Dairy Development, the Responsibility of the Dairy Industry

10th African Dairy Conference, Nairobi/Kenya

Manu SCHÄRER, Supplier Development, Nestlé EAR Ltd.

September 24th, 2014

4. Nestlé Creating Shared Value:the example of milk sourcing in Indonesia

3. Nestlé Creating Shared Value:milk sourcing around the world

1. Nestlé at a glance

2. Development of the dairy farming sector:the need to grow a rural based business

The Nestlé Story – Looking at 150 years

Nestlé: World’s Leading Nutrition, Health and Wellness Company

• Founded in 1866 in Switzerland as an infant nutrition company• CHF 92.2 billion in sales in 2013• 333,000 employees• 447 factories in 86 countries• 34 R&D and technology centers• 2,000+ brands• More than 1 billion Nestlé products sold every day• A product for every moment of every day, from morning to night and

from birth to old age

Nestlé: World’s Leading Nutrition, Health and Wellness Company

Development of the dairy farming sector:

the need to grow a rural based business

Dairy farming, is development sufficient?

What do we aim at? Who does what? Who leads and where? Who decides? Who talks? Who knows?

Who pays? Who has the money?

?

Business relation

Potential for growth of the dairy sector (output) in East Africa is substantial, considering available resources

Progress,Growth, Profit &

Sustainability

Environmentfactors

Rural Communityneeds

Marketabsorption

Dairy Farmingpractices

• Suitability for dairy farming• Seasonality (dry and rainy seasons) &

fodder availability• Land availability & soil fertility• Water• Infrastructure (roads, electricity)

• Capabilities & extension• Productivity improvement• Gaps (feeding, calf rearing, breeding,

milking hygiene, health, management)

• Inputs (on-farm, quality, cost)• Quality & competitiveness

• Pricing (stable, fair, focused, on time)• Outlet (choice for supply); competition• Commitments (contracts, buy & sell)• Development support (technical &

financial); improved infrastructure• Surplus absorption (flush & lean)• Legislation (quality, regulations)

• Dairy farming as an acceptable alternative (income generation; job creation)

• Cost of opportunity (cash crops vs. fodder crops)

• Credits• Partnerships

A viable (profitable) dairy farming sector?

Rural development

The dairy industry, a major player/partner in development

YESbut we need

=

Nestlé Creating Shared Value

milk sourcing around the world

Nestlé Milk Sourcing around the world

2013 Milk procurementAcross 4 continents; 30 countries; 59 milk districts7.1 Mio MT (63.5% direct from farmers)413’500 dairy farmers: 345’000 direct & 200 via third parties 11’700 sourcing staff active in the field

Nestlé in Africa3 countries

· S-Africa (520 t/d)· Morocco (185 t/d)· Zimbabwe (11 t/d)

15’220 farmers720 MT/day

Largest procurement operationsBrazil: 5’275 MT/dayMexico: 2’240”China: 1’670”Chile: 1’335”Pakistan: 1’310”India: 1’090”

Largest milk districtsSheikhupura (Pakistan)Moga (India)Hulunbeir (China)Kejayan (Indonesia)El Jadida (Morocco)

Milk procurement operations (milk districts)

(farmers)170’000

66’72550’53036’00015’000

Nestlé Milk Sourcing: Creating Shared Value

Develop farmers & suppliers; building capacity for growth

Secure availability (timely and long term) of adequate agricultural raw materials

Ensure safety and qualityof agricultural raw materials

CREATING CREATING SHARED SHARED VALUEVALUE

Objective (for a milk sourcing operation)To ensure long term raw milk supply to Nestlé factories based on quality specifications, required volumes and at competitive cost

Creating Shared Value begins with the understanding that for our business to prosper over the long term, the communities we serve must also prosper

How do we (Nestlé) support the dairy farming community in becoming our long term business partners?

Indonesia case study

Nestlé Milk Sourcing: CSV in Indonesia

• Cooperatives with >35K dairy farmers

• Commercial farms

• Cooperatives owned

• 20-300 km distance to factory

• 24 hours fresh milk reception

• >510 collection points

• >250 cooling centers

• >375 cooling units

• >85% direct cooling

• 2x collection/day

Dairy FarmersLoans & Training (Dairy Development)

Dairy Cooperatives Loans & Training & ControlPayroll (Milk Procurement)

Third Party fresh milk supply = Dairy farmers Dairy cooperatives Dairy factory

Nestlé Milk Sourcing: CSV in Indonesia

Milk Procurement & Dairy Development Department with dual function

Milk Procurement Section

Dairy Development Section

SHORT TERM• Volumes• Quality control• Suppliers (Coops) operational

set up• Standards• Commitments

LONG TERM• Sustainable growth• Dairy farmers • Productivity improvement• Development projects• Sustainability of dairy farming• Commitments

Develop trust of Nestlé FM suppliers for a long-term sustainable business relationship

Nestlé Milk Sourcing: CSV in Indonesia

Technical support through a team of Field professionals with relevant operational background: animal husbandry, veterinary sciences, agronomy

Variety of improvement programs aiming at increasing long-term sustainability performance of dairy Cooperatives & dairy farmers

MILK PROCUREMENTFocus: milk collection

operational set-upObjective: fresh milk quality

• Improving operational standards (Nestlé standards, SOPs)

• Quality based payment system (TPC base)

• Investment programs (credits)• Regular supplier operation audits

(compliance with Nestlé standards & requirements)

• Facilitate import of critical equipment (cooling tanks)

• Suppliers yearly competition

DAIRY DEVELOPMENTFocus: sustainability of dairy

farmingObjective: cow productivity

• Feed & fodder: cultivation of improved fodder; silage; cattle feed formulation

• Animal health: mastitis prevention; deworming

• Herd management: recording (to keep track of performance of dairy cattle population); water availability

• Competitiveness: establish a network of dairy farmers for monitoring of cost of production (supporting pricing decision making process)

ENVIRONMENTFocus: water protection &

renewable energyObjective: biogas

• Promotion of biogas• Joint project with HIVOS, set-up of

units in large scale• Improvement of cattle sheds• Investment programs

3 major focus areas for long-term development

Nestlé Milk Sourcing: CSV in Indonesia

Quality is what the consumer wants

1. Bacteriological quality as the main driver to develop milk procurement quality based payment system

Fresh milk quality issues Nestlé Minimum Requirements and Standards (SOP) Operational gap assessment Corrective action plan Investment plan Quality based payment system

2. Quality differentiation as a major payment parameter to push for quality the better the TPC, the better the price

3. Cooling of fresh milk close to the farmers to guarantee quality results decentralized (direct) cooling

4. Financial support as key element to sustain Cooperatives and farmers long-term development affordable funding

Guidelines – Supply contract – Compliance – On-time payroll – (Support) Audits – Technical and financial support mechanisms

Success or not?

In Indonesia

A large part of the African continent has a favorable environment for dairy farming and promising volumes currently produced

We need now to make this milk attractive, by: Ensuring its quality and its competitiveness Positioning it on local and international markets

How is the dairy industry (business) going to include the dairy farming community in the business development process?

As conclusion…

THANK YOU More available at: www.nestle-ea.com