Concept of Value Chain in Dairy Cooperatives

Dr. Bishwa Mohan Acharya

Abstract

The concept of value chain is first of all coined by the Harvard Business Schools’ Michael E. porter, who also
developed the Five Forces Model that many businesses and companies use to figure out how well they can compete
in the current marketplace. He first discussed the value chain concept in his book Competitive Advantage. Creating
and Sustaining Superior Performance in 1985. Michael Porter’s value chain concept merged several streams of
business management theory. The Value Chain includes a business’ primary activities. These activities should be run
at optimum level if the organization is to gain any real competitive advantage. Value chain starts from the inbound
logistics and ends with service. However, value chain is related with the pre-production to the end users or
consumers.

The origin of value chain analysis has two distinct traditions. the French ‘Filière concept’ and Wallerstein’s concept
of a commodity chain (Raikes et al. 2000; Bair 2005). The ‘Filière concept’ was developed in the 1960s at the Institut
National de la Recherche Agronomique (INRA) and the Centre Internationale en Recherche Agronomique pour le
Développement (CIRAD) as an analytical tool for empirical agricultural research.

The key players in the value chain are the input suppliers, farmers of various sizes, milk collection centers,
processors and retail outlets. Each of the players in the value chain carry out various value adding services, the
input suppliers for instance provide various veterinary drugs, milking equipment, all services, feed among other
services. The primary producer in the dairy value chain – the farmer carries various animal husbandry measures
such as disease control measures, provision of feed to in-calf and lactating cows requirements and traded through
the formal marketing channels.

Most of the cooperatives in Nepal are characterized by weak management capacities, inadequate capital base, and
low economies of scale. The core activities within the ‘’inbound stage’’ of the dairy value chain and should include;
provision of farm inputs, selection of good cattle breeds, provision of animal feeds and drugs and proper milk
handling practices, this means training the dairy farmers on clean milk production, at the farm level. Lack of
knowledge of the members on how to handle milk especially at the milking stage, and poor hygiene of the milk jars
used during the milking process is a major problem in dairy cooperatives. The added-value chain proposes adding
an expanded set of activities to the original value-chain concept; specifically activities that can help improve the
livelihoods of the dairy farmers.

Key words: Concept of Value Chain, Value Activities, Porter’s Value Chain, Milk Value Chain

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1. The Concept

The concept of value chain was first coined by Harvard Business School's Michael E. Porter, who
also developed the Five Forces Model that many businesses and companies use to figure out how
well they can compete in the current marketplace. He first discussed the value chain concept in
his book Competitive Advantage. Creating and Sustaining Superior Performance in 1985.
Michael Porter’s value chain concept merged several streams of business management theory
(Altenburg, 2006), and contributed a more nuanced understanding of business strategy by
advocating for a firm level, network approach. In particular, it focused on the competitive
advantage derived from horizontal and vertical market linkages, and the value added at each
linkage.

Linkages refer to the relationships between two or more market participants. Vertical linkages
refer to the relationships between market participants engaged in different stages of the
production process. While horizontal linkages refer to relationships that connect market
participants within the same stage of the value chain.

The value chain identifies a firm as a link within a chain that enables a product to move from
pre-production to final consumption. A typical value chain will contain input providers,
producers, processors, packagers, suppliers and retailers. Therefore, the concept of the value
chain is relational. The Value Chain includes a business’ primary activities. These activities
should be run at optimum level if the organization is to gain any real competitive advantage.
Value chain starts from the inbound logistics and ends with service. However, value chain is
related with the pre-production to the end users or consumers. The flow chart of value chain
can be depicted as follows.

Value chain analysis relies on the basic economic principle of advantage — companies are best
served by operating in sectors where they have a relative productive advantage compared to
their competitors. Simultaneously, companies should ask themselves where they can deliver
the best value to their customers. The underlying concept of value chain was subject to
different influences and objectives (table 1).

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 Table 1: Characterization of existing chain frameworks

Filière Commodity Value Chain Global World Global Value

approach Chain (1974) (1980s) Commodity economic Chain
(1960s) Chain (GCC) Triangle
(1990s) (2000s)
Theoretical No unified World No unified World systems World systems Global
foundation theoretical systems theoretical theory theory commodity
approach theory foundation Organizational Organizational chains
derived from sociology sociology
dependency
theory
Objectives Physical Explanation Focus on Power Upgrade of Governance
inputs & of the World industrial relations of regions or and
outputs, Capitalist firms globally linked clusters regulation
prices and economy Competitive production Linking cluster systems
value added advantage by systems (meso development Linking
in marketing breaking and micro & value chains horizontal
chains down its level) and vertical
Focus on activities into Focus on approaches
agricultural the value industrial
commodities added goods
Underlying No International Concept of Governance Governance Governance
Concepts underlying division of in-house (consumer- Upgrading of Transaction
concept labor value added driven/ buyer- clusters costs
(neutral) Core driven) Upgrading
periphery Organizational
Semi Learning/
periphery Upgrading
Characteristics Static model Holistic point Restricted to Focus on Qualitative Composition
National of view production governance Analysis of
boundaries Macro processes at commodity
orientated firm level chain, GCC,
Qualitative No attention World
analysis to economic
international Triangle
territorial
arrangements
Key Authors Raikes et al. Wallerstein Michael Gereffi Messner Gereffi &
(2000) (1974) Porter (1985) (1994a), (2002) Kaplinsky
(1994b), (1999) (2001)
Gereffi et al. Humphrey &
(2005) Schmitz
(2000a),
Gereffi et al.
(2005)
Source: Adjusted following Bair (2005)

The origin of value chain analysis has two distinct traditions. the French ‘Filière concept’ and
Wallerstein’s concept of a commodity chain (Raikes et al. 2000; Bair 2005). The ‘Filière concept’
was developed in the 1960s at the Institut National de la Recherche Agronomique (INRA) and

3
the Centre Internationale en Recherche Agronomique pour le Développement (CIRAD) as an
analytical tool for empirical agricultural research. The concept was used to gain a more
structured understanding of economic processes within production and distribution systems for
agricultural commodities (Raikes et al. 2000). The general Filière concept has been applied to
the domestic value chains stopping at national boundaries (Kaplinsky/Morris 2002). In the
1970s, Wallerstein (1974) developed the concept of commodity chains, embedded in the world
systems theory, which is an elaboration of the dependency theory.

2. The Development Agency Approach

The insights developed in academia have more recently been incorporated into the work of
development donor organizations. According to Altenburg (2006), this rise in attention among
members of the development community has been driven by four underlying assumptions.

i. Economic growth leads to pro-poor outcomes;

ii. High economic growth rates are dependent on internationally competitive economic
sectors;
iii. Global integration is facilitated by the development of formal relational networks; and
iv. Development is about the integration of actors into marketable activities while
balancing competitiveness and equity.

More explicitly, the value chain approach to economic development asserts a direct causal
relationship between pro-poor outcomes and the engagement of poor producers and
processors in value chains. Riisgaard and Ponte (2011) argue that central too much of the value
chain literature are the assumptions that supplying formal value chains automatically generates
greater income and other benefits for the asset poor, and enables pre-production investment,
knowledge and technological assistance to overcome barriers to entry.

3. Mapping the Value Chain

The first step of a value chain analysis is the so-called mapping. Before doing so, the boundaries
to other chains need to be defined. A mapped value chain includes the actors, their
relationships, and economic activities at each stage with the related physical and monetary
flows. There are two different kinds of approaches used for mapping.

Functional and Institutional Analysis

The FAO provides a set of modules, which presents a systematic approach to value chain
analysis for agricultural commodities. The mapping is denoted as a functional and institutional
analysis (FAO 2005a) which starts with constructing a ‘preliminary map’ of a particular chain to
provide an overview of all chain actors (institutional analysis) and the type of interaction
between them (functional analysis). The FAO methodology includes three essential aspects for
developing a preliminary map (FAO 2005a). The principal functions of each stage − The agents

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carrying out these functions − The principal products in the chain and their various forms into
which they are transformed along the entire chain
Once the flow chart has been drawn, these flows are quantified, both in physical and monetary
terms. The procedure allows assessing the relative importance of the different stages or
segments of the chain.

Kaplinsky and Morris (2002) suggest similar procedures for implementing value chain analysis.
Their concept consists of two steps in order to map the value chain of interest. The first step
includes drawing an ‘initial map’, which shows the chain boundaries including the main actors,
activities, connections and some initial indicators of size and importance. The second step
consists of elaborating the refined map by quantifying key variables such as value-added, and
by identifying strategic and non-strategic activities. This refined map can be understood as a
framework for showing chain statistics (McCormick/Schmitz 2001).

4. Value Chain in Dairy Cooperatives

Milk production plays an important role in poverty alleviation through employment generation,
improving the feeding behavior of the people, and creating new opportunities for poor farmers.
Since the labor to cost ratio of cattle farming, especially milky cows and buffalos is high, milk
and milk products are bulky and perishable, and milk has continuous demand in the market, its
production and marketing allows high productive employment. Increasing milk production and
marketing thus contribute to commercialization of the rural economy and create many off-farm
jobs.

Based on per capita milk consumption standard, Nepal is still an undernourished economy. The
FAO has recommended a minimum consumption of 92 liters of milk per person per year. The
figure for Nepal is 58 liters per year. Obviously, there is a huge unmet demand for milk and milk
products in Nepal. Even at this low level of consumption, there is a daily requirement of 8.2
million liters of milk in Nepal. With increased population and changing food habits, demand for
milk and milk products has been growing at the rate of 4 per cent per annum. The dairy sector
is a growing industry (The Kathmandu Post, 2015).

50 per cent of the milk produced in Nepal is consumed by the milk producing farmers
themselves. The remaining half is distributed. 15 per cent supplied by the organized sector, 25
per cent goes into production of traditional milk and milk products like milk, yoghurt, hard
cheese, milk solids, butter and other products, and 10 per cent is supplied by the informal
sector operating in various urban areas.

Compared to the daily demand of 8.2 million liters, the daily supply is 4.26 million liters. This
demand-supply gap in milk is reflected by a huge disparity in the import and export of milk
products. Nepal imports NRs 1 billion worth of milk products and exports NRs 13 million worth
of the same, a mere fraction of the total trade. Exporting milk and milk products is still a long
cherished goal. Nepal is still dependent on imported milk and currently the farmers are
estimated to receive less than 70 per cent of the money.

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Dairy cooperatives in Nepal play a vital role in milk production contributing 8% in the national
GDP. They have contributed in alleviating poverty and providing employment to the rural
people safeguarding small and marginal milk producers.

It is estimated that 1.72 million MT of milk is produced in the country which has provided
employment to 130,000 persons. In addition, more than 500,000 small farmers, producers and
suppliers are involved in the formal milk flow. Similarly more than 2.6 million farmers are
producing the milk without involving in the formal milk flow. This sector is increasing at the rate
of more than 10% every year. However, the per capita annual consumption of milk in Nepal is
52 liters which is less than the average of Asian countries. Though the change occurred in the
habit of the urban consumption, the use of milk is increasing (NDDB, 2015).

The portion of the dairy cooperatives in milk production is remarkable. A total of 500,000 liters
of milk per day is collected by the dairy cooperatives which derive 20.5 million NRs daily to the
rural areas from the urban areas. The dairy cooperatives have provided employment to a
number of 11,000 persons and operate a total of 25 milk processing plants. These plants
process 30,000 liters of milk every day. There are 400 chilling vats established by these
cooperatives and 275 cooperatives are using automatic milk analyzers.

According to the Department of Cooperatives there are a total of 32,663 primary cooperatives
established at various purposes. Of which 9,463 are agricultural cooperatives and just 1,674 are
dairy cooperatives accounting 5.13% of total number of cooperatives (DoCs, 2015).

The dairy cooperatives in Nepal have adopted a three - tier system of which the MPCSs are the
first-tier primary level cooperatives. In the second tier, MPCSs in different districts have formed
district level District Milk Producers’ Cooperative Unions (DMPCUs), which are registered under
Cooperative Act as district level bodies.

Presently, there are 34 DMPCUs in different districts (mainly in Terai and mid-hills) and their
main objectives are to deliver programs designed to support the increased production and
processing of milk and milk products and to contribute to the financial and social upliftment of
the rural milk producers. The network of milk cooperatives is extended to 62 districts out of 75
districts in the country. In the third tier, the MPCSs and DMPCUs have formed Central Dairy
Cooperative Association Limited Nepal (CDCAN). CDCAN is registered as their central-level
cooperative organization (FAO, 2010).

The MPCSs have become one of the major actors in the present day dairy sector of Nepal by
being a strong channel between the rural milk producers and the milk processing industries.
However, majority of the present MPCSs is found to be operating in a condition of disarray. The
available information shows that the MPCSs have not been able to generate enough capital
bases for providing real support to their member milk producers except acting as an agent
between the milk producers and the milk processing industries. Presently, the dairy
cooperatives in Nepal are playing a limited role of collection and selling of raw milk to either
DDC or private dairies.

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Value chain can be used to examine the various activities of a dairy cooperative and how they
interact in order to provide a source of competitive advantage by performing these activities
better or at a lower cost than the competitors. In competitive terms, value is the amount
buyers are willing to pay for what a firm provides them. Creating value for buyers that exceeds
the cost of doing so is the goal of any generic strategy. Value instead of cost, must be used in
analyzing competitive position’’. Sustaining competitive advantage depends on understanding
not only a firm’s value chain but how the firm fits in the overall value system (Anja et al., 2009).

There are several stakeholders, who are not direct actors/players in the dairy value-chain, but
contribute to its development. The stakeholders may be in different forms such as government;
development organizations or promoters and input suppliers who are necessary and have
played very important roles in the development of the dairy subsector.

The key players in the value chain are the input suppliers, farmers of various sizes, milk
collection centers, processors and retail outlets. Each of the players in the value chain carry out
various value adding services, the input suppliers for instance provide various veterinary drugs,
milking equipment, all services, feed among other services. The primary producer in the dairy
value chain – the farmer carries various animal husbandry measures such as disease control
measures, provision of feed to in-calf and lactating cows requirements and traded through the
formal marketing channels.

It has been established that the larger the scope of operation of the farmer, the lower the cost
production, hence economies of scale. The Milk Collection Centers play intermediary roles for
small holder farmers to enable them enter the commercial selling of milk through the
processors to the market. Milk Collection Centers (MCCs) will bulk the milk, test the milk for
quality and chill the milk to the approved temperature by the processor. Some MCCs provide
capacity building services to farmers in order for the farmer to run dairy farming as a business.

The processor is an important player in the dairy value chain. The processors have played the
role of promoting the growth of the dairy subsector and offering the market to the MCCs and
the farmers to buy their milk. The processors buy raw milk and produce various milk and milk
products. Some of the products the processors produce include pasteurized fresh milk, long life
milk, lacto, butter, among others. The processor enters into supply agreements with various
retail outlets.

Dairy is a development tool because it “widens and sustains three major pathways out of
poverty. (1) securing assets of the poor, (2) improving smallholder productivity, and (3)
increasing market participation by the poor”. The following trends will affect dairy production,
particularly rural, smallholder livestock producers. 1) Increasing pressure on common grazing
and water resources; 2) A shift in livestock production from a local, multi-purpose activity to an
increasingly market-oriented and vertically integrated business; and 3) Strong growth of
industrial production units reliant on the use of cereal based feeds close to urban centers.

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Collaboration between government agencies, non-governmental agencies, and private
agribusinesses offers the greatest potential for applying the value chain concept, with the aim
of increasing income and employment through improved farming.

To strengthen the capacity of the small holder dairy farmers, it is necessary for the promoting
organizations that they should have field level hands on support and training to direct
beneficiaries of the dairy cows and maintain close monitoring through farm visits in addition to
group meetings. The farmer training should focus on record keeping, improved management of
animals, with attention to growing special feed for dry season months.

Conclusion

Most of the cooperatives in Nepal are characterized by weak management capacities,

inadequate capital base, and low economies of scale. The core activities within the ‘’inbound
stage’’ of the dairy value chain should include; provision of farm inputs, selection of good cattle
breeds, provision of animal feeds and drugs and proper milk handling practices, this means
training the dairy farmers on clean milk production, at the farm level. Lack of knowledge of the
members on how to handle milk especially at the milking stage, and poor hygiene of the milk
jars used during the milking process is a major problem in dairy cooperatives.

This has affected the quality of milk as a result of bacteria that contaminates the milk, causing
rejects at the collection points. For Michael Porter’s value chain model to be effective in the
producer-owned dairy groups, there is need to include external support activities that are
outside the milk value chain. Expanding the value chain ensures that no potential strategic
activity is forgotten and no opportunity for enhancing value are over-looked. The added-value
chain proposes adding an expanded set of activities to the original value-chain concept;
specifically activities that can help improve the livelihoods of the dairy farmers.

REFERENCES

Anja et al (2009). Value Chain Analysis Methodologies in the Context of Environment and Trade
Research. Discussion Paper No. 429.

Bair, J. (2005). Global Capitalism and Commodity Chains. Looking Back, Going Forward.
Competition & Change, Vol. 9, No. 2, pp. 153–180.

FAO (2005c). EASYPol. On-line resource materials for policy making. Analytical tools. Module
045. Commodity Chain Analysis. Impact Analysis Using Market Prices
www.fao.org/docs/up/easypol/332/CCA_045EN.pdf.

FAO (2010). Dairy Sector Study of Nepal.

Kaplinsky, R. and M. Morris (2002). Handbook for value chain research, IDRC.

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National Dairy Development Board (NDDB), Nepal, 2015

Porter, Michael E. (1985). Competitive Advantage. Creating and Sustaining Superior

Performance. New York. Simon and Schuster.

Raikes, P., Jensen M.F, and S. Ponte (2000). ‘Global commodity chain analysis and the French
Filière approach. comparison and critique’, Economy and Society, Vol. 29, Issue 3, pp. 390–417.

The Kathmandu Post, 24 October 2015.

Wallerstein, I. (1974). The Modern World-System, Vol. I. Capitalist Agriculture and the Origins of
the European World-Economy in the Sixteenth Century. New York Academic Press.

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About the Author

Dr. Acharya is currently involved at UNDP as National Consultant. Prior to joining UNDP he had served as Director
at National Cooperative Development Board (NCDB) and Expert (Cooperatives and Poverty) at Ministry of
Cooperatives and Poverty Alleviation (MoCPA) Nepal. He has published several articles in management and
cooperatives. His book entitled “Rural Agricultural Cooperatives in Nepal” is published by the Scholars Press,
Germany in 2014. He can be reached at: bmacharya60@yahoo.com;bmacharya60@gmail.com; facebook: Bishwa
Mohan Acharya.