Ensuring the efficiency and effectiveness of supply chains in the food sector is an important challenge to today’s businesses. Fresh milk is a perishable product; it’s easily despoiled and risky to supply chain. In order to ensure that when the milk arrives into markets, it is safe and in the top quality at the same time, the supply chain involved in moving milk from the farm to the market has to be managed carefully. This report aimed to review particular risk issues associated with the optimisation of the supply of fresh milk.
The concept of supply chain risk management including supply chain risk sources, risk consequences, risk drives and risk mitigating strategies. In this report, there were also analyses the above information and produce an outline and strategies which suitable mitigation processes to alleviate the risk within the global network.
Supply Chain Risk Sources
The type of supply chain risk can divide by internal and external risk. The internal risks have including supply risks/ commercial risks, operational risks, strategic risks and security risks/ technical risks. According to the Hiles and Barnes (2001, p. 31), he divided that the internal supply chain risks of an organisation can be covered into five core risks.
Internal risks (Hiles and Barnes, 2001):
Supply risks or Commercial risks- the risk of relationships failing or succeeding, including business interruption due to loss of key supervisory.
Operational Risks- the risk of human mistake or careless, which obstruction supply chain run smoothly including design mistakes, employee practices risk and interrupt.
Strategic Risks- the risk of plans failing or succeeding, for example the marketing strategy or business strategy of the company itself are imperfect.
Technical risks- the risk of physical assets failing/ being damaged or enhanced, for example equipment breakdown and infrastructure failure
Financial risks- lack of financial control such as over budgets
The external supply chain risk sources can divide by supplier / logistics failures and environmental risks.
Suppliers and Logistics failures- risks between the stream of product or information which within the network, upstream supply chain of the company.
Environmental issues: the environmental risks can be divided by 5 types, for example:
Natural disasters, the geological events such as earthquakes; space weather such as sunspots, and extreme weather events such as hurricanes, typhoons and floods and health pandemics such as SARS or AIDS. Natural disasters may cause infrastructure damage, telecommunication downtime, and damage to a firm’s assets and danger to its employees.
Political risk such as international relations, unstable political and governmental policies, will become the barriers of supply chain.
Infrastructure risks, including IT failures, power blackouts and transport blocking or deterioration, may delays the transportation time.
Legal Liabilities, the regulations may arise from fulfilment with product liability standards.
The particular risk issues in the fresh milk supply chain
Environmental issues: Natural disaster
The natural disaster is the significant importance risks of fresh milk supply chain. Seasons always are the problems in foods supply chain. In this case, the seasons always affect the production of milk. According to the research reported the milk production is high in spring season when the fields are at their most lush, and reduces in the late autumn and winter. In order to overcome the problem, farmers have to manage calving and feed supplement to make sure milk can produce evenly throughout the year (www.tdtvictoria.org.au). At the same time, milk quality also has been affected by seasons; the milk quality will be low during the dry season. According to the research, in spring, the cow can provide high quality milk with high production. But in winter, the production and quality of milk will become low (Alan Spedding, 2009).
In addition, another natural disaster for example bad weather, Tsunami and volcanic, it will delay the transportation times, and it could add significantly increase cost including transportation costs, labour costs and the opportunity cost and costs of damage. Due to the fresh milk is a perishable product, deliver on time is very importance to meet the consumer needs, but serious delays cause by natural disaster may lead to spoilage and rejection. (www.defra.gov.uk).
Technical risks & logistics risks
Poor infrastructure for milk collection, distribution and storage will affects the supply chain efficiency and effectiveness. The lack of technical will increase the food safety and spoilage risks. According to the David Harris (2008, p3) claims that “Fresh milk sales were handicapped by the lack of an effective refrigerated supply chain from on-farm cold storage through to home storage.” Long distances of transportation and insufficient chilling facilities will increase procurement cost and harmfully affect milk quality, the cold storage facilities is significant important to the long distances milk transportation (Arshad H. Hashmi, 2004).
Milk suppliers need to have enough capacity and safety in technical support and milk collection centre because the lack of chilling and cooling centre at potential milk producing and supply area are not allow in the milk supply chain (www.business-ethiopia.com). Another increase the logistics risk is high cost of collecting raw milk from the manufacturer. According to the Milk & Market (2010), it found that the high transport costs through political intervention such as environmental taxation, and fuel prices has increased in milk supply chain logistics costs. The motorway charges for heavy goods vehicles have increases about 15 % and the new EU-Regulations (April 2007) reduced lead- and calmtimes of the drivers become the logistics risk of milk supply chain (www.milchindustrie.de).
Cows are milked twice times a day and it can be store in the refrigerated vats for no longer than 48 hours. To avoid spoilage, the milk should be collected from the vats every 24 or 48 hours by refrigerated tankers. So the process of milk stored, and transport to processing centre, retailer and supermarket should be as soon as possible (www.tdtvictoria.org.au). Especially in hot climate countries, the milk will spoilage easily, the process of milk store and transport should be fast. The production of milk process is complicated, from farms to collect centres until to supermarkets, the process is long, people cannot makes any mistakes in this whole process. The process such as milking practices, milk handling, sanitation or the process of delivering milk should be clean, safe and fast.
Milk’s supply chain
Global supply chains risks including supply disruption, supply delays, demand fluctuations, price fluctuations and exchange- rate fluctuations (Chopra. S & Meindl. P.,2010). In milk supply chains the large fluctuation in milk prices and foreign exchange risks have result significant hurt milk supply chain performance. For example, in the 2008 the supply of milk on the global market increased and the demand reduced following rising prices for dairy products and the recession. The foreign exchange risks also have a major impact on the income statement and balance sheet in Arla company ( Arla Annual report, 2008)
The risk consequences of supply chain
3.1 Risk consequences in natural disaster
The seasons affect the milk production and milk supply chain and it makes the financial loss, performance loss and psychological loss to the organisation. According to the Blackburn. N and Kite. E. L (2008) defines that “weather has played a part in milk production with the UK predicted to produce 13.19 billion litres in the 2007-08 quota year, some 300 million litres less than 2006-07”. The decrease of milk production and increases the financial loss to the company.
For another example, the milk shortages case in Pakistan’s urban place during the summer periods. The shortage increase the adulteration processes in Pakistan. In the fresh milk process, the unscrupulous traders added the water and other substances and harmful chemicals to fresh milk (Arshad H. Hashmi , 2004). This risk consequences including in this case are financial loss, performance loss and psychological loss because the health dangers basis by these practices are huge and the costs of ignoring the current levels of adulteration in fresh milk supplies will be far costly than rectifying the system (Arshad H. Hashmi , 2004). And the milk supply chain also gain the financial loss and performance loss after the Iceland Volcanic eruption.
3.2 Risk consequences in milk process
The risk consequences in milk process have including financial loss, performance loss, psychological loss time loss and social loss. The process such as milking practices, milk handling, sanitation or the process of delivering milk should be clean, safe and fast, because milk easy spoilage after 48 without cool stored and using unclean containers, drunks. The processes to refining milk also have to ensure all materials and milk products are safe for human use by destroying all bacteria that may be harmful to health. Unsafely materials will harmful to people healthy, it will increase the psychological loss, performance loss, financial loss, time loss and social loss. For example:
China sick milk cases had poisoned many children, although that is human fault but this also shown that the serious risk consequences of milk process which did not process safety (BBC news, 2008). In this case, Arla facing the financial loss, psychological loss and time loss worked together with its China partner to re-establish trust in the company’s products again. They also take time and money to procedure for multiple testing of the milk used in production which have been recreated and implemented (Arla annual report, 2008).
3.3 Risk consequences in technical risk and logistic risk
Technology also plays an important role in the supply chain management. Morden technical can improve the milk supply chain efficiency and milk quality. The refrigerated collects milk can helps to reduce the time barriers of the milk supplier deliver milk from farms to collect centres or processing factory. The new technology also helps to produce high quality milk and milk quality control. Cooling system is too expensive to a small farm to cool a small amount of milk. So for the small farm which lack of technical, this become the risk in the milk supply chain, because milk easy spoilage in high temperature, the process to deliver the fresh milk to the milk collect centres should be fast. Delays deliver will increase the physical loss and financial loss.
The risk consequences in logistics risk have including performance loss, time loss and financial loss. The long distances transportation milk will gain the time loss and reduces the quality of milk, affect the milk performance increase the milk supply chain performance risk. The high cost of logistics will cause to financial loss because it will increase the cost of milk production.
3.4 The risk consequences in financial risks
When the large fluctuation in milk prices in the year 2008, the milk supply chains difficult to look forward to development in the rapidly changing global market, many milk members have chop down about 15 % of the milk, in order to survival Arla goings-on to pay its members the highest possible price for their milk, this is the difficult periods to Arla to continue their milk supply chain business, but this has significantly hurt supply chain performance. Besides that, the foreign exchange matters also are a significant factor for Arla Foods, its have a major impact on the Arla’s income statement and balance sheet (Arla Annual Report, 2008).
According to the Jutner,U., Peck,H and Christopher, M. (2003) states that the risk drivers is the issues that turn risks into consequences. The risk drivers increased the level of risk, there are including internal and external issues, for example a focus on efficiency rather than effectiveness, globalisation, the rend to outsourcing, reduction of the supplier base, political or regulation etc (Tang. C.S., Teo. C.P, Wei. K. K, 2007). The supply chain risk drivers can define by either internal or external of the companies. The external drivers have included demand, supply risk and environmental, however the internal drivers are including process risk and control risk (www.decisioncraft.com).
Table 4.1 Risks drivers in milk supply chain
Plan & control risk
EU health and safety regulations
Increase cost of capital
Globalisation of supply chains
Reduction of the supplier base
Replacement purchase costs
Changes in preferences
4.1.1 The complexity of the Legal liabilities
EU health and safety regulations are once of the policies that affects to the milk supply chains. The regulation is used to identify the milk quality assurance. All of the milk supply chains especially the distribution which has participate in internationally competitive supply chain, they should fulfil with EU health and safety regulations (www.optimilk.net). In order to fulfil the EU health and safety regulations, milk supply chain improve their safety process to produce milk from farms to supermarkets. The high cost of the safety process will increase the burden of milk supply Chain Company, increase pressure on margins, cost and efficiency. The regulatory also increase the complexity of the supply chain such as assembly line, outsourcing, off-shoring, and this makes the milk supply chain outsourcing more import from outside EU (www.goodfood-project.org).
4.1.2 Transportation costs- Motorway charges
The high transportation costs become the risk driver in milk supply chain. According to the Milk & Market (2010), it found that the high transport costs through political intervention such as environmental taxation, and fuel prices has increased in milk supply chain logistics costs at the same time increase the capital costs in companies, it may become a financial burden in the company especially for the global companies. (www.milchindustrie.de).
The reduction of the supplier base
The raw material risks drivers turn a significant risk into consequences of supply chain. A great example of Arla’s group, it’s always have shortage problems in milks and other raw material risks. The material prices will increase when in the shortage periods, in order to reduce the risk; Arla will make a fixed agreement with its suppliers to ensure price predictability (Arla Annual report, 2008). The reduction of the supplier base cannot meet the customers’ needs; this will cause the supply chain failure.
The globalisation of supply chains
The globalisation of supply chain is risking to domestic supply chains, in order to gain the competitive advantages, the domestic supply chain have to expand their business to the global supply chain. However, the global supply chain will face many barriers, such as transportation costs, language problems, different business strategy, regulation and culture. This all uncertainty management is the risk drivers in overseas supply chains.
Risk mitigating strategies
According to the Wu. T and Blackhurst. J (2009, p.16) states that the risk mitigation plans in the Supply Chain Risk Management should include:
Risk identification and modelling- identify the root causes of risks
Risk analysis- analysis the potential consequences in the supply chain risk
Risk management- selecting solutions and undertaking the implementation
Risk monitoring and evaluation- monitoring, controlling and managing solutions
Organisational and personal learning- such as knowledge transfer to others within the organisation and its supply chain members.
Tang, C, (2006) has provide a robust nine strategies for mitigating supply chain disruptions. The strategies including postponement , strategic stock, flexible supply base, make and buy, economic supply incentives, flexible transportation, dynamic pricing and promotion, assortment planning and silent product rollover (see Appendix A)
5.1 The mitigation of milk supply chain risk
There have found that the main risks in the milk supply chain are natural disaster, Technical risks & logistics risks and process risks. There have several strategies below that can mitigation of milk supply chain risk:
Postponement: delays deliver because of the natural disaster in the milk supply chain always affects the milk quality, in order to maintaining the transportation costs and maintaining the quality of milk. Milk supply chain companies can using the postponement strategy aims at delaying some supply chain activities until customer demand, this designed to increase flexibility and responsiveness and also maintaining unit cost and quality (Bowersox.D.J, Closs. D.J, & Cooper.M.B, 2010). This will mitigate the time loss and financial loss in milk supply chain risk.
3PL: for the logistics risk in milk supply chain, the milk supply chain can use the 3rd party logistics method not only can share the logistics risk with them. 3PL offers many types of transportation services, after milk supply chain using a 3PL provider, the milk supply chain companies can focus on the milk production. This will improve the milk quality and also increase the efficiency and effectiveness in supply chain. Today, many food companies are outsourcing various supply chain activities- 3PL to gain a competitive advantage, for example Cadbury Adams, Hershey, Nestle they all have works together with 3PL logistics.
Flexible supply base
Joint venture: Lack of the supplier always is the risk in the milk supply chain, outsourcing and joint venture with others farmers is the another method to increase more suppliers. For example, Arla occasionally buy milk from others suppliers provided them technical to meet the quality standards. The joint venture method has brought UK farmers closer to Arla and to develop the cooperation with their Finnish milk suppliers and collaborators (Arla Annual Report, 2008). For the milk supply chain companies who lack of supplier, the joint venture is the goods method to remove this risk.
Adoption of new technology: Processing risk is the serious risk in milk supply chain; the failure process in milk production will come out significant consequences. In order to remove the risk, the training on milk handling practises, farm & processing are needs. For the complexity of the food safety regulation, milk supply chain should encourage adoption of new technology complimented farm production extension resources to enforce food safety regulations. Arla Foods’ after using wastewater treatment technologies the problem of milk spillages have been reduced by around 400-1000 litres per day and also reduce discharge costs at its milk processing plant in Hobro Mejer (Shaun Weston, 2009).
There have many internal and external supply chain risks in the milk products. The risks issues have included environmental issues, process risks Technical risks & logistics risks.
The risk consequences in milk supply chain industries are very wide, it have include financial loss, performance loss, psychological loss, time loss and social loss. The supply chain risks always occurs, there are no such a ways to remove all the risks.
The suitable mitigation processes to alleviate the risk with the global network there have:
Postponement strategy: to delaying some supply chain activities until customer demand, increase flexibility and responsiveness and also maintaining unit cost and quality.
Flexible transportation: working with 3PL logistics provider helps to increase the integrated operation, warehousing and transportation services in milk supply chain and also can share the risk with others.
Flexible supply base: Joint venture with others to increase the supply flexibility, firm can to shift production among suppliers promptly.
Innovation of technology: to maintain and increase the quality of products.
Appendix A: Supply chain risk mitigation strategies
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