Case Study: Scottish Organic Milk Producers Ltd

This case study covers the following points:

Scottish Organic Milk Producers Ltd (SOMP)/Graham’s Dairies

The Commercial Drivers for Collaboration in the Chain

In 2003 the future for organic milk production in Scotland looked bleak. Falling prices, a fragmented market and with a considerable ammount of disillusionment among their ranks, a group of organic milk producers were faced with some important decisions regarding their future.  With a realisation that the producers would have to work together SOMP was formed with the aim of marketing their milk more effectively that in turn would improve their margins.  The group was made up of 27 farmers, who were responsible for producing 17 million litres of organic milk annually.

With assistance from the Scottish Executive, through a Marketing Development Scheme grant, SOMP took action to turn the situation around.  A feasibility study was carried out to investigate the way forward including a thorough review of the market and an in-depth study of the supply chain.

 

The conclusion that was reached was that SOMP had to have greater interaction with the supply chain and get closer to the consumer.  They soon realised that they could not achieve this on their own and set about looking for partners with whom they could collaborate to bring about success.

What are the Key Working Relationships and how are they Maintained?

One of these partners is Graham’s Dairies based in Bridge of Allan, near Stirling.  The company was established in 1939 and is Scotland’s largest independent dairy company, and the seventh largest milk processor in the UK, yet remains very much a family business.  With a fleet of more than 100 refrigerated delivery vehicles and employing more than 280 full time staff, the delivery network spans throughout Scotland with depots in Glasgow, Fife, Ayrshire and Angus. Graham’s market a range of products including organic milk (whole, semi-skimmed and skimmed), organic cream and Scottish organic butter.  Customers include supermarkets, independent shops, restaurants, delicatessens, hotels, nursing homes, coffee outlets, and garages. Among Graham’s impressive portfolio of customers is Sainsbury’s, Waitrose, Tesco and Starbucks.

SOMP regard Graham’s as a key partner in the supply chain and the main benefit of working together is the ability to ensure that they can supply what the consumer wants. The consumer drives the demand for organic milk and planning for future demand is a major factor in satisfying the market.   By studying the market Graham’s and SOMP are able to plan for the future and make sure that the supplies are available to meet the growing demand.  SOMP’s fundamental goal is to ensure that all the milk they produce is sold into the organic market and therefore maximises the price they receive.  One example of how this is achieved is the arrangement where Graham’s pick up milk on SOMP’s behalf, where it poses logistical difficulties to collect milk outwith the main milk production areas.  This demonstrates where collaborative working has provided real benefits to both parties.  In the case of SOMP, they now collect milk from some member’s farms, that was previously sold into the conventional market that can now be sold as organic at a significantly higher price.   Graham’s have benefited from increased supplies that can be used to service the growing demands of their customers.

What are the Collaborative Business Propositions and Targets Agreed by the Chain?

Both SOMP and Graham’s share a common objective of expanding the market and increasing the sales of organic milk.  With consumers evermore interested in the source and provenance of their food, sales of organic produce have increased dramatically in recent years.  As a result new outlets for milk have been secured and consumers have greater choice of products within the sector.  This has included the development of Graham’s own organic milk brand that complements the various “own brand label“ products that they produce for a variety of retailers such as Sainsbury’s.  Dealing with this increased demand however has increased the need for more efficient ways of managing both supply and demand to ensure that they remain in balance. This can only be achieved by both organisations working more closely together.  Through better coordination of the planning and forecasting process, in conjunction with SOMP, supply and the anticipated demand can be predicted more accurately.  This gives Graham’s the confidence to take on new customers with the knowledge that they will have supplies of milk that will be required to service any new business.  Knowing, with some degree of certainty, what volume of milk will be available to them in the future is viewed by Graham’s as a very important factor in future planning.

As milk for the retail sector is sold as a fresh product the freshness of the milk is a key aspect of quality and everyone in the supply chain has to work together to attain this goal.  This involves keeping the milk at the correct temperature throughout the supply chain.  The process begins on the farm and the temperature of the milk has to be maintained at the required level all the way through the supply chain, as it is crucial in extending the shelf life of the product.  If any problems arise that compromise the temperature of the milk as it moves along the supply chain, the chance of milk being rejected for not meeting the required quality criteria is increased.  This therefore requires all the participants in the chain to ensure that they undertake their responsibilities effectively.

As a large part of Graham’s business is supplying retailers with milk on a daily basis, continuity and consistency of supply is a vital requirement of Graham’s to make sure that they are in a position to service the market.  This has been addressed by SOMP working with their members to even out the production patterns so that consistent volumes of milk are supplied to Graham’s dairy each day.  SOMP have achieved this by providing information to producers on a regular basis to make them aware of their individual production profiles.  They are then encouraged to consider changing to a more level production pattern through the use of a seasonality based price structure.

Examples of the Results of Collaboration

Since both organisations began working together a significant amount of trust has been established between them. This has been achieved through having regular discussions on various subjects and the sharing of information that benefits both parties.  As organic milk is regarded as a niche market, the specialist knowledge that SOMP have in regard to “organics” is shared with Graham’s that has assisted them in capitalising on opportunities in the marketplace.  The high level of trust and commitment that has been developed has meant that there is an increased transparency in the relationship between the two companies.  This in turn has allowed free and open discussion to take place on topics such as new product development and potential new markets, which can be discussed without fear of the trust being breached.

 

In a relatively short time organic milk producers have seen the price they are paid for their milk increase significantly.  Prices paid to farmers have increased by over 20% in 2 years with a combined value of more than £7 million per year across the SOMP membership.  This has been due, in part, to a general increase in demand for their product that has resulted in an increase in the base price for organic milk.  In addition the increase in the volume of milk that has been able to be sold into the higher value organic market, rather than being sold into the conventional milk market, has also contributed to the increased revenue for all SOMP members.  Stuart Martin, Marketing Director of SOMP, observed “Following a few tough years our members are now seeing a fair reward for their efforts and I am convinced that it would not have been possible without taking a more collaborative approach to marketing our milk.”

Opportunities to enter new markets have also presented themselves and made a contribution to the overall success of the supply chain.  Graham’s, for example have been able to take advantage of increased milk supplies from SOMP to develop innovative new products such as their organic butter, which is currently the only organic butter produced in Scotland.  Another significant business opportunity that Graham’s were able to benefit from was the chance to supply milk to the recently opened Waitrose stores in Scotland.  Robert Graham said, “Being able to provide Scottish consumers with Scottish milk is a priority for us, so we are pleased that Waitrose recognises this and has chosen us to provide it for them.”

Long Term Thinking and Mutual Support

Looking forward to the future SOMP are actively taking steps to increase their membership, and therefore their milk supplies, to ensure that they will have the ability to meet the increased demand from the market.  Due to the relationship they have developed with Graham’s, this has given them the incentive to recruit new members that will provide the extra volumes of milk needed to satisfy the growing market. As Stuart remarked, “Not so long ago the idea of attracting new members to our group would have been unthinkable but because we are able to discuss our future targets more openly with our customers like Graham’s, we can move forward with more confidence.  This has meant that we can offer the benefits of SOMP membership to others”.

Both SOMP and Graham’s have demonstrated their mutual long-term commitment to the organic milk sector and their relationship has provided them with a clear understanding of each other’s position that has brought about some stability to the market.  Through increased sharing of information and resources they have opened up the market for organic milk and milk products that can be developed even further in the future.  As Robert Graham explained, ”We have been able to discuss issues with SOMP of a confidential nature concerning new business opportunities from a very early stage as I know I can rely on their discretion”.

Conclusion

The benefits of working together across the supply chain are clear.  Increased stability in the market, better planning and forecasting, improved coordination of activities and the introduction of greater efficiencies in haulage and production are all evident in the supply chain.  The farmers have received increased prices for their milk, the processor has developed new products and gained new customers and the retailer has a range of first class products to offer the end consumer.

As Stuart commented, “We have developed a refreshing and open collaborative relationship in an industry not renowned for it. We trust each other and it works well.  Without taking this approach we would not be able to sell our milk to full advantage and capture the vibrant market that is out there.  The relationship we have with Robert and his team has gone from strength to strength”.

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rupert.pigot@saos.co.uk

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