Milk Operations Organization Ltd.

We are ushered into the board room of one of Europe’s oldest companies. A very old dairy
company, this firm was one of the few remaining firms that still supplied milk to doorsteps in a country
in Europe. Extremely short on cash flow, falling milk subscriptions, product inventory and perishability
had all been plaguing this firm. In the meeting are present

1. CEO
2. CFO
3. CIO
4. Head of Marketing
5. Head of Manufacturing
6. Head of Milk Division
7. Head of Dairy Products Division
8. Head of Procurement
9. Representative from Product firm XYZ (invited like us)

“How can you help us?” is the question our team is expecting at the end of this meeting. Our presence
in this meeting is at the insistence of the CIO.

Milk Operations Organization Ltd. is divided as follows:

1. Milk Division
a. Consumer Division
b. Industrial Division
2. Dairy Products Division
a. Spreads Division (Butter and Other Spreads)
b. Cheese Division

Interestingly the profitability and revenue percentage share of these divisions is as follows:

Revenue Profit

15 13
Milk 38 Milk
19
66 Cheese Cheese
49
Spreads Spreads

Products manufactured by Milk Operations Organization Ltd. are: Bottled milk, flavored milk, tetra-pack
milk, milk powder, butter, lite butter spreads, cheese and cheese spreads. Bottled milk is supplied to
residences as well as businesses, hence the industrial sub-division.
 The CEO welcomes everyone to the meeting and states that it doesn’t look likely that they will
meet their profit guidance this time around. He requests the CFO to state the situation for the benefit of
all concerned, from a shareholder perspective.

The CFO states share-price figures that are disappointing and proceeds to state that unless some
hard decisions were taken regarding non-performing areas of the company, the cost structure looked
unsustainable. He also says that along with the CEO’s office they have conducted an analysis which
indicated that they were completely unable to control inventories and in a highly perishable product line
that spelt disaster. Also, their manufacturing lines seemed to be less efficient than earlier and it may
need a deeper analysis at the plants themselves. This had also been communicated earlier to the
manufacturing head as well as head of procurement and it is hoped that they can throw some light on
the problem and potential solutions. Also, since most of these problems were seen significantly in the
Milk division rather than the Products division, the Milk division head was also expected to outline his
plan for tackling this situation.

The Milk Division head speaks next. He first shares a page with all showing a set of figures:

Revenue Profit
Mn Euros Mn Euros

1400 1.4
1200 1.2
1000 1
800 0.8
1231
1140

1.25
1034

600 0.6 1.01 1.02 1.1

899

400 0.4
200 0.2
0 0
2013 2012 2011 2010 2013 2012 2011 2010

Residential Milkmen
Customers
2200
1100000 2150

1050000 2100
1090000

2050 2200
2150
1040000

1000000
2100
1000000

2000
975000

950000 1950 2000

900000 1900
2013 2012 2011 2010 2013 2012 2011 2010
The Head of Milk Division went on to say that as visible from the sheet, milk subscriptions have been
steadily falling. The cost of fresh milk delivered to your door in the morning is a cost that more and more
customers seemed un-willing to pay. They could find cheaper alternatives in the supermarket often from
Milk Operations Organization Ltd. themselves. Since long life milk has slightly higher shelf life, it could be
cheaper but more importantly the delivery logistics were a drain that supermarket deliveries didn’t have
to contend with. The primary costs in the logistics chain were from depot maintenance, vehicle
maintenance, fuel, and manpower. In fact, reducing manpower had an adverse effect on fuel because
the subscription reduction did not always mean route reduction.

Earlier there was a force of habit that drove the milk subscriptions in spite of higher pricing. However
just like newspaper delivery to the door was becoming scarce so was milk delivery to the door. People
were happy to read news on the net or mobile, and similarly buy milk ‘on demand’ from their nearby
stores. In fact there was a generational shift that their company now needed to plan how to address.
The Head of Milk division then shared a paper which showed the generational shift of how people
shopped for food in the country, showing percentages of food spend by retail type.

100 1
3 4
6
Web
95 9
8 6
4
Convenience
90 1
store
5 3
Local
85
Mom and Pop
89 90
85 86 Superstore
80

75
1995 2000 2005 2010

With such a large shift in consumer behavior he argued there were two main issues his division
faced, and in the given situation, dealt with them the best they could:

1. Falling demand and hence inventories piling to an extent

2. Increased ‘per delivery’ logistics costs which could not be passed on to the consumer

He had tried his best to stem the attrition and control costs by

1. Improving delivery assurance (it was difficult to move the needle here because over the
years he has already made it a very reliable delivery system)
2. Increasing supermarket products manufacture i.e. tetra-pack milk, flavored milk as well as
milk powder
 3. Giving adequate heads up to manufacturing based on trends, but manufacturing still
insisted on pushing bottled milk and seemed reticent to change production numbers

His conclusion was that he had adequate planning in place in his division but upstream parts of the
company needed to heed his planning and change accordingly.

The Head of Manufacturing spoke next.

He started with a guideline that had been arrived at after just such a meeting in the CEO’s office year
before last:

It has been observed that while we have tried to put forecasting and planning in place, there are
inventory problems in 1. Bottled milk, and 2. Powder milk. While bottled milk causes perishability loss,
powder milk is very low in margin. Since we are struggling to remain a profitable company,
manufacturing planning needs to be based on forecasts from downstream divisions. Any excess
production should be pushed downstream on a proportional basis rather than manufacturing excess
bottled milk and/or milk powder.

Therefore, he said, downstream units may receive excess product based on the production batches that
are running and that was just the nature of the business. He assured all present that any excess was
allocated based on total forecast ratios.

The Product firm XYZ representative spoke up saying that had they been using their forecasting tools
well, this would not happen. Why would there be excess production if it is planned. If it is purely for
efficiency of the production line, it may make sense to look at the cost-benefit given the margin impact
it was having.

The Head of Procurement spoke up to explain the nature of the business to the visitors. Milk Operations
Organization Ltd. procured milk from thousands of farmers across the country. They had to necessarily
procure whatever quantity of milk a farmer brought in to their sourcing centers. That was in the
contract. Because a farmer wouldn’t sign a limited quantity contract since that meant he would waste
some milk if he was in excess. All dairy procurement operated in this way and if Milk Operations
Organization Ltd. tried to change that, their competitors would sign on that farmer. Reality was that
cows produced more milk in winter than in summer and there was a clear trend. Also year on year milk
production techniques and feed were getting more advanced leading to a steady increase in production.
Once the milk is procured it is double checked for quality, stored in towers, processed and then either
converted to different products or bottled. If there is excess milk than needed based on downstream
forecasts, you still needed to use it within that day in production.
 Milk procured (Mn litres)
165

160

155

150

145

140

135
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012

With that very useful insight the Head of Procurement begged the pardon of the Head of Manufacturing
and requested him to continue.

But the Head of Marketing spoke up. Before anyone says that while supply is bound and contracted, it is
marketing’s job to ensure demand keeps pace, let me say that all we ask for is a little heads up. If we
know just a month in advance that there will be excess production we can plan promotions or activate
channels to food service customers or tie up with supermarkets for complementary promotions. We can
even tell manufacturing where the excess should be routed rather than just pushing it across the
portfolio but we don’t get that heads up.

The Head of Procurement stated that it was very difficult for him to forecast the nation’s cattle mood
swings and that elicited a muted chuckle or two. He proceeded to say that he would appreciate any
ideas from the consultants present on this aspect.

The Head of Manufacturing then continued. He stated that often mid production, the spreads division
would call up plants trying to influence the plant managers to move more excess towards cheese
production. The spreads folks would complain that the current forecasting did not create accurate
enough forecasts and they did not want a problem of over supply especially given the refrigerated
storage required. That sometimes led plants to create more cheese and milk powder purely based on
the relative ease of storage.

The products division head spoke up. He said that he felt that their ability to plan was limited by the
fluctuating demand that they saw which was typical in any branded products unit. Promotions, trade
incentives, etc. existed for that purpose. To provide levers to adjust demand. Any consumer product
business, he maintained, could not be run like an old milk supply business.
The Product firm XYZ representative spoke up. He said that Milk Operations Organization Ltd. was using
their product for demand forecasting and it was impossible that their forecasting tool did not give a
good forecast provided the right inputs were provided. For the tool, he said, any historical demand was
just a number. As long as those numbers showed a trend, the future number could be extrapolated.
There were no exceptions to this. He said 70-80% accuracy was delivered by their tool in other clients.

The Marketing Head then said if the demand trend could be forecasted to 80% accuracy, he could use
media, discounts, retailer push and other techniques to manage some of the problem. But was 80%
possible?

He looked to us and said, what do you gentlemen think? You’ve been pretty quiet so far?

So,

1. What are the core issues afflicting Milk Operations Organization Ltd.?
2. Is it possible to address those issues? Can Milk Operations Organization Ltd. remain relevant in today’s
consumer scenario?
3. What are your initial ideas to turn around Milk Operations Organization Ltd. given the above
information?