and activities take place. Through
proper resource costing, dairies can actively manage raw
materials, ingredients, packaging, labor and machines,
as well as quality, energy, maintenance and waste, in
order to optimize margins and boost protability.
Free up working capital with improved
inventory levels
The ability to classify, control and record specic values
for inventory is extremely important in dairy processing.
A plant manager needs to be able to monitor many
variables throughout the manufacturing process, e.g.
solids, temperature, hold, quarantine, available levels,
and more. Here are a few of the questions a plant
manager asks every day:
Do I have sufficient quantity and quality inventory to
satisfy this order?
What is the shelf life date of this specific batch?
What is currently under inspection?
What are the physical constraints of the warehouse?
Plant managers need to be able to dene the various
states of inventory and control its movement, availability
and usage.
Leading dairy manufacturers have the capability to
monitor the stock levels and expected shelf lives of their
products at any stage in the process. Their demand
planning process involves an integrated inventory
system, which is able to provide information about the
status of any product. Efcient customer forecasting

helps reduce the quantity of products put on stock

by being able to gauge customer demand prior to
manufacture. Manufacturers are moving towards a
make-to-demand philosophy, which helps reduce
the amount of working capital tied up in inventory.
However, the majority of producers are still operating on
a make-to-stock basis, due to fear of not being able
to meet unexpected customer demands.
The GMA 2003 study of CPG supply chain performance
indicates that reductions in inventory levels represent a
signicant opportunity for better nancial performance.
According to the study, each day of nished goods
inventory reduction frees up, on average, a total of $7.1
million for the 25 companies participating in the survey.

Leading food manufacturers are improving their
inventory levels by fostering a customer-focused culture
and integrating their planning and execution teams.
These teams typically consist of managers from logistics,
sales, marketing, nance and other functions. They
are also using one set of operational gures to drive
planning for sales, supply, and factory/manufacturing.
These practices are helping them to balance demand
and capacity levels throughout the supply chain.
12
Improve customer retention levels with
integrated sales and distribution capabilities
Industry estimates suggest that it costs ve to eight
times as much to attract new customers as it does to
retain them. The key to retaining customers is meeting
their expectations in processing and fullling orders. As
order cycle times decrease, manufacturers must ensure
that their sales and distribution functions are completely
synchronized, through order processing, delivery, billing
and payment.
This end-to-end process is increasingly becoming
automated via EDI. Dynamic pricing models and correct
discount and rebate calculations are becoming standard
for the dairy industry. Manufacturers are investing
in technologies that enable Web-based ordering,
with associated rule-based inventory checking and
verication of ordering authority.
An efcient logistics delivery mechanism is necessary
to avoid mistakes with picking, packing and shipping.
Picking the correct batch number in the delivery process
via a handheld system can increase the speed of
delivery and reduce errors. A competent logistics system
can also improve efciency through optimized route
planning and by automatically generating corresponding
documents, such as delivery notes, transportation
documents and invoices. Improved information visibility
can also provide better capabilities to plan, schedule
and execute on-time and in-full distribution at optimum
costs. As one might expect, using outsourcing services
for distribution has become an increasingly popular
solution for driving down the costs of logistics.
5. Solutions for the industry what can
dairy companies expect?
In order to respond effectively to changing market
trends and challenges, dairy companies must support
their improvement efforts with industry-specic
solutions.
These solutions should have the following characteristics
and provide the following capabilities:
Pre-configured processes with clearly
defined implementation scope. A streamlined
implementation strategy is necessary to minimize
disruptions to your business while maximizing
enterprise-wide adoption. When a high-quality
solution tailored to the specific needs of the dairy
industry is coupled with a rapid implementation
approach, it can deliver immediate business value,
generating a high overall return on investment and
a low total cost of ownership.
Accelerated development of new products
and recipes. An effective solution should help
dairies manage the entire product development
process, from the first idea through manufacturing.
It should include structured, re-usable product
specifications; the ability to document the results
of trials; change management capabilities to
communicate the results; and seamless integration
into the production planning and execution process.
Efficient milk procurement and payment
management. Necessary capabilities for efficient
milk procurement encompass purchase and
collection of raw milk from the producer by tank
trucks; compliance with high quality standards
and traceability requirements at all process stages;
calculation of payments based on quantity and
quality characteristics; monitoring of procurement
and payment processes; and the release of reports
to involved parties. An effective solution should
also support additional purchases of raw milk
or other raw materials, such as cream, skimmed
milk, concentrates or standardized milk from other
companies, to compensate for shortages in the

13
demand planning and forecasting processes. In
addition, it should support vendor payments based
on contract stipulations concerning the quantity and
quality of the raw material.
Optimized and streamlined production
planning, processing and forecasting. Effective
systems must be able to handle a multilevel
production process, starting with raw milk and
progressing through the separation, pasteurization
and standardization processes. It must also be
able to manage several stages of semi-finished
products up to the finished goods, which are
normally characterized by a short shelf life. For each
production run, the manufacturer has to balance
many variables, including the available quantity and
quality of raw materials and associated components.
Effectively balancing that ever-changing equation
is the key to achieving optimum utilization of
raw materials, maximum product profitability and
adequate fulfillment of customer demand. Increased
planning and simulation capabilities based on these
characteristics support more accurate demand
forecasting; more efficient production schedules;
and better visibility into the manufacturing process.
Improved sales order processing and
distribution. The sales and distribution cycle
requires capabilities to support effective sales
order processing, delivery, billing and payment.
The picking and delivery process has to be
extraordinarily accurate due to the short shelf-life
of dairy products. In addition, dairy companies are
selling raw materials to other companies, which
requires quality-based invoicing. The overall process
must meet high quality standards and traceability
requirements.

Integrated financials with integrated cost

management. Compiling real-time data across all
stages of production support is critical to analyzing
the use of available resources. It is also needed to
model the cost effects of changes and to maximize
the profitability of the manufactured product
mix. It is key to have an integrated finance system
capable of handling internal and external reporting
requirements; of providing real-time data access;
and of drilling down to greater levels of detail.
6. Conclusion
The global food business is a multi-trillion dollar industry.
Despite its huge size, annual growth is often limited to
expansion of the worlds population base, especially
increases in the middle-class. In mature markets, such
as North America and the European Union, where
population growth is limited, achieving the Holy Grail
of protable growth and stakeholder value creation
requires truly differentiated business performance.
While every dairy business starts from a different point,
there are common themes in the path to success:
Better understanding of the consumer
Dairy and related businesses will need to keep
an eye on fast-moving changes in consumer
requirements. Growing consumer expectations
for quality and variety, more diverse populations,
and rising concerns over food safety will require
firms to introduce new products targeted to more
specialized markets and to rethink their production
processes and supply chains.

14
Effective innovation and new product
introduction The ability to respond and adapt
quickly to changing customer and consumer
demands is essential, and it must be accomplished
via the introduction of new products and formats
that are successfully planned and executed. This
represents the largest single opportunity to drive
profitable growth.
Closer customer relationships As retailers
rationalize their supply base across all food
categories, dairy processors will need to work more
closely with a smaller number of customers, each
of whom will represent a growing portion of their
business.
Differentiation through assured quality
Quality in and of itself is not enough; manufacturers
must also offer products that can gain real
consumer recognition. Accordingly, appropriate
brand positioning, and processes that support it,
will be essential. It will also be important to embed
and reinforce a culture of quality within dairy
organizations.
Efficient compliance Dairy companies face a
barrage of pressures related to the safety of the
food supply, including both legislation and broader
retail-led assurance schemes. Viewing compliance
as a way to build good practices into routine
operational processes rather than as an expensive
overlay is critical to meeting these requirements
while remaining cost-competitive. Instituting a
culture of quality as a means to change attitudes
and practices, rather than relying on compliance
checks to intercept problems, is also important.
Establishing corporate governance
arrangements This will be necessary to ensure
that food safety standards are not compromised by
other commercial priorities. It will also be necessary

to put an appropriate performance-management

framework in place. These actions and more will
be necessary to comply with the legislation of 2005
that is impacting the industry across Europe and
around the world.

Operational excellence - In a highly competitive
low-margin business, operating models that
combine high levels of labor-efficiency with
effective yield management, minimal waste and
rigorous batch segregation will be fundamental to
victory and survival. Successfully integrating the
different technology components of the end-to-end
food supply chain (labeling/tagging, ERP systems
and Manufacturing Execution Systems), in a way
that complies with food safety requirements is also
critical. Companies will also need to capitalize on
the potential offered by integrated information
systems and new track and trace technologies.
These include global Electronic Product Code
(EPC) standards and associated Internet-based
technical architectures for product look-up as well
as Radio Frequency Identification (RFID) tagging
to achieve effective end-to-end traceability and
selective recall capability.
Better information to manage the business
Flying blind is no longer an option. Improving
demand forecasts, better planning of procurement
and supply, and gaining a real understanding
of product and customer profitability will be
fundamental to prosperity.
Companies that can successfully address these issues will
be the ones that prosper. The key to managing these
challenges, and ultimately to driving protable growth,
lies in designing and implementing effective processes
and supporting them with a exible, integrated
information system capable of meeting the distinct, and
constantly evolving, needs of the dairy industry.

15
For more information about the Deloitte and SAP
Food and Beverage Initiative please contact:
Deloitte
Lawrence Hutter
lhutter@deloitte.com
SAP
food@sap.com
beverage@sap.com
For more information about Deloittes global
Consumer Business practice:
Global Consumer Business Leader
Ed Carey
ecarey@deloitte.com
Asia Pacific
Yoshiaki Kitamura
ykitamura@deloitte.com
Europe, Middle East, and Africa (EMEA)
Gilles Goldenberg
ggoldenberg@deloitte.com
Latin America, Caribbean
Francisco Perez Cisneros
fperezcisneros@deloitte.com
North America
Brent Houlden (Canada)
bhoulden@deloitte.com
Tara Weiner (US)
tweiner@deloitte.com
16

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