OMD 13 - Milking The Future DVF

SECOND PLACE
case 4-854-290
Fernando Roxas May 16, 2018
Andrea Santiago
Milking the Future: DVF Dairy Farm Partners with the

Filipino Farmer
It was early September and the rains had come late to the province of Nueva Ecija, located 130
kilometers north of the country’s capital. The ground was still wet and Danny Fausto could smell the
stimulating aroma of freshly cut grass.
Fausto, president and CEO of DVF Dairy Farm, stood by its front gate, visibly upset and shaking his
head from side to side. The week had begun ominously. This was the second time that a farmer whose
carabao (water buffalo) milk supply, originally earmarked for Fausto’s production facility, had been sold to
a different buyer instead (see Exhibit 1). The buyer was undoubtedly Fausto’s competitor.
“Pole vaulting,” the local term for the selling of agricultural produce to third parties outside existing
contractual arrangements, had become a common practice in many contract-growing schemes. Furthermore,
farmers felt it was simpler to sell to other dairies rather than to the DVF Dairy Farm because of DVF’s higher
quality specifications.
Fausto had had to raise the quality specifications for his raw milk supplies to develop the A and B
marketsi for his products. He surmised that the farmers who sold to his competitors did so because they
did not want to exert the extra effort to institute the process standards required to meet the quality
specifications for fresh milk. This was the market reality, Fausto presumed. His greatest fear, however, was
that poor quality products would damage the reputation of carabao milk, a reputation that he had carefully
cultivated in the minds of the premium market segments. Over the last twenty-five years, he had labored
to create a premium market for carabao milk products: fresh milk, various milk-based confectionery, several
types of cheese, yogurt, and flavored milk drinks (see Exhibit 2). The products, sold in urban outlets in
Manila, provided additional revenue for farmers who supplied his company with fresh milk (see Exhibit 3).
Fausto felt his frustration growing exponentially. He had strategically developed his products for the
premium market and demand was steadily increasing. The opportunities were vast because he had barely
made a dent in the Philippine market that relied on milk imports.
i
A and B are the top socioeconomic classes in the Philippine population.
Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.
©2018 Fernando Roxas and Andrea Santiago. This case was written by Fernando Roxas, DBA, and Andrea Santiago, CPA, DBA, of the
Asian Institute of Management, Manila, Philippines. It was created as a basis for class discussion rather than to illustrate either
effective or ineffective handling of a business situation. The case should not be considered criticism or endorsement and should not
be used as a source of primary data. All dollars are USD unless otherwise indicated.
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Milking the Future: DVF Dairy Farm Partners with the Filipino Farmer 4-854-290
Exhibit 1
A Farmer with a Native Philippine Carabao
Source: Mabugat-Simbajon, M. (2012, October 23). “The Carabao: From the Beast of Burden in Fields to the Beauteous Beast in Festivals.” From www.hubpages.com/animals/
The-Carabao-From-the-Beast-of-Burden-to-the-Beauteous-Beast-in-Philippine-Festivals. Accessed 09 March 2018.
Exhibit 2
DVF Dairy Farms Product Portfolio
Source: DVF Dairy Farm Facebook page, www.facebook.com/dvfdairyfarm/photos/. Accessed 09 March 2018.
2
Exhibit 3
DVF Dairy Farm Outlets—Home Delivery, Company-owned Kiosks & Supermarkets
Source: DVF Dairy Farm Facebook page, www.facebook.com/dvfdairyfarm/photos/. Accessed 09 March 2018 and from Danny Fausto.
Initially, Fausto saw two basic options. First, he could reduce his reliance on farmer supplies by doubling
his home-grown herd from the existing 150 in the medium term, and then quadrupling it in the long term.
Increasing his herd would ensure that he would get the quality he required as well as even out the peaks
and troughs of raw milk supply over the entire year. The downside of this approach was that he would be
competing directly with the farmers he wanted to help in the first place. Fausto had spent nearly 20 years
devoting his life to improving the economic well-being of the farmers in his hometown of Talavera, Nueva
Ecija and did not want to reverse the trend.
Fausto’s other alternative would be to decrease the proportion of fresh milk from his product line. He
could extend the raw milk supply by producing flavored drinks, candies and other milk based products. The
ratio of raw milk to his fresh milk product was about 1:1, while it was 1:4 for milk-based confectionery and
flavored milk drinks. The ratio of cheese to milk was an average of 200 grams of cheese for every liter of
carabao’s milk, compared to 85 grams for every liter of cow’s milk. The liquid portion of the cheese, called
whey, could be processed into ricotta cheese or cottage cheese. However, only a very small amount of the
original cheese could produce ricotta or cottage cheese. Given his product extensions, Fausto realized he
had some leeway in this aspect, yet, he was also aware that his brand was built on fresh milk as the flagship
product. He had to ensure that his institutional customers (hotels and restaurants), who were responsible
for about 50% of sales, were guaranteed their requirements.
The Province of Nueva Ecija—The Rice Granary of the Philippines
The province of Nueva Ecija (see Exhibit 4) produced a significant part of the agricultural output of the
country. It was also known as the “rice granary” of the Philippines. Two of the best agricultural institutions
in the country—the Philippine Carabao Center and the Central Luzon State University—were both located
in Munoz, some 20 kilometers from Talavera. Fausto collaborated with the institutions and had become a
learner and eventually a resource person for both.
3
Exhibit 4
Nueva Ecija Province in the Island of Luzon, Philippines
Source: Created by case authors.
Rice farmers in Nueva Ecija harvested between 150 to 200 cavansii of rice (equivalent to about 8,400–
11,200 kilograms of milled rice) per year. The rice grains were sold for $20 a cavan at 2017 prices. Generally,
70% of total revenue was spent for inputs such as seeds, fertilizers, pesticides, and the labor component,
which by itself was 50%1. The farmers were fortunate because a large percentage of their agricultural
lands had natural irrigation coming from a nearby dam, unlike farmlands in other parts of the country that
depended on rainfall for water irrigation.
The Beauty of Carabao’s Milk
Fausto thought about his breakfast that day, which included a glass of fresh carabao milk. He wondered
how much of local demand was supplied by the milk produced from local livestock. He realized that almost
all the milk and dairy products sold in the supermarkets and groceries were from multinationals that
imported powdered milk from Australia, New Zealand, and the United States. These companies rehydrated
the milk and labeled them “fresh” before selling them at the local groceries and supermarkets. Fausto
estimated that local dairy supply accounted for less than 1% of demand.
Although 100 million Filipinos were not considered traditional milk drinkers (milk consumption was
only 5% of total daily food intake of a typical Filipino2), the Philippine demand for milk was 22 kilograms
per capita per annum, only about 8% of what Americans consumed.3 Depending on the variety, a healthy
carabao could provide between seven to fourteen liters of milk a day, which could be sold at $1.30 (plus
margins) per liter in the Philippine market4 (see Exhibit 5).
ii
A cavan is a Filipino term used for a unit of measure for rice.
4
Exhibit 5
Local Dairy Production from 2014 to 2016
(‘000 2011 2012 2013 2014 2015 2016 2017
Metric (projected)
Tons)
Dairy 16.5 18.5 19.5 19.7 20.4 21.2 22.0
Source: Philippine Statistics Authority, “Dairy Industry Performance Report,” Dairy Industry Performance Report psa.gov.ph/sites/default/files/DAIRY%20Industry%20
Performance%20Report%20-%20Jan%20-%20Dec%202015_0.pdf. Accessed 09 March 2018.
In several aspects, carabao’s milk was superior to cow’s milk. Carabao milk had only a fifth of the
cholesterol found in cow’s milk, while having a smoother texture. Carabao milk contained more calcium,
magnesium, phosphorous, and protein compared to cow’s milk (see Exhibit 6).
Exhibit 6
Comparison between Carabao Milk and Cow Milk
Properties Cow Carabao
Fat (%) 4.30 7.90
Total Solids (%) 13.10 16.30
Protein (%) 3.60 4.20
Lactose (%) 4.80 5.00
Tocopherol (mg/g) 0.31 0.33
Cholesterol (mg/g) 3.14 0.65
Calcium (mg/100 g) 165 264
Phosphorous (mg/100 g) 213 268
Source: Fausto, Danilo (2005). Dare to Dream: Filipino Entrepreneur’s Tale of Success in Dairy Farming. Leading Edge Forum for Excellence Inc., Manila, Philippines. p.56.
The Carabao Teams Up with the Farmer
Early in his career, Fausto had a promising thought: Could farmer incomes be improved by adding a dairy
component to their produce?5 Fausto first had to learn how to raise and care for carabaos himself to become
an expert. He was no stranger to carabaos, being the son of a farmer and helping his father during school
breaks while he was growing up. Caring for them, however, was another thing altogether.
“I was the laughing stock of the town when I bought my first ten carabaos. I knew nothing about raising
the animal. But I believed that by self-study and consulting the experts, I would be able to learn all that
I needed to know. And I did.” Fausto explained further, “When my herd arrived, rice harvest was a month
and a half away. There was no forage to feed my herd and their health quickly deteriorated. Harvest came
and I was able to store rice straw in silos I had constructed. I learned early on how important food was for
raising animals.”6
From this experience, Fausto learned how inherent the logistical challenges were in carabao milk
production at the commercial level. It was not only availability of forage, but more importantly its quality,
that would impact milk production. For the typical farm family, taking care of one or two carabaos would
not be difficult. However, at 10 heads, the family would certainly be needing assistance. Could poor farmers
be trained to feed and take care of the carabaos, instead of only using them to plough their fields, so that
5
the income from milk could augment their farm incomes? Fausto did not know if they could, but would never
find out if he did not try.
Fausto learned to level his expectations. To begin with, typical farmers would not be familiar with
taking care of, and milking, carabaos. Additional revenues could motivate them to sign up to his program,
but then they would have to learn new skill sets and work attitudes. However, the Philippines did not have
many experts in ruminant care who could be enlisted to train the farmers. This was why Fausto had to learn
it firsthand, so that he could teach the farmers himself.
From the viewpoint of animal care, Fausto preferred carabaos to cows because they were tough and
durable. “Being relatively unadulterated by genetic manipulation, unlike the modern cow, carabaos thrived
without the need for large antibiotic doses and high protein feeds. Rice and corn stalks made up the majority
of the carabao’s diet. These animals did not require special climate conditioning—they simply wallowed in
mud pools when they needed to cool down,” Fausto reasoned.7
Of the different carabao breeds, Fausto learned that the Indian Murrah had the ability to produce high
volumes of milk: about fourteen liters per day.8 However, it was difficult to re-breed them. Thus, he chose
the Holstein-Sahiwal crossbreed that could be purchased for between $1,500 to $2,000 per head, which
was half the cost of imported Indian Murrah. They could produce an ample supply of milk and were capable
of adapting to the Philippine climate. Moreover, because they returned to heat one to three months after
calving, there was a possibility of a twelve-month calving interval yearly. Finally, the crossbreeds would
graze even when it was very hot.
Selecting the breed was only one part of the equation. The other part was deciding what to feed the
lactating carabaos so that milk production was maximized. By then, Fausto knew enough about carabaos
to appreciate how proper nutrition affected the animal’s ability to produce quality milk. He thought about
commercial feeds mixed with available forage. However, his training in economics quickly convinced him
that poor farmers who relied on commercial feeds would incur a higher cost of inputs. The high input costs
were the same inefficiencies that kept rice farmers perpetually poor. While rice straw might be plentiful
post-harvest in Nueva Ecija, his own experience taught him that seasonality of supply would pose risks,
especially for a young calf. Fausto needed to find a better way to make feedstock always available and at
low cost to provide better margins for the farmers. Thus, he experimented and stumbled upon Napier grass,
scientifically known as Pennisetum purpureum.
From Planting Rice to Planting Grass
In his research on the dairy industry, Fausto learned that providing pregnant carabaos with fresh
Napier grass, in addition to his regular feed mix, produced an incremental three to five liters of milk beyond
normal production levels.9 Fausto had an exciting idea. Could he convince traditional rice farmers to plant
grass instead? The potential of Napier grass was outstanding. The grass was fast growing, needed very little
maintenance, had high caloric and nutrient content, and did not need replanting after every harvesting. A
farmer planted the grass one time and over the next nine years could harvest every 45 days. All farmers had
to do was to cut enough from the top of the grass to feed their herd. In addition, farmers would not need
to buy expensive fertilizer because they could use the carabao’s manure to enrich the soil. In a year, there
could be six harvests (see Exhibit 7).
6
Exhibit 7
Super Napier Grass Plantation
Source: Photo from Danny Fausto, reprinted with permission.
Fausto proposed that farmers plant Napier grass instead of rice so that he would have a steady supply
of freshly cut grass to mix with other feed components to arrive at a suitable total mix ratio. He was willing
to purchase Napier at $1 for every 50 kilograms. He estimated that each hectare of Napier grass would yield
300,000 to 600,000 kilograms per year, enough to feed 20 heads of carabaos which, in turn, could be milked
for ten months every year. Of course, he did not expect the farmers to completely abandon their rice fields
for planting grass—at least not in the beginning. He knew he had to secure the farmers’ buy-in. He felt that
he had a credible business model on both the market and supply side. It was clear in Fausto’s mind: “Our
product is grass, and we convert grass into milk by using a machine called carabao.”10
The Birth of DVF Dairy Farm
Fausto’s neighbors no longer laughed once they saw his herd grow in number over time. In fact, the
initial skeptics wanted to join the dairy initiative to earn supplemental income. Fausto realized that as he
began to scale-up, he would need to rely on external groups for feed stock and milk supply. Thus, instead
of dealing with individual farmers, Fausto asked those interested to form a cooperative, later known as
Talavera Dairy Cooperative Incorporated (TDCI).
The role of TDCI was to provide carabao stocks, financial and technical assistance, feed supplements
and veterinary medicines for health and nutrition, as well as to guarantee the purchase of milk produced
by the member-cooperator. The member-cooperators, in turn, provided housing, labor, animal produce and
milk, which were sold to the cooperative. Initially farmers entered into lease-purchase arrangements for the
carabaos, but Fausto simplified the model by providing the member-cooperators with a monthly stipend of
$12 for each carabao that came from TDCI11 (see Exhibit 8).
7
Exhibit 8
Members of the Talavera Dairy Cooperative Inc. at 2011 General Assembly
Source: Photo from Danny Fausto, reprinted with permission.
Subsequently, Fausto established the DVF Dairy Farm, now a proud family-run business, to process
the milk he bought from the cooperative and to sell the processed products to institutional and retail
customers. Not only would the company create a market for the cooperative, but the economics of the
business made absolute sense to Fausto.
Investment in carabaos yielded exponential returns to the business since one carabao would produce
another carabao and two carabaos would produce four, and so forth. However, if a male calf was born, it
was sold. Further, the large number of cattle would be a good hedge against inflation because the prices of
carabaos would naturally increase in the future. Finally, carabao milk could compete successfully in a niche
market against imported cow’s milk dominated by the multinationals.
Like any start-up, DVF Dairy Farm had a very modest initial set-up. It started with capital of $2,000,
95% of which was spent buying the initial stock of carabaos.12 Once the carabaos began producing milk,
Fausto had his agents deliver fresh milk every day to customers around Talavera at six in the morning and
collected payment every Saturday, using pedal-powered, three-wheelers. Initially, the carabao milk was sold
in generic but attractive plastic bottles sourced from bottle collectors around Talavera. Subsequently, the
fresh milk was packed in PET (polyethylene terephthalate) bottles and later upgraded to new plastic bottles
embossed with the company-owned logo.
As TDCI, through its farmer cooperators, increased the supply of milk, Fausto’s team began developing
other products such as milk-based sweets, cottage cheese branded as DVF Dairy Farm kesong puti, as well as
a variety of flavored milk. “We experimented by making milk-based delicacies called pastillas de leche,” Fausto
8
said.13 The market loved the pastillas and developed a loyal following not only in Talavera but in Manila,
where the products were later sold. The Manila market accounted for 90% of company sales.
Even as Fausto created product extensions, the flagship product was still fresh carabao milk sold under
the name DVF Dairy Farm Gatas ng Kalabaw, a name that was the direct translation of “carabao milk” in the
Filipino national language.
Fausto eschewed mechanization of processes in his dairy plant because the mission of the
company was to provide livelihood to the farmers and employment to the residents of Nueva Ecija. The
company’s operating strategy was to introduce change slowly to mitigate the risks of expanding too fast
(see Exhibit 9).
Exhibit 9
DVF Dairy Farm’s Vision and Mission Statements
VISION
A pioneering company in the local dairy industry, providing livelihood opportunities in the
countryside, making the farmers’ dairy produce available, in the highest standard of quality and
excellence acceptable to the discriminating market.
MISSION
To be able to realize its vision, DVF Dairy Farm shall develop new products using dairy farmers’
produce, open new markets for their milk, generating employment and operating its business in a
sustainable manner, thereby allowing the dairy farmers to continuously enjoy their share of the fruits
of their labor and contribute to the development of the Philippine economy.
Source: Fausto, Danilo (2005). Dare to Dream: Filipino Entrepreneur’s Tale of Success in Dairy Farming. Leading Edge Forum for Excellence Inc., Manila, Philippines. p.43.
The DVF Dairy Farm processing plant was in a 2,000-square meter lot along the national highway at
Barangay Poblacion Sur in Talavera, a property which Fausto inherited from his parents.14 The basic dairy
plant machinery was bought from Bangkok, Thailand. In time, more sophisticated equipment was added as
the product line expanded to yogurts and various types of cheese. His equipment and processes were world-
class. After all, he envisioned the business to last a century.
Why Other Dairy Farms Failed
The underdeveloped Philippine dairy industry did not suffer from lack of government support. In fact,
the government had provided funds to many ventures, but the government’s initiatives lacked strategic
focus. Fausto explained:
“Many of these dairy plants were built with capacities that were far too large that it became
unprofitable to run them. By the time the plant became operational, the supply of raw milk
that it was supposed to process was yet to be developed. Thus, whether you processed small
quantities of raw milk or ran the plant to its full capacity, the plant would consume the
same amount of electricity and overhead. The lesson here was that production should always
consider the environment and other forces affecting the demand and supply of goods from
raw materials to finished products.”15
9
The other secret of a viable dairy farm was to get good quality animals—something that one could not
be sure of when using the government policy of procuring from the lowest bidder. Fausto added:
“What I have learned was that there are ways to select a good dairy animal that would
maximize the production of milk and offspring. I looked at the data about the animal itself,
its ancestors, and its family, and I evaluated the animal’s physical appearance. A good milk
animal would have conformed to dairy types, have good health, have no abnormalities,
and have a good temperament. It should possess a large and well-developed udder with
functional teats of uniform sizes. Of course, the best animal to buy was the one that was
already pregnant, so you could already start milking it after a few months. Likewise, buy
crossbreeds. Purebreds have difficulty coping with hot and humid climates.”16
Striving for Quality
Fausto realized that the key to establishing a sustainable partnership with the farmers was to put
procedures into place that ensured quality products. To this end, farmers who were member-cooperators of
TDCI or other similar cooperatives were trained in proper animal care, including proper mixing of forage for
feeds, basic husbandry skills, and correct techniques for milking lactating animals.
Quality products would require quality milk that, in turn, required healthy, well-fed carabaos. As Fausto
explained, “Selling milk was a sensitive business. It needed an assurance of quality production and control
to prolong shelf life. The principal objective of quality control was to maximize customer satisfaction. This
translated to higher sales and profits. It also helped to minimize losses due to rejects and factory defects.”17
DVF Dairy Farm maximized milk production and quality by ensuring that the animals were well-cared
for and were fed good quality forage. “We caressed and brushed their coat to remove dirt. We cut long hair
from the udder, hind legs, and rear flanks. Hooves were trimmed when they got too long,” Fausto explained.18
Management had installed showers in the barn to keep the animals comfortable, especially during the
summer months. The company protocol was to milk the animals very early in the morning so that everything
was quiet and peaceful. “Stress caused milk production to drop. We milked our lactating animals twice a day
for maximum production. We also regularly cleaned the udders and teats and inspected them for signs of
mastitis.iii Milk from animals with mastitis was unfit for human consumption,” explained Fausto.19
Consistency was key to the milking operations. If a lactating animal was not milked continually for two
to three days, the milk would dry up. As much as possible, Fausto kept to the milking schedule that the
animals got used to. “We even used the same milkman to ensure familiarity—in touch, smell, and manner of
milking the animal.”20
Fausto built appropriate housing for his herd and even provided a separate pediatrics pen for newborn
calves and maternity pens for carabaos about to give birth. The specialized pens were useful to separate
animals. Weeks after giving birth, the carabaos went into heat for about 21 days, at which time they were
allowed to mate with the Holstein-Sahiwal crossbred bulls that were replaced every three years. If mating
did not take place or there were no quality bulls, carabaos were impregnated through artificial insemination.
This was a last resort because it was stressful for carabaos and could result in the absence of milk production
during the entire lactation period.
iii
Inflammation of the mammary glands
10
Exhibits 10 and 11 show the contrast between what DVF partner farmers provided the animals in terms
of facilities and those elements of tender loving care that DVF dairy farms had invested in to ensure that
the animals and the milk they produce achieved quality benchmarks.
Dairy animals could normally be milked 300 days a year for 15 to 20 years. Fausto estimated that a two-
year milk production would be more than sufficient to achieve payback for investors who wanted to make a
passive investment in carabaos, such as overseas Filipino workers (OFWs).
Exhibit 10:
Carabao Care and Milking by Partner Farmers
Source: Luga, Gia Leanne, “A Generation of Dreamers” from www.gk1world.com/a-generation-of-dreamers. Accessed 09 March 2018. “Nueva Ecija farmers get gold daily from carabao
dairy,” Philippine Daily Inquirer from business.inquirer.net/78654/nueva-ecija-farmers-get-gold-daily-from-carabao-dairy#ixzz59JaP9rnd. Accessed 09 March 2018. Rotor, Ave.
“Philippine carabao – a threatened species,” from avrotor.blogspot.com/2011/03/philippine-carabao-threatened-species.html. Accessed 09 March 2018.
Exhibit 11:
Carabao Care and Milking by DVF Dairy Farm
Source: DVF Dairy Farm Facebook page, www.facebook.com/dvfdairyfarm/photos/. Accessed 09 March 2018.
11
Bringing the Product to Market
The company’s Gatas ng Kalabaw was positioned as a premium product—more expensive than cow’s milk.
The packaging and the retail outlets chosen reflected this positioning. In addition, research established
that 45% of all milk consumption was in Manila21. Fausto had mapped out the supermarkets and groceries
where the target consumers shopped. “These buyers enjoy trying new products while remaining loyal to their
established preferences. Hence, we continually develop new products to grow the company’s share of pocket
from these consumers,” he explained22 (see Exhibit 12).
Exhibit 12:
Packaging of DVF Dairy Farm Products
Source: DVF Dairy Farm Facebook page, www.facebook.com/dvfdairyfarm/photos/. Accessed 09 March 2018 and from Danny Fausto.
In terms of pricing, Fausto had the following considerations in mind. First, the psychological behavior
of the customer. Second, the dynamics of a raw material supply that was not only seasonal, but also
dependent on the quantity and quality of fresh milk produced by TDCI and the local farmers. Third, the
seasonality in demand and the motivations of his middlemen with respect to timing of sales and allocation
of inventory. Last, the possible counter-strategies of his competitors.
DVF Dairy Farm products were priced with a slight premium to provide modest margins to dealers and
outlets. Prices were set not so high as to attract too much competition, but just enough to build a loyal
following among customers. Fausto even developed his own brand of cow’s milk to take a share of the
lower priced but larger market, and to satisfy institutional buyers like coffee bars that required cow’s milk.
However, the cow’s milk product line had been temporarily discontinued as the company wanted to refocus
its energies on developing and strengthening the flagship product—Gatas ng Kalabaw.
12
To transport his product, DVF Dairy Farm preserved the tradition of delivering products to individual
houses when markets in Manila opened. The company had enlisted one resident from each village to
which DVF delivered. The resident would act as a dealer who would handle the individual orders, storage,
and actual deliveries using motorbikes and bicycles. As a service, the company provided the appropriate
refrigeration system to ensure proper storage of the products prior to deliveries.
Refrigeration was important not only for home deliveries, but for retail outlets as well. Fausto ensured
that his sales team visited the supermarkets and groceries where his products were sold. Whenever he
received a complaint of spoilage from customers on the company’s Facebook page, Fausto was quick to
respond, offering free replacements and following up with any dissatisfied customer to convert them once
again to a loyal customer.
It could be said that Fausto was so successful in developing and servicing the market for carabao’s
milk and its derivative products that it created problems in meeting demand growth. With available supply
unable to keep up, he wondered whether his business model could remain sustainable and consistent with
the company’s mission. “If we just followed the demand growth trajectory, we would be pursuing a growth
rate anywhere from 30% to 50% per year. This was a big problem because we were not prepared to financially
underwrite this growth, nor was our supply chain, especially supply from partner cooperatives/individual
farmers. We tweaked our supply chain to track a 15% growth which was what we believed to be a sustainable
rate that we could maintain in terms of quality in our products and stability of our relationships with our
farmer partners.”23
Fausto estimated that his business model had impacted the lives of around a thousand farmers since
he began his operations. He was awarded the Philippines’ 2016 Most Outstanding Agricultural Entrepreneur
title by President Rodrigo Duterte (see Exhibit 13).
Exhibit 13:
Danny Fausto Named “Most Outstanding Agricultural Entrepreneur” of 2016 by
President Rodrigo Duterte
Source: Photo from Danny Fausto (2016) reprinted with permission.
13
Managing the Supply Chain
Although milk sourced from the 150 carabaos under the care of DVF Dairy Farm yielded nearly consistent
volumes and quality, the same could not be said for milk produced by the 150 or so carabaos with member-
cooperators in Nueva Ecija Province.
Fausto’s relationship with farmer neighbors was indirect. Although he visited different groups of farmers
on a weekly basis, he had to rely on cooperatives such as TDCI to work with their member-cooperators
in providing the financial and technical assistance they needed to care for the carabaos. It was their
responsibility to enforce measures that ensured consistent quality standards were met.
In the final analysis, DVF Dairy Farm could only focus on trying to control the quality and quantity
of milk it bought from the cooperatives. Fausto had not been completely happy about either. In terms of
quality, sometimes the milk was sometimes contaminated with blood or manure and therefore not fit for
consumption. In response, he had instituted control mechanisms by paying not a flat rate of $1.30 per
liter, but rather a scaled buying price, paying more for higher quality, less for lower quality deliveries, and
nothing for contaminated milk. DVF Dairy accepted only Grade A raw milk that had passed five series of
tests to be processed as fresh pasteurized milk. He relied on the cooperative’s accredited milk collectors,
equipped with lactometers, to make the judgment about grade level at the point of collection.
At the beginning of operations, there were only minor problems. However, when the company operations
scaled up production to match market growth, supply problems began to appear. There were insufficient
quantities of milk at Grade A quality.
Fausto had several hypotheses to explain the insufficient supply: “Some farmers were so hard up that
they became migrants, looking for work elsewhere to support their families. This meant that only the wife and
small kids were left to take care of the animals. However, there were farmers who were obviously too lazy to
even try to change the way they took care of the animal. Others were too hard-headed and resisted learning
new ways to take care of the animals. Worst were the truly untrustworthy ones who had no problems selling
the milk to my competitors for a little more money than the quality of their milk would earn from me.”24
In the beginning, Fausto had no problems with competitors trying to copy his business model or
with those who tried to buy raw milk from the farmers he had regularly trained. “With local supply levels
insignificant compared to aggregate demand, there was enough room for everyone who contributed to import
substitution,” Fausto believed.25 However, as his fixed contractual obligations to his institutional customers
grew in volume, he realized that he needed to secure a minimum amount of raw milk, so that he could
deliver to those institutional clients who depended on him for fresh carabao milk and its derivatives.
The unmatched seasonality between available supply and retail demand exacerbated the challenge
of matching sources and uses of milk. Although carabaos could provide milk ten months in a year, the
maximum production normally occurred during the months of January to March, after carabaos gave birth
during the last quarter of the year. Carabaos would not yield milk prior to giving birth because they reserve
it for their newborns. Unfortunately, the market demand for milk and milk products peaked during the last
quarter because this coincided with gift giving and celebrations brought about by the Christmas holidays.
Fausto was forced to think about his company’s long-term supply chain strategy. He believed that the
problem would simply get worse as the company expanded both upstream and downstream capacity.
14
Strategic Alternatives for DVF Dairy Farm
It was almost nine in the morning when all the pregnant carabaos had been milked. The machinery in
the processing plant began to hum. Fausto was still bothered by the pole vaulting episode, especially since
he now knew which farmers sold the milk to other processors. Clearly, he needed to have a strategy in place
to deal with the issue.
Fausto sucked in air through clenched teeth. He did not want to protect his market at the expense of
helping local farmers. However, he also did not want to protect the farmers at the expense of his market.
He took a deep breath and savored the aroma of dewy, newly cut grass, wondering whether there were other
solutions to his dilemma.
15
Endnotes
1 Fausto, Danilo, personal interview, 9 October 2017.
2 Food and Nutrition Research Institute (2015). “Philippine Nutrition: Facts and Figures 2013”. Department of Science and
Technology, Manila, Philippines, p. 20. From enutrition.fnri.dost.gov.ph/site/assets/uploads/2017/06/Dietary-Survey.pdf.
Accessed 09 March 2018.
3 Ang, P. (2015) “Philippines: Dairy and Products Annual—Situation and Outlook.” Global Agriculture Information Network. USDA
Foreign Agricultural Service.
6 Fausto, Danilo (2005). Dare to Dream: Filipino Entrepreneur’s Tale of Success in Dairy Farming. Leading Edge Forum for Excellence
Inc., Manila, Philippines. p.23.
16
Notes
17
Established at the University of Michigan in 1992, the William Davidson Institute
(WDI) is an independent, non-profit research and educational organization focused on
providing private-sector solutions in emerging markets. Through a unique structure
that integrates research, field-based collaborations, education/training, publishing,
and University of Michigan student opportunities, WDI creates long-term value for
academic institutions, partner organizations, and donor agencies active in emerging
markets. WDI also provides a forum for academics, policy makers, business leaders, and
development experts to enhance their understanding of these economies. WDI is one
of the few institutions of higher learning in the United States that is fully dedicated to
understanding, testing, and implementing actionable, private-sector business models
addressing the challenges and opportunities in emerging markets.

OMD 13 - Milking The Future DVF

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SECOND PLACE

Milking the Future: DVF Dairy Farm Partners with the

The Province of Nueva Ecija—The Rice Granary of the Philippines

Source: Created by case authors.

The Beauty of Carabao’s Milk

The Carabao Teams Up with the Farmer

From Planting Rice to Planting Grass

Source: Photo from Danny Fausto, reprinted with permission.

The Birth of DVF Dairy Farm

Source: Photo from Danny Fausto, reprinted with permission.

Why Other Dairy Farms Failed

Striving for Quality

Bringing the Product to Market

Source: Photo from Danny Fausto (2016) reprinted with permission.

Managing the Supply Chain

Strategic Alternatives for DVF Dairy Farm

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