Operations and Logistics.
Senior undergraduate students and postgraduate students specialising in agricultural economics/agribusiness/supply chain management and can also be used for executive training for supply chain managers and corporate social responsibility (CSR) managers of food companies.
This case presents an industry leading company – Nestlé’s sustainable initiative in its dairy supply chain in China. The case begins with the background of China’s dairy industry, followed by an introduction of the case company. The case then moves on to the comparison of Nestlé’s fresh milk supply chain operation before and after 2008 and different approaches to help the dairy suppliers’ transformation. The focus is on Nestlé’s innovative industry collaboration platform, the Dairy Farming Institute.
Expected learning outcomes
This case allows students to explore the following theoretical frameworks: sustainable supply chain management; supply chain leadership, supply chain learning and supply chain structure. By analysing this case, students should be able to gain an understanding of how multinational corporations (MNCs) play a supply chain leadership role in supply chain learning of sustainable supply chain initiatives.
Teaching Notes are available for educators only. Please contact your library to gain login details or email firstname.lastname@example.org to request teaching notes.
CSS 9: Operations and Logistics.
CitationGong, Y., Jia, F. and Brown, S. (2018), "Modernisation of dairy farms: the case of Nestlé’s Dairy Farming Institute in China", Emerald Emerging Markets Case Studies, Vol. 8 No. 1. https://doi.org/10.1108/EEMCS-10-2016-0201 Download as .RIS
Publisher: Emerald Publishing Limited
Zhendong Zhang, Fresh Milk Procurement and Agriculture Service Manager of Shuangcheng Nestlé, is sitting in his new office in Shuangcheng, Heilongjiang Province, located in the northern most part of China bordering Russia. He has just been promoted and transferred from Qingdao milk district, Shandong Province to and is very pleased to come back to his hometown where his career began with Nestlé after he graduated from university in 2000. He knows the rationale behind this promotion: because of his success with the transformation at the milk district in Shandong, Nestlé would like him to bring his invaluable experience and replicate the success model in Shuangcheng.
Nestlé Shuangcheng started operation in 1990 and is Nestlé’s first dairy plant in China. Embracing a local sourcing strategy, gradually Nestlé turned Shuangcheng (a small town near Harbin, capital of Heilongjiang Province) into one of the largest milk producing regions in China, where there were more than 20,000 dairy farmer households at its peak.
However, after 2008, although Nestlé defended itself from involvement in the melamine crisis (more details are provided in the next section), the external environment tended not to favour Nestlé’s traditional “factory + farm” model in which small-scale backyard farms see the need to upgrade themselves to medium and large modern farms realising that they are inefficient and cost disadvantaged.
While upgrading, the traditional training provided to farmers seems outdated, and new knowledge is needed for modern farming. Looking at the data available, Zhendong Zhang knows he must take immediate action because under the economic downtown small dairy farmers are leaving the industry at a rapid rate.
He feels excited that he could help with the transformation of the dairy industry in his hometown, but at the same time, he feels it is a challenge because the number of small dairy farmer households is several times greater than the milk district he worked in previously. Looking out of his window, he is lost in his thoughts as the dairy processing factory’s white mist rises.
China’s dairy industry
Research suggests that in the past three decades China’s dairy production and consumption has seen rapid growth. In the first decade of the new millennium (2000), the average annual production growth rate reached 12.8 per cent (Sharma and Rou, 2014). From having a population with barely any milk drinkers, China has steadily become the world’s third largest milk producer, after the USA and India, to meet a soaring demand. Figure 1 shows China’s raw cow milk production from 2005 to 2014.
Current predictions are that milk output will grow at a rate of 5-7 per cent per annum in the future. However, China has not reached a level of self-sufficiency for its dairy products. China imported 16.6 per cent of all milk consumed domestically in 2013 (Goldberg and Niles, 2015).
One reason for the rapid growth is the promotion of the nutritional benefits of milk by the Chinese Government. A widely quoted speech was given by Chinese former Premier Wen Jiabao, “I have a dream and my dream is that each Chinese person, especially the children, can afford to buy one Jin (500 g) of milk to drink every day”.
The year 2008 was a turning point for China’s dairy industry. There were media reports that milk for infant formula had been tainted with the toxic industrial chemical, melamine in an attempt to increase its protein content and, hence, sales price. It was not clear whether the adulteration had been made by the milk collection centres or by middlemen. According to press reports, more than 20 domestic producers were affected, including the market leader, Mengniu and Yili. In total, more than 300,000 babies were hospitalised, resulting in the deaths of six infants (BBC, 2008, 2010). The sector is still recovering from the damaged consumer confidence. People deserted domestic milk for imported alternatives due to product safety concerns. While Nestlé was not involved in the scandal, it was also influenced by the incident to the extent that it also has to use more imported milk for infants because of consumer preferences.
After the scandal, the Chinese Government responded by pushing for the consolidation of the dairy industry and demanded the creation of large-scale milk production units and sourcing from large farms. Before the scandal, more than 80 per cent of China’s milk was produced in the dairy farmers’ backyard which have no more than five cows per “farm” (Sharma and Rou, 2014). The policy has been to push these household farms to consolidate into medium or large-scale farms with a minimum of 100 cows.
Government policy holds a strong opinion that economies of scale and the industrialisation of production practices would lead to an adequate and safe dairy supply and a better way to monitor both the upstream and downstream aspects of the dairy supply chain. Different tactics such as vertical integration were adopted by Chinese companies by investing in building large farms or through overseas investment.
The result of all this has been a massive shift away from traditional dispersed dairy production to concentrated and standardised farms (Sharma and Rou, 2014). These modern farms are believed to have more reliable quality, land use and greater labour productivity.
There were over 50 farms in China which have more than 10,000 heads of cattle in 2015. Although the debate concerning large-scale farms is still continuing: these large-scale farms are believed to be more vulnerable to diseases such as brucellosis, mastitis, foot and mouth disease and anthrax; the cows of these farms are non-indigenous breeds. In addition, their feed is largely based on imports, which leads to a larger global environmental footprint and increases the reliance of the domestic sector on foreign resources (Sharma and Rou, 2014). With the accelerating development of these modern farms, an obvious gap exists as to the management of talent and knowledge.
Under these circumstances, the challenge facing large dairy processors like Nestlé therefore hinges on, how to manage and optimise the scale of dairy farms to sustain quality and stabilise the supply of milk and how to train and organise smallholder farmers to meet Nestlé’s standards. The case provides a vivid example of how a multi-national corporation innovates its supplier development practices by bringing together all the knowledge providers to create an agricultural service platform, i.e. a Dairy Farming Institute to modernise the dairy farming system in North China. This, in turn, creates significant and positive environmental and social impacts locally as well as providing a best practice example to disseminate globally within and beyond Nestlé.
Nestlé was the world’s largest food and beverage company in terms of revenue in 2015. It was founded through the merger of the Anglo-Swiss Condensed Milk Company established in 1,866 by brothers George and Charles Page and Nestlé founded by Henri Nestlé in 1,867, who invented Farine Lactée infant food. Year 2016 marks the 150th anniversary of Nestlé.
Headquartered in Vevey, Switzerland, Nestlé has operations in nearly all countries around the world. It has 436 factories in 85 countries and employs 335,000 people. The company achieved total sales of CHF 88.8bn in 2015 (The CHF is the currency abbreviation for the Swiss franc, 1 CHF ≈ US$1.042.)
Nestlé has a wide range of products, including baby food, bottled water, breakfast cereals, tea and coffee, confectionery, dairy products, ice-cream, frozen food, pet foods and snacks. It produces more than 2,000 brands, which include the well-known brands Nespresso, Nescafé, Kit-Kat, Smarties, Nesquik, Stouffer’s, Vittel and Maggi.
Nestlé has adopted the “creating shared value” principle as its sustainability strategy (as in Figure 2). The business concept was first introduced by the Harvard Business Review article, “Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility”, by Michael E. Porter and Mark R. Kramer in 2006. The concept aims to create value for the company’s shareholders while at the same time for the communities in which it operates, it stands on top of sustainability which focus on protecting the future and compliance which aims to meet laws, business principles and code of conduct requirements. Nestlé focusses upon the three key aspects of nutrition, water and rural development being embedded in its creating shared value model.
Nestlé operates through markets which are grouped into three zones, i.e. Zone Asia, Oceania and Sub-Saharan African (Zone AOA), Zone Europe and Zone Americas. The Nestlé Greater China Region (GCR) comprising Mainland China, Hong Kong, Macao and Taiwan belongs to Zone AOA with the head office in Beijing. GCR, also known as Nestlé China, is the second largest market of the Nestlé Group after the USA. Its revenue was CHF 6.638bn in 2014, as of December 2014, the company employed 53,000 people in GCR, with 34 factories and four research and development centres in Shanghai, Beijing, Xiamen and Dongguan (data from interviews).
This case is focused on Nestlé’s rural development practices in its dairy supply chain in China. Nestlé has established three milk districts in China: Shuangcheng in Heilongjiang, Laixi in Shandong and Hulunbeier in Inner Mongolia. As early as 1987, Nestlé started building its first dairy plant in Shuangcheng, and while preparing the factory, foreign dairy experts were sent to Shuangcheng to train the local farmers how to raise dairy cows.
Nestlé adopts a local sourcing strategy especially in big markets such as China. Over 90 per cent of products sold in China are produced in the country using local raw materials. Nestlé prefers to purchase the raw milk directly from and forms a long-term partnership with dairy farmers. Nestlé also put an emphasis on the rural development strategy by providing training to farmers it worked with. In 2014, training was provided to over 375,000 farmers out of the 700,000 farmers it worked with in over 50 countries (Goldberg and Niles, 2015).
Nestlé’s dairy operation in Shuangcheng before 2008
In 1990, Nestlé’s dairy factory in Shuangcheng went into operation. Nestlé developed a close relationship with dairy farmers and the local government. It has also provided thousands of local farmers with free training and technical assistance since the late 1980s and provided credit guarantees for farmers who have shown potential to grow their business. Slowly, Nestlé turned Shuangcheng into one of the largest milk producing regions in China.
To govern the fragmented dairy suppliers, Nestlé has applied a “factory + farm” model to secure its fresh milk supply. Instead of relying on middlemen or private milk collection channels, Nestlé has set up its own milk collection centres. Jonathan Dong, Vice President of Corporate Affairs at Nestlé China said:
We like to interact with the farmers directly […] and we don’t (do business) via any third parties or purchase with the help of third parties. We go to the villages and provide technical resources and training to the farmers. In this way, first, we have better visibility on how the milk is produced, which helps to ensure more control in product quality by knowing the source of our raw materials, and to control some social issues such as child labour. Second, without a middleman we managed to reduce costs for the benefit of both farmers and Nestlé.
The “factory + farm” is also called “milk district model” globally in Nestlé, the model first applied in the 1870s in Switzerland, and now it involves five provisions which are summarised in Figure 3: Nestlé closely monitor the quality and safety of raw milk from farm to factory; it continuously provides technical, animal husbandry and veterinary support to dairy farmers; Nestlé provides the transportation and infrastructure to keep milk fresh; provides microfinance loans to dairy farmers in need; and provides prompt payment to farmers.
In Shuangcheng, normally the collection centres were within one hour’s distance from the surrounding dairy farmers. Each dairy farmer registered in Nestlé’s system with a unique number and account. Once farmers collected the fresh milk, they brought the milk to each Nestlé collection centre, where a computerised system sampled, tested and tagged each batch of the milk. Then, the farmers were paid monthly based on the quantity and quality of milk they delivered. Figure 4 presents Nestlé’s dairy supply chain in China before 2008.
To enhance the quality further and reduce risk, the Fresh Milk Procurement and Agriculture Service Departments (As “Agriculture service” in Figure 4) at Nestlé worked closely with the dairy farmers. The Department segmented the milk district into different areas based on geographic locations and transportation convenience and the number of collection centres. Each Technical Assistant (TA) Supervisor in the department looked after a certain number of farmers and collection centres. They visited the regions frequently so that they knew the farmers and the cows’ general conditions, providing technical assistance and training to the farmers. Jonathon Dong continued to comment that:
Because each TA has assigned dairy farmers to monitor, they know the details. The milk district requires them to visit the farmers periodically. For example a region might have 20 farmers and they know how many cows each farmer owns and the basic conditions of the cows. In the case where a farmer’s cows fall sick and need antibiotics and the volume has not changed for the fresh milk, the TAs know the farmers must have delivered milk from silk cows (which is not allowed by Nestlé). Such awareness could make sure the raw milk is secure and contributes to the quality of milk.
Continuous training was provided to the farmers in various forms according to seasons and farmers’ needs:
Nestlé not simply emphasises the purchase of the fresh milk but also provides a service to the milk district […] Training was provided from the very first day that a farmer supplies Nestlé, said Chongkun Xu, Shuangcheng Milk District TA Supervisor.
Sometimes we organize training in the villages or we invite the dairy farmers to our factory, sometimes we also invite experts: there are various training modes. We have also prepared incentives for the farmers to attend the training, and we gave positive feedbacks to the farmers who did well or learn well, said Zhendong Zhang.
Nestlé’s dairy operation in Shuangcheng after 2008
The “factory + farm” model defended Nestlé from being involved in the crisis of 2008. However, changes were happening amongst other dairy producers – they started to build large, or even mega dairy farms (with more than 10,000 cows each farm) themselves to secure the fresh milk supply according to consumers’ demands and as a way to respond proactively to the government’s call for consolidation.
Consumers and government were in favour of the modern farms. In combination with rapid urbanisation and the slowdown of economic growth in China, these factors saw many small dairy farmers quit the industry. The number of dairy farmers in the Shuangcheng district also fell sharply after 2008.
Despite a slow start, Nestlé responded to the transformation positively, Zhendong Zhang said:
Nestlé is really good at management of the dispersed dairy farmers: we have collaborated with them for more than 20 years, we taught them from knowing nothing to understand hygiene and antibiotic residues and we have been very successful. However, we cannot rest on the past achievements.
Nestlé agreed to partner with the Shuangcheng Government to increase the level of training and technical assistance it had already provided to the local farmers. By the end of 2011, the two parties distributed 1,000 free milking machines to those farmers who had milked the cows by hand.
Debates have been held within Nestlé on the right approach to transformations in Shuangcheng – should Nestlé also build mega farms and phase out the small dairy farms? How does Nestlé upgrade the small dairy farms if it keeps them as suppliers? Jonathon Dong answered:
After our discussion, we decided to respond to the Government’s call positively and do it in a way where Nestlé can add bigger value. We can also build farms, but can we do something others cannot do or have not done in order to truly play a role as the industry leader? Our proposal was to build the Nestlé Dairy Farming Institute (DFI). The DFI is open to the whole industry and can provide the much-needed training to address new changes in managing a modern farm, such as farm efficiency, environmental impact, etc.
Nestlé planned to help the farms which were willing to upgrade to medium and large-scale farms. It also planned to build the DFI in 2012 containing: three different sizes of dairy farms including a small farm for 200-400 milking cows, a medium farm for 600-1,200 milking cows and a large farm for 3,600 milking cows; and a learning institute equipped with modern teaching facilities, specialised laboratories and dormitories for both students and teachers.
The farmers could visit the demonstration farms and decide which model is more suitable for them, and they could upgrade to their corresponding levels, more importantly, they could receive training on modern farming at the institute from both Nestlé and DFI partners including more than 20 input providers supplying dairy farmers (e.g. milking, feeds and equipment). Figure 5 presents Nestlé’s dairy supply chain in China after the operation of DFI.
Upgrading dairy farms
Upgrading dairy farms is no easy task. The small dairy farmers lack capital, land and especially modern farming knowledge. According to Nestlé, the majority of farmers have an education level of above high school; however, the methods for raising dairy cows have not changed since the 1990s. Modern dairy farming is completely new for the local farmers.
Nestlé has taken four steps to help its traditional small dairy farms upgrade to modern medium and large size farms: supply chain mapping, awareness building, capacity building and capacity sustaining (summarised by authors from interviews).
Supply chain mapping
The agricultural team made a comprehensive survey at the beginning to gain a thorough understanding of the dairy farmers, especially in terms of their willingness to upgrade and their needs. Farms with a daily supply of more than a certain amount are selected as “key dairy farms”, which are recognised to have more potential to upgrade to modern farms.
At the end of 2012 we had made a list of these dairy farmers and visited them from one farm to another. We have a team to find out those interested in upgrading. They also explained to the farmers the benefits of a modern farm. We did a very good survey, selected the key farmers and arranged specific TA supervisors to follow and encourage them, said Zhendong Zhang.
The supplier survey has helped Shuangcheng Nestlé to identify potential and capable dairy farmers who were willing to upgrade. It also helped them to identify their specific needs, such as the lack of capital and land to expand and the need to purchase modern facilities. The TA supervisors then worked closely with and helped them to make plans for continuous improvements. Plate 1 provides an example.
The farmers’ awareness of the changes is built along with the supplier survey and day-to-day communications with the TA supervisors. The TA supervisors provided the dairy farmers with the latest government policy, information about new technologies and most importantly educated them about the urgency to upgrade for survival and further improvement.
Before Nestlé began working with the dairy farmers on upgrading, Nestlé also faced a lot of internal challenges - employees had been working on the traditional model for more than 20 years. Some of them were resistant to change. Employees also had to learn new things, similar to farmers, who had to increase their knowledge of livestock management from several cows to dozens and hundreds. Zhendong Zhang said:
From our perspective, all of us started to learn. What is the most suitable farm design? How does it look like? How do we transform the farms? We invited professional companies to teach us […].
Zhendong Zhang sent some TA supervisors to other regions of China to learn the best practices of modern dairy farming. These people then shared their experiences with the rest of their team members.
Nestlé then took various actions to support the transformation: adopting a price differentiation strategy, providing financial support, liaising with government and providing facility support.
Nestlé set up a grading scheme for the dairy farms. The farms which have a daily supply above 500 kilograms are called Direct Suppliers. These farms are further classified into four types, A, B, C and D (A < B < C < D, D is the best), according to the scale of the milk supply, facilities, raw milk quality and overall farm management. A different purchasing price is paid according to the grades. Nestlé arranges free transportation for these Direct Suppliers. Zhendong Zhang said:
The purpose of the grading scheme is to reward those farmers who invest in better farm management. Type “A” farms are paid much higher than the guidance price (for suppliers which are not direct suppliers). We classified them into A, B, C, D to incentivise them. With a higher grade, you will be paid more and have a higher profit margin […] it has different levels and is progressive.
Quality incentives are also provided to the farmers. Zhendong Zhang said:
All milk needs to meet the quality standard. The reward scheme is to encourage continuous improvement. For example total mixed ration (TMR) has a big impact on the milk’s fat protein component. We consider this in our pricing table […] to let them have the motivation to raise better cows. Having more milk is one thing and higher protein is another […]. There is a higher price for a better performance. All our work is encouraging everyone to focus on improvement. It is important for them to have the motivation.
Whenever a farm applies for a grade, the Fresh Milk Procurement and Agriculture Service Departments will conduct an on-site audit, together with the Finance and the Quality Assurance Departments. If it fulfils the standards then it can be upgraded. If not, an improvement plan is jointly discussed and agreed with the farm.
The grading and incentives have a positive effect on the farmers. Some farmers with resources are trying to become grade A suppliers. Other small farmers who lack resources but are willing to continue are encouraged to join the bigger farms, which are called, “Cow Hotels”: places where one party owns the land and invests in the facilities but does not own or have enough cows, and other parties who lack land and facilities, but own cows, to compensate the issue of the cow shortage of the first party.
Cow hotels are normally classified as A or B grade – collectively the farmers are paid higher than if they individually deliver milk to Nestlé. As a transitioning solution, it provides a pragmatic and inclusive approach to consolidation and transformation: small dairy farmers receive a bigger return on investment through cow hotels, and the owners of the cow hotels can gain extra profits by charging an administration fee from the farmers and by the price difference.
In 2012, Nestlé invested one million RMB for silage allowance: whenever farmers buy silage, Nestlé helps by paying for one-third. In this way, it enhanced farmers’ understanding of the new feeding materials.
A big challenge for the dairy farmers is lack of capital. Nestlé collaborated with the local government and a local bank to provide support to the farmers. In 2013, Nestlé and the local government each invested 1m RMB in the Bank of Harbin to create a guarantee scheme for the farmers. Based on the guarantee, the Bank provides 200m RMB credit to dairy farmers in 2013. Zhendong Zhang said:
Because we have the details about how much money they need as well as whether they need a milking parlour or a cooling tank, we can help the bank to get a better estimate of the capital that is needed. We helped coordinate this issue and within just six months, the bank approved the lending to around 60 farmers with more than 60 million RMB […] the farmers do have confidence in development and do want to grow bigger.
Direct guaranteed financial support was also provided to some exemplary dairy farms by Nestlé. Zhendong Zhang provided an example:
We have also provided a direct financial support of demonstration projects. We have a dairy farm locally with 100 cows. The owner wants to grow and we consider that he has the potential. So we are thinking about how we could help it develop, then we invited the experts who are helping design DFI at that time (to help him design cowshed) […]. With a bank loan of five million RMB the farmer has grown from less than one ton fresh milk per day to more than three tons. The five million was spent in building a standard cowshed and buying cows.
Liaison with government.
Nestlé also liaised with Shuangcheng local government for land and electricity use. Dairy farmers used to raise cows in their backyards, and with the expansion of farm-size, land became a constraint for their further development.
Zhendong Zhang said:
It is not easy for farmers to get suitable land, so we communicate with the government whether they could give priority to dairy farmers […] whether government could provide some allowance for construction. For example, with regards to the allowance policy for ten RMB a square meter of cowshed, we have several farms getting this allowance or get land to build farms […] for electricity, the milking parlour needs to use three-phase electricity and we coordinate with the government again on whether the state owned utility company, who is influenced by the government, could give a discount to the farmers.
In 2014, Nestlé invested 10m RMB in purchasing facilities (e.g. milking parlour, cooling tank) for the dairy farmers, in which farmers need only pay 40 per cent of the facility price before tax. Nestlé pays for the remaining 60 per cent and the extra 17 per cent tax.
Furthermore, instead of paying cash, the farmers could pay the 40 per cent through future milk payments. It is a big help for the farmers. Once the farmers use the facility, they may upgrade from A to B. With the increased milk price, the farmers could repay money they owe to Nestlé quite quickly, normally within three to six months. Zhendong Zhang said:
We still plan to invest five million RMB this year on facilities. Because of the lack of understanding about the new equipment from the farmers, it takes time. So for instance, this year we plan to purchase the reclaim machine to get silage: a tool that none of the farmers in Shuangcheng have used before […] and also the cow brush, which we have in DFI: we must think how to introduce it to them to improve animal welfare. These could have a pull effect on them and let them feel someone is helping them. It is a leading effect.
Capacity sustaining by continuous training
During the upgrading process, Nestlé emphasises training throughout. The traditional training continues, but the focus has been changed toward providing knowledge of modern farming. The learning activities are carried out in various forms: study groups, learning from peers, observation of best practice from DFI, formal training in DFI and supplier conferences.
Quality is still at the heart of Nestlé. Posters with illustrations and clear and understandable messages are sent to farmers from time to time with information about best practice as well as explanations about some incorrect methods. Study groups are organised based on dairy farms’ size and location by the TA supervisors:
Now each supervisor is in charge of a certain number of direct dairy farms. They organise a gathering almost every week or two, either around the farms or at one farm to discuss the industry trends, assess the situation of the farms and make improvement plan, said Chongkun Xu.
Another learning activity is learning from peers. At the beginning, whenever a new milking parlour is built, the supervisors lead a group of the key dairy farms to pay a visit:
Through the success story of some farms, we let other farmers know that it is not unrealistic to succeed and if one farm could achieve its goals, why can’t they? If they have any questions, we help them and encourage them to develop, said Zhendong Zhang.
Training is also provided to the farmers whenever Nestlé provides support to any facilities to let farmers know how to use them in an effective way.
DFI also serves as a good resource for learning. The Agriculture Service Team leads dairy farmers to review the construction process of DFI almost every month. The dairy farmers get a vivid picture of the creation and operation of a world class dairy farm. Ning Ma, Shuangcheng Nestlé TA supervisor, still remembers the effect on the farmers:
It was an eye-opening experience. Many years of experience of the farmers suddenly proved to be outdated […] One big challenge is the mindset. Actually land, capital, and skills all become problems, but they are not the most important. Their mindset is very difficult to change. Quite a lot of them have raised cows for more than 20 to 30 years. They believe that their model was satisfactory, however it is not the same now. They were fascinated by what they saw. This is exactly where DFI can play a very important role, i.e. to show our farmers how a modern farm is managed with good results. It changed their mindset.
The opening of DFI has a significant impact on the industry which will be illustrated further in the following section.
The last learning activity is taking dairy farmers to attend external dairy conferences, symposia and forums. Farmers are also encouraged to take part in government-organised training. Quarterly meetings were also held for all the direct farms for them to understand the economic trends, international dairy price and the efficiency of each farm. At the end of the year, an annual supplier conference was held to reward the farms with good operations.
Dairy farming institute – a supply chain innovation in supplier development
Nestlé invested around CHF 30m in the DFI (Plate 2) in Shuangchen, which is one of Nestlé’s biggest dairy investments. It was formally opened to the public in October 2014.
The aim of DFI is to modernise China’s dairy farming practices to meet the fast-growing demand of dairy products in a sustainable manner. Nestlé benefits from establishing DFI by ensuring a stable supply of raw milk and safety. It serves as a platform for Nestlé collaborating with partners and aims to help dairy farmers in the following ways: learn how to use the latest agriculture technology; improve their farm management skills; learn how to improve productivity; train with national and international experts; acquire practical experience in expanding their business; and gain insights into producing high quality milk more sustainably.
The institution is not only open to Nestlé dairy farmers in its three milk districts but also to other dairy farmers in the whole dairy industry. The learners can gain practical experience in expanding their farm business, improving productivity and providing high-quality milk. Different from pervious training, all the trainees need to pay a training fee depending on the training courses selected. Nestlé dairy farmers could enjoy a discount. Previously existing free training is still provided to the dairy farmers by the agriculture service team.
Nestlé invites a number of partners into this platform which covers all the main aspects of dairy farming and production. It looked for partners which are capable and highly respected in their fields globally.
Finally, the first group of business partners are Nutrition partners Alltech and Land O’Lakes; Milking and Reproduction partners Alta Genetics, GEA, SCR; Animal Health partners Boehringer Ingelheim, Elanco, Zoetis; Farm Facility and Equipments partner Avery Weign-Tronix, East Rock, Foester Technik, Goke Stoti; and Academic partners include the University of Wisconsin Madison, Northeast Agriculture University in Heilongjiang Province and International Farming Comparison Network (IFCN). Plate 3 is a photo taken inside DFI, showing a wall display of its list of partners.
The business partners can provide expertise in their specific areas, and the academic partners are responsible for the design, delivery and measurement of the training programmes both at a global and regional level. The design of DFI enables trainees to experience both classroom teaching and hands-on training at the demonstration farms.
At the end of 2015, after being open for one year, the training institute had provided training to more than 800 people. The training courses included the prevention and control of diseases, increasing milk production of each herd, improving milk quality and saving feed, all topics that are relevant to the farmers. By the first anniversary of DFI, another six companies became DFI’s partners.
Success learning stories were promoted by Nestlé. For example, Jiangang Xue, who attended the milking and milk quality course in March, 2015, gave feedback to Nestlé on how his farm’s performance improved – the milking speed increased and the incidence of cow mastitis dropped from 5 to 1 per cent.
Creating shared value
Nestlé has always practiced the Creating Shared Value philosophy. It never stopped purchasing fresh milk from the dairy farmers even during difficult times when there was a surplus of fresh milk during the melamine crisis. Helping the farmers to upgrade in a modern way once again demonstrates the Creating Shared Value viewpoint.
We know where the suppliers are, we know what they do, we get involved in operations; we visit them regularly; we build relationships; they know our quality standards. I don’t think it’s right that we as a company simply just say there is a new model now but we don’t give them the opportunity to be involved and drop them even though they’ve been with us for 25 years. We don’t tell them that we don’t care about them anymore […] We don’t drive people away - those that want to leave will leave on their own will. For the others we tell them if you want to stay in the industry, you have to grow, these are the criteria, said Robert Erhard, former General Manager of DFI.
DFI also serves as a platform for young generations:
The attraction for the younger generation is different. As more and more young people are leaving dairy farming for jobs in big cities, we need to let them see opportunities to work in dairy farming - without the leadership they can’t see the hope. Dairy farming is a profession […] DFI could help the young people to achieve their ambitions, said Jonathan Dong.
Creating Shared Value is also recognised by DFI partners:
DFI serves as a platform, as a big laboratory, and a demonstration farm to let people study here, to learn, that is the value. It helps the dairy farmers to enhance their overall farming skills. At Nestlé, this is called Creating Shared Value. I am impressed,
Said Yongxin Liu, Project Manager of East Rock.
DFI makes good business sense. It is a showcase of corporate social responsibility. We also have an obligation: our ultimate goal is to improve the levels of dairy farming. With DFI, we are on track to achieve this goal, said a manager from GEA, one of DFI’s partners which take the lead for milking equipment.
The transformation, the training and all the activities not only benefit the dairy farmers but also Nestlé and, finally, the consumers. To respond to the government-initiated transformation efforts, Nestlé worked with its business partners to build a world-class training centre. Together with local government, they are transforming the traditional dairy farmers to modern dairy professionals. DFI partners have gained a good reputation in a short period and approached the dairy farmers more effectively. With safer and better raw milk, Nestlé is also strengthening consumer confidence in its products.
Although most of the local dairy farmers have visited DFI and were impressed by what they saw. There was still some reluctance for them to participate in the formal training which must be paid for. According to the interviews with some farmer participants to DFI training, they are concerned about the cost and are not used to the formal lectures delivered. There is still some way to go before both Nestlé and DFI partners and farmers adapt to each other.
Total mixed ration is a method of feeding dairy cattle, which can be defined as “the practice of weighing and blending all feedstuffs into a complete ration which provides adequate nourishment to meet the needs of dairy cows”, by Wikipedia in https://en.wikipedia.org/wiki/Total_mixed_ration
Grass or other green fodder, compacted and stored in airtight conditions, typically in a silo, without first being dried, and used as animal feed in the winter, is a perfect feeding material for dairy cows.
Three-phase electric power is the most common method used by electrical grids worldwide to transfer power. It is also used to power large motors and other heavy loads.
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The authors would like to acknowledge the financial support of University of Exeter Business School, travel grant by Nestlé (China) Ltd., and a number of interviewees with special thanks to Jonathan Dong in Nestlé (China) Ltd.
Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision-making. The authors may have disguised names; financial and other recognizable information to protect confidentiality.
About the authors
Yu Gong is Lecturer at Southampton Business School, University of Southampton, Southampton, UK. He is a Lecturer at the University of Southampton. He obtained his PhD studies at University of Exeter. His doctoral research focus on how MNCs assume leadership in how their supply chains learn and adopt proactive sustainability practices in China. Prior to his PhD studies, he had three years’ working experience in management consulting firms.
Fu Jia is Senior Lecturer at Business School, University of Exeter, Exeter, UK. He is a Senior Lecturer in Supply Chain Management at the University of Exeter Business School. He is also a Visiting Professor to several universities. Dr Jia is the Director of Business, Nature and Value (BNV) Research Centre. He has published extensively in leading international OM/SCM journals. Dr Jia is an Associate Editor to Journal of Purchasing and Supply Management.
Steve Brown is Professor at Southampton Business School, University of Southampton, Southampton, UK. He is a Professor of Management within Southampton Business School. He has led many funded research projects. He is a Visiting Professor at Baruch College, City University New York. He is actively involved in consulting projects. Professor Brown is an Editor in Chief of the International Journal of Operations & Production Management, which is a leading journal in its field.