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Value Chain Analysis of Informal Dairy Processing Units in Haryana (India): A

System Dynamic Approach

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DOI: 10.1007/s40003-020-00502-2

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https://doi.org/10.1007/s40003-020-00502-2

FULL-LENGTH RESEARCH ARTICLE

Value Chain Analysis of Informal Dairy Processing Units

in Haryana (India): A System Dynamic Approach
Amit Thakur1 • Anil K. Dixit1 • Shiv Kumar2 • Gunjan Bhandari1

Received: 22 February 2020 / Accepted: 31 August 2020

Ó NAAS (National Academy of Agricultural Sciences) 2020

Abstract The study intends to examine the value chain of liquid milk of informal sector based on procurement systems by
dairy processing units, applying simulation model Vensim PLE x32 package. Mapping of product flow and core actors
involved in value chains are based on primary data pertaining to year 2019. The total sample size was 27 of small and
micro dairy processing units in Karnal district of Haryana state. The study concluded that cost of milk procurement was the
least in collection centre (Model-I). The integrated production and processing system (Model-II) could attain higher profits
(Rs. 9.56/L) compared to Model-I (Rs. 2.65/L) and Vendor system, i.e. Model-III (Rs. 1.78/L). The identified three key
interventions, viz. training in milk handling, packing and processing; efficient transportation and processing technology
and efficient design of procurement systems need to be applied for leveraging of milk value chain.

Keywords Value chain
Raw milk
Distribution
Informal channels

Introduction indispensable for gaining momentum in the growth of rural

Dairying has provided livelihoods to millions of the
poorest in our country [6]. A large part of Indian population
including 70.2 million rural households, primarily having
small and marginal farmers and landless labourers, are
connected directly or indirectly with the dairy sector [13].
Farm households derive triple benefits from dairy sector in
the forms of nutritive food, supplementary income and
productive employment for family labour [8, 11]. In the
past more than three decades, the pace of production
growth of livestock sector has continuously outperformed,
in value terms the rate of production growth of most of the
food and non-food grain crops. The dairying has become
& Anil K. Dixit
poojanilwe@gmail.com
1
Division of Dairy Economics, Statistics and Management,
ICAR-National Dairy Research Institute, Karnal, Haryana
132001, India
2
ICAR-National Institute of Agricultural Economics and
Policy Research, Pusa, New Delhi 110012, India
India in general and agriculture sector in particular. Value
of output from livestock sector is dominated by milk pro-
duct group which contributes around 66% of total value of
livestock sector [12].
Milk procurement, processing and marketing is an
important source of income for over 70 million milk pro-
ducers, which signifies its role to alleviate rural income and
employment [5]. Indian dairy industry is characterized by
the dominance of informal milk distribution system which
deals with 80% of total milk surplus [15], unlike advanced
countries where 90% of milk is distributed through formal
organized channels [10]. There also exist an economic
significance of informal milk sector in terms of value
addition [17].
Informal milk distribution system is prevalent in Har-
yana state. Moreover, this state has highest average milk
productivity of the buffalo (8.39 kg/day) and ranks 2nd in
terms of per capita milk availability (930 gm/day) in the
country [12]. Moreover, the income of household earned
from livestock in Haryana is around 18%, which is more as
compared to the national average of 11% [16]. Agricul-
turally advanced Karnal district is earmarked as potential

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milk processing cluster by the Government of Haryana and
constitutes a share of 6.47% in overall milk production in
the state [4]. The actors of informal milk distribution sys-
tems have easy access to technological backstopping from
National Dairy Research Institute besides being an integral
part of ecosystem of milk value chains from pre-production
to consumption. Thus, dairy processing units in production
catchments act as a major value chain actor to maintain the
quality of milk and add value for consumer. To capture the
dynamics of interaction and interplay of actors and factors
in informal milk distribution system would be possible
through value chain analysis approach [1, 18]. This
approach provides better understanding of key capabilities
and identified areas for improvement at each unit operation
level. The knowledge emanating from the research would
decipher how competitors enhance overall profit by adding
value besides providing deep insights to various organi-
zations and actors in taking decision up to what extent of
particular activities and kind of integration is required.
There are few studies on milk value chain in India, e.g. on
upstream milk value chains [3, 7, 9] and downstream milk
value chains of the organized dairy sector [2]. Very little
research attempts have been made by researchers in India
to study the value chain of milk in informal milk pro-
cessing sector.
Data and Methodology
This study is based on primary data collected from Karnal
district of Haryana state. A sample of 27 small dairy pro-
cessing units (less than 1500 L per day capacity) was taken
by personal interview method. The actors entailed in value
chain such as dairy farmers (25), milk vendors/suppliers
(25), processing units (27), retailers/distributors (10) and
consumers (30) were investigated for formulating milk
value chain models (Fig. 1). The procurement pattern of
milk by sampled processing units was perused during the
year 2018–2019. Three main routes for supply of raw milk
to the processing units identified are, viz. (i) collection
centres, (ii) integrated production and processing units, and
(iii) private vendors (Fig. 1). The focus of the study
revolves around processing units, their system of milk
procurement, distribution and cost incurred in various
operation throughout the value chain. To capture the
dynamics of interaction and interplay of factors and actors,
a simulation package Vensim PLE x32 was used to develop
milk value chain models. Vensim was applied to depict the
linkages among the actors and successive value addition at
each stage of value chain [14]. In addition, mapping the
roles and responsibility of the actors in the value chain
actors would identify the core process, linkages among the
actors, institutional support and enabling environment.
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Results and Discussion
Three milk procurement systems with different processing
units were classified into three models, viz. collection
centre system (Model-I), integrated production and pro-
cessing system (Model-II) and private vendor system
(Model-III). Model-III has attained predominant position
(62.96%), followed by Model-I (29.63%) and Model-II
(7.41%) which trailed far behind in order of importance in
raw milk procurement. Mapping of value chain is done
according to the system of milk procurement in the study
area.
Value Chain Mapping of Liquid Milk Under
Collection Centre System (Model-I)
Mapping the actors and their associated costs involved in
value chains of milk emanating from stage of milk pro-
duction by farmers to end consumption has been done with
the help of Vensim software (Fig. 2). The core actors found
in collection centre procurement system were dairy farm-
ers, collection centres units, dairy processing units, dis-
tributor/retailers and consumers. The farmers were
supplying milk at the rate of Rs. 34/L to the collection
centre established by processing units and also incurred
transportation cost of Rs. 0.5/L. The cost per litre of milk
involved at this stage till it reaches processing unit per-
taining to reception, chilling, labour, transportation was Rs.
0.19, Rs 0.51, Rs 1.0 and Rs 0.76, respectively. The esti-
mates of variable cost component such as packing/pack-
aging, fuel charges, distribution cost and fixed cost
(deprecation) were used in this dynamic programme
approach to decipher how profit changes with change in
approach of actors involved.
Value Chain Mapping of Liquid Milk Under
Integrated Production and Processing System
(Model-II)
In integrated production and processing system of milk, all
activities are undertaken by producers (dairy farms), who
perform the functions of milk production, collection, stor-
age and transportation till it reaches the processing units
wherein dairy farmers apply processing operations on raw
milk to transform it in desired products. At the level of
processing unit, the operations of cooling, heating and
refrigeration are also performed by farmers themselves
(Fig. 3). The estimated cost of milk production was Rs.
30/l, while procurement cost was found to be Rs. 2.05,
which includes reception, transport, chilling and
Agric Res
Fig. 1 Actors involved in value chain of processing units
Fig. 2 Value chain map of liquid milk under collection centre system (Rs./L)
refrigeration. Perusal of Fig. 3 indicates that Model-II
could save the cost incurred at collection centre, which was
involved in Model-I.
Value Chain Mapping of Private Vendor System
(Model-III)
Core actors identified in the value chain mapping of
Model-III included farmers, private vendors, processing
units and consumers. Vendors collect milk from farmers
and transport it to the processing units (Fig. 4). Processing
units perform the reception, chilling, refrigeration, storage
and distribution activities. The purchase price of raw milk
was higher in this system, since some of the costs incurred
in transport were born by vendors. However, fixed cost per
litre of milk was comparatively less in comparison with
other systems of procurement. This might be attributed to
the fact that costs of activities like transportation of milk
from production point to processing unit were incurred by
another actor, i.e. vendor. These vendors are selling raw
milk to household consumers directly, from where they
earn due profit and surplus milk is being sold to processing
units. It is observed that downstream actors are involved in
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Fig. 3 Value chain map of liquid milk under integrated production and processing system (Rs./L)
Fig. 4 Value chain of liquid milk under private vendor system (Rs./L)
price negotiation with upstream actors (i.e. processing units
negotiate with vendors as well as farmers; and vendors
with farmers). However, a reverse trend was not observed,
indicating that buyers have upper hand. It can also be
interpreted that upstream actors are at disadvantage
position.
Cost of Milk Procurement Under Different
Procurement Systems
Milk procurement cost mainly consists of (i) transportation
cost; (ii) reception cost and (iii) chilling cost. Table 1
reveals that procurement cost was of Rs. 1.46 per litre in
Model-I, whereas Model-III entails comparatively high
procurement cost of Rs. 2.15 per litre. The major cost
component of procurement was transportation. Private
vendors collect the milk from farmers (Model-III), whereas
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Agric Res
farmers themselves deliver milk in collection centres
(Model-I), which make a difference in procurement cost.
Most of the processing units (Model-I) have their own
transportation arrangements wherein these units handled
comparatively large quantity of milk bringing down the
total cost since fixed cost is spread more and more as the
volume of haul of raw milk increased. This is an indication
of managerial efficiency at each level under this system.
The purchase price of raw milk was comparatively
higher in case of processing units associated with Private
vendor system of procurement (Model-III), while fixed cost
was comparatively less. This is because of the presence of
one more actor in the chain (i.e. vendor), who shared some
cost and benefits. Further, the processing cost was mini-
mum at the tune of Rs. 6.07 per litre in private vendor
system (Model-III) followed by collection centre system
(Model-I) at Rs. 7.39 per litre and integrated production
and processing system (Model-II) at Rs 8.39 per litre
Agric Res
Table 1 Cost of milk procurement under different systems of procurement (Rs./L)
Procurement model Transportation cost
I II
Collection centre system (Model-I) 0.76
Integrated production and processing system (Model-II) 1.12
Private vendor system (Model-III) 1.14
(Table 2). The higher processing cost of integrated pro-
duction and processing system (Model-II) is attributed to
mainly two factors, firstly comparatively lesser handling
capacity and secondly, better compliance to food safety
norms. These units have established good linkages with
downstream actors (i.e. consumer-households) and also
received premium prices, as evident from Table 3. Com-
paratively lower processing cost of Model-III is due to
fewer number of processing and post-processing opera-
tions, for instance, selling of loose milk in (Model-III) and
thereby reducing the cost of packing and packaging by
50% as compared to Model-I (Figs. 2, 4). Total cost was
found highest to the tune of Rs. 43.35 per litre in case of
collection centre system followed by private vendor system
(Rs. 43.22/L). The reason behind higher cost of Model-I is
due to the cost of establishments in villages, i.e. collection
centres. Such establishment cost is not in case of Model-III
and Model-II. Interestingly, total cost per litre was found
lowest in integrated production and processing system
(Model-II). This is due to shorter supply chain and
squeezing of cost and margin of actors of collection centre
and vendors.
Value Addition and Profit Under Existing Value
Chain Systems
Dairy processing units were categorized based on milk
procurement system, as also discussed above. Various
activities performed by value chain actors (VCA), cost
involved and value addition at each level were estimated
Table 2 Cost of liquid milk in various value chain (Rs./L)
Particulars Cost involved in existing value chain systems
Collection centre system
(Model-I)
Cost of raw milk/purchase price (1) 34.50
Procurement cost (2) 1.46
Processing cost (3) 7.39
Total cost [1 ? 2?3] 43.35
Reception cost Chilling cost Total procurement cost
III (I ? II ? III)
0.19 0.51 1.46
0.25 0.68 2.05
0.26 0.75 2.15
for all existing systems. The estimated profit was
also compared with modal profit (Rs 2.5 per litre—per-
ceived from processor point of view). The value addition in
milk due to primary processing operations and distribution
ranged from Rs. 10 to 20 per litre under different value
chain systems (Table 3). It is evident from the results that
establishment of Collection centres in the production
catchments (Model-I), which perform chilling, refrigera-
tion at initial stage after milking and subsequently proper
packaging of milk at processing unit level, emerged as
leverage points, as these interventions help in maintaining
the value throughout the chain.
The profit earned by integrated production and pro-
cessing units (Model-II), i.e. Rs. 7.21 per litre was over and
above the modal profit of Rs 2.5 per litre. The profit of
processing units (Model-I) was marginally higher than
modal profit, whereas profit of private vendor system
(Model-III) was lower than modal profit (Table 3). Inte-
grated production and processing units (Model-II) were
found to be the best among the existing system in terms of
value addition per litre of milk. It seems that higher profit
under Model-II was on account of lower cost of raw milk
(i.e. Rs. 30/L), but even after adjusting purchase price of
milk at par of private vendor system (i.e. Rs. 35/L), the
profit was still higher. Although unit cost for performing
various operations of Model-II was higher than other sys-
tems, it was on account of less volume of quantity handled
and cost involved for compliance of food safety norms.
Under Model-II, all activities starting from milk production
till it reaches to consumers are being performed by farmers,
while ensuring safety and quality at each unit operation
Integrated production processing system Private vendor system
(Model-II) (Model-III)
30.00 35.00
2.05 2.15
8.39 6.07
40.44 43.22
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Table 3 Value addition at each level of value chain under different models and estimated profits (Rs./L)
Procurement model Actors Activities/unit Price Price Value Actual Modal Difference in
operations received paid addition profits profit profits

Collection centre system Dairy farmers (a) Production 34.00 – – – – –

(b) Transportation 0.50
Collection unit (a) Chilling 36.77 34.50 2.27 – – –
(b) Transportation (6.57)
(c) Labour
Processing unit (a) Reception 43.35 36.77 6.58 – – –
(b) Refrigeration (17.89)
(c) Heating 46.00 43.35 2.65 – – –
(d) Packaging (6.12)
(e) Refrigerated
Storage
(f) Distribution
Consumer (a) Consumption 46.00 – – –
Overall (Model-I) 46.00 34.00 12.00 2.65 2.5 ? 0.15
Integrated Production and Farmers (a) Production 32.26 30.00 2.26 – – –
Processing System processing (b) Collection (7.75)
unit
(c) Chilling 40.44 32.26 8.18 – – –
(d) Transportation (25.35)
(e) Heating
(f) Refrigeration
(g) Packaging
(h) Distribution
Consumer (a) Consumption 50.00 – – –
Overall (Model-II) 50.00 30.00 20.00 9.56 2.5 ? 7.06
Private vendor system Farmers (a) Production 35.00 _ _ – – –
Private vendor (a) Collection 36.14 35 1.14 – – –
(b) Transportation (3.25)
Processing unit (a) Reception 43.22 36.14 7.08 – – –
(b) Chilling (19.59)
(c) Refrigeration
(d) Heating
(e) Packaging
(f) Distribution
Consumer (a) Consumption 45.00
Overall (Model-III) 45 35 10 1.78 2.5 - 0.72
Figures within parentheses indicates percentage of value addition

level enable to fetch premium prices (Table 3). During
survey, the opinion of consumers associated with Model-II
was also ascertained to know the reason for buying milk at
higher prices. Trust of consumers in this system due to
supply of milk from single source and unified management
has emerged as an important reason for their willingness to
pay more. Most of the consumers associated with this
system (Model-II) are regular buyer. The success of the
Model-II is largely attributed to producer approach which
follows vertical integration of different stages of milk value
chain. Hence, vertical integration in milk value chain acts
as leverage point, as evident from Model-II. It can be
concluded that profitability is linked with quality—clean
milk production and system approach—integrating pro-
duction with processing and efficient distribution of milk in
appropriate packets. Dairy processing units with shorter
chain and with strong connection at back end seems to be
more profitable. The selected dairy entrepreneurs under
Model-II have undergone training from ICAR-National
Dairy Research Institute (NDRI) on various aspects of

123
Agric Res
commercial dairy farming and processing and have
enhanced their managerial and entrepreneurship capability
in running such model. Training on various unit operations
and protocols can reduce the transaction costs and improve
the efficiency of the value chain as a whole. Hence, training
in milk handling, packing and processing; efficient trans-
portation and processing technology; and efficient design
of procurement systems need to be applied for leveraging
milk value chain.
Conclusions
The paper has examined the value chains of liquid milk
handled by informal sector based on procurement system
by dairy processing units. Product flow and core actors
involved in milk value chains were mapped. Three main
routes of milk procurement by processing units for supply
of raw milk to the processing units were identified, namely
(i) collection centres, (ii) integrated production and pro-
cessing units, (iii) private vendor systems. To arrive at
value addition and profit, chain-wise cost incurred at each
unit operation level was computed in a simulation model
Vensim PLE x32 package. The study concludes that cost of
milk procurement was the least in collection centre
(Model-I). The integrated production and processing sys-
tem (Model-II) could attain higher profits (Rs. 9.56/L)
compared to Model-I (Rs. 2.65/L) and vendor system, i.e.
Model-III (Rs. 1.78/L).
Integrated production and processing units system
(Model-II) was found to be the most profitable system. The
success of the Model-II is largely attributed to producer
approach which follows vertical integration of different
stages of milk value chain. The profitability is found to be
linked with system approach—integrating production with
processing and efficient distribution of milk in appropriate
packets, while maintaining the quality throughout the
chain. The fully vertically integrated value chain operates
completely under control and command of management.
The sources of risk and entry points of risks at each stage in
value chain could be easily traced and identified, thus
helping in bringing risk of contamination of milk at zero
level. Hence, the compliance as per standards for main-
taining quality of milk at each stage has become core point
for success of the model. Besides, three important identi-
fied key interventions, viz. training in milk handling,
packing and processing; efficient transportation and pro-
cessing technology; and efficient design of procurement
systems need to be renewed and realigned periodically as
per emergent business environment for leveraging milk
value chain.
View publication stats
Acknowledgements The authors acknowledge the help received
from project staff under ICAR-NIAP project on Policy Imperatives
for Promoting Value Chains of Agricultural Commodities in India
during data collection.
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