I recently saw an interesting article about Nestle’s innovative way of sourcing milk in China.
Sourcing of safe, high-quality dairy products is a large problem in China. Since 2008, the country has been scandalized by incidents such as melamine-tainted infant formula from the country’s domestic producers. To defend against this. Nestle uses imported milk powder for its baby formula.
For all the rest of its milk sourcing, Nestle has found a way to source clean milk while at the same time maintaining a “shared value“ relationship with its suppliers.
How Nestle sources its milk in China
Nestle sources its milk directly from local dairy farmers. According to the article, more than 18,000 farmers supply Nestle China with a daily average of about 100 liters (~26 gallons) of milk. Farmers bring the milk directly to a Nestle collection center where it is tested for quality.
In order to receive better quality milk, Nestle also gives training to farmers that covers topics such as cow selection and feed quality. As the industry consolidates in China, Nestle is opening a new institute to deliver more sophisticated training to larger, more professionally-run dairy farms.
Beyond training, Nestle also provides other support to its farmers that signal its long-term relationship focus. For example, for farmers who want to increase their production, Nestle provides credit guarantee to farmers to buy more cows. Nestle also provides free veterinary services and has also on more than one occasion raised the price it pays to dairy farmers to allow them to cover rising feed costs.
A bit of history…
Nestle has a long history of sourcing its milk locally for its factories. It began doing so in 1866 for its factories in Switzerland which produced infant milk powder and condensed milk.
In the many years since then, Nestle has expanded its local sourcing methodology to England, Germany, the US, Australia, Latin America, and finally to Asia in the 1960s.
Nestle sources its milk primarily from three sources: semi-processed milk solids (e.g. powdered milk) and fresh milk from farmers as well as other third-parties (e.g. dairy cooperatives). Today, Nestle works with over 600,000 farmers globally – most of whom operate small farms – to source its milk.
As a result, there are benefits for all participants: for Nestle, its actions allow it to sustainably meet its dairy needs in local markets such as China. Second, there are considerable cost benefits from sourcing locally, such as reduced customs duties.
For markets such as China, Nestle has a large impact on helping establish the local supplier ecosystem, bringing training and stable cash flow to farmers. This has also kick-started economic development in the areas surrounding their factory in Heilongjiang Province, China.
But while the advantages are clear, there are disadvantages too. First, Nestle is less flexible in controlling its supply as they have to buy all the farmers milk, regardless of how much or how little is delivered. It seems Nestle is able to handle this surplus quite well by converting supplies into shelf stable products and storing them.
If you enjoyed reading this post, Danone, another one of the world’s dairy giants, has done a similar project in partnership with Grameen Bank, sourcing milk from local farmers in Bangladesh. See the article here.