Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Cost Diminution in Supply Chain of a Dairy Industry
Naveed Ahmed Khan
The ever increasing importance of food industry can’t be denied & especially in the wake of
escalating population & prices both in developing & developed nations. Thus this issue
demands the attention of researchers especially in the area of supply chain to identify cost
diminution waste eliminating supply chain practices in the said industry. For such purpose
the “Dairy Division” of Engro Foods Limited, one of the biggest food companies in Pakistan
was taken into consideration in a case study manner. Based on the literature review &
interviews following variables were obtained Energy, Losses, Maintenance, Taxes, and
Logistics. Having studied the said variables, it was concluded that management of relevant
industries operating in a comparable environment need to efficiently manage two major
areas e.g. Energy & Taxes. On the other hand similar kind of other organizations could be
benefited by adopting the proficient Supply chain practices being observed at Dairy division
of Engro foods limited.
Keywords: Cost diminution, Delphi method, Supply Chain, Dairy Industry
Introduction
The dairy industry contributes a significant role in generating business and providing
employment in Pakistan. In terms of value, it is larger than the wheat and cotton sectors
combined (FAO, 2006a). According to a 2006 PDDC report (cited in Ahmed et al, 2012)
“the contribution of dairying to the national economy is of the order of Rs.540 billion,
with 97% described as informal non-documented economic activity, and this value was
expected to grow at 4% per year in 2006”. The annual milk production in 2007/8 was
estimated as 42 million tonnes, making Pakistan one of the world’s top milk producers
(FAOSTAT, 2010). Some 95 percent of all milk is produced from small-scale rural and
peri-urban
holdings
with
two
to
three
milking
animals.
(SocialSciencesInstituteNARC,2003)
Engro Corporation Limited, established in 1957 is one of the largest industrial
corporations in Pakistan. It operates in sectors including fertilizer, food, energy,
chemical, and business automation solutions. In 2012, Engro Food generated around
30 billion rupees in revenue, with over 5 million consumers purchasing its products
including fresh milk, powdered milk, lassi and ice cream. Engro Food’s Dairy Division
aims to grow and diversify its portfolio. The division has 2 major plants in Sukkur and
Sahiwal and a dairy farm in Nara in Sukkur. The Sukkur and Sahiwal plants are milk
processing plants and milk is received from interior areas collected via milk collection
centers or area offices. Engro’s Nara dairy farm has around 4000 German and
______________________________________________
Naveed Ahmed Khan; King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia.
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Australian cows for milking purpose.
Being a quality provider company has achieved following certifications and audits:
Global Gap - Related to Livestock
British Retail Consortium (BRC Audit)
ISO 9000
ISO 14000
ISO 22000 – Food Safety Audit
Halal Certified
Assessing the series of ISO 18000
Methodology
Research Approach
Delphi research approach is preferred for the research title “COST DIMINUTION IN A
DAIRY INDUSTRY”. The Delphi approach was developed by the Rand Corporation in
the 1950s with the purpose to flourish a sequential method to attain the most reliable
consensus of a group of experts. The Delphi method constructs group communication
where individuals and the group as a whole can deal with a intricate problem (Linstone
and Turoff, 1975; Okoli and Pawlowski, 2004). Wissema (1982) noted that Delphi
method has been developed in order to make discussion between experts possible
without permitting a certain social interactive behavior as happens during a normal
group discussion and hampers opinion forming. Baldwin (1975) observes that in
absence of comprehensive scientific knowledge, managers have to depend on their
own perception or on intuitive estimation of field experts. (Cornish, 1977).
In this study mid-level experienced managers were asked to respond to research
question e.g. Identification of cost related factors in a Dairy industry so its supply chain
could be more efficient?
Research Purpose
The purpose of this research is to understand the important factors for Supply Chain
Managers in a dairy industry & how the management of these factors could help reduce
cost. This study not only could help national level dairy companies both in Pakistan but
in other developing nations. Further, this research aims at understanding the use of
Delphi method at smaller scale so the author could adjust large scale future research in
area of supply chain & quality.
Limitations / Delimitations
Although the organization understudy is one of the largest revenue generating
organizations in Pakistan, still the presence of other local & international competitors
could have their influence on study & conclusion if studied along. Similarly, keeping the
exploring nature of study & shortage of resources in consideration, only a few but highly
experienced management professionals were included in this study.
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Research Ethics
The nature of this study is purely academic & prior Permission has been taken from the
respondents.
Data Source
Primary data source is collected through 2 sessions of open structured interviews.
Whereby secondary data is collected from Engro Corp. Website.
Description of Variables
After conducting series of Delphi sessions, this study identified five factors, which
encompasses the problems and their strategies to overcome the problems.
Energy
Maintenance
Loses
Taxes
Logistics
Practical Implications
The implications of this study are for those supply chain managers who are working in
similar industries to learn and implement these practices that pertain to cost
diminutions.
Findings
Although at the beginning of the study, researcher’s tended to identify mere internal
supply chain related factors which could be discovered to make supply chain more lean,
After conducting the interview with company executives it is found a mixed of both
internal & external factors are playing their roles to impact supply chain of food industry
in large & dairy in particular.
Thus, Company has to control 5 major cost incurring areas.
Energy
Losses from Production
Maintenance
Taxes
Logistics
Although, management of EFL is working hard to minimize the costs and utilize
maximum output. Brief scope of work on which teams is working to reduce cost are
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Energy Cost
Pakistan is generating 35.2 percent of its electricity from furnace oil and diesel oil that is
mostly imported. Pakistan consumed more than 7.4 million tons of oil equivalents of
furnace oil and diesel oil in 2011-12 for electricity generation. The per unit cost of
electricity generated from imported furnace oil and diesel oil is high and is expected to
increase further due to high forecasted increase in the oil prices. The per unit price of
electricity generated from furnace oil is neither viable for industrial consumers nor for
domestic consumers.
70% of energy consumption is depend upon diesel in the industry , price are fluctuating
regularly, Engro has two major plants one is in Sukkur catering to 30% demand of Sindh
and Baluchistan and remaining 70% of the regional demands of the country is served
through Sahiwal plant, generators are installed on these plants which are running over
diesel , gas is another option but availability is doubt full all the time (110 days available
out of 365 days). Gas is cheaper then diesel but it is not source on which industry can
rely for ongoing processes. The combination of these energy resources is acceptable
for the time being. The rising price of oil on international level affects the global village
very abruptly & turned to be very expensive for the industry.
What are the Alternatives?
Although Area Offices and Milk Collection Centers which operate under Milk
Procurement Department (MPD) are operating on Diesel Generators due to non
availability of Natural Gas and other cheap means, EFL has been planning to introduce
environment friendly solutions to combat both environmental issues & severe power
shortage. Solar panels, Biomass are available alternatives, the solar panels installation
on the plants is the part of planning for cost reduction, but at the initial stage such kind
of initiatives require huge investment and involves supply chain efforts for negotiating &
outsourcing with suppliers; so is the case with biomass.
Losses
Loss to production is another beyond the control factor. Where there is a bulk
production, there is some percentage of Loss. At EFL loss percentage is 1% of total
production.
Loss can be reduced by maintaining the process and smooth operations. At EFL they
provide incentives to their production teams if they reduce the losses from 1%. When
they reduce it to 0.9% they get incentive as 1 gross salary each, when it is reduced to
0.8% they get 2 gross salary bonuses. This creates integrity to work. Plant cost is
increased when any machine caught in downtime, thus production is stopped and loss
to production is reported. Losses also occur due to damages, mishandling and sudden
cooling breakdown of freezers etc.
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Maintenance Cost
Evaluating the nature and strength of project, machines are purchased. At EFL most of
the times new machinery is preferred over used but sometimes well maintained used
machines with extended useful life are also purchased for initiating or supporting the
project. Maintenance cost of EFL is 11 Paisa per pack, whereas industry operates at 16
paisa per pack. Maintenance operations are well designed using fleet with 24 hours
maintenance service, backup availability of vehicles & operators, thus occupying
maximum output.
Preventive maintenance is essential for keeping the continuous processes;
Maintenance cost assessed by finance department for purchase of right machinery after
considering the accurate requirements is first preventive step. The right estimation of
capacity of machinery for operational job prevents the down time cost, machinery which
is non operational for the some reason attributes to losses. Two out of three panel
members preferred the use of new imported machinery with proper installation &
training although costs higher at initial stage but if use efficiently could produce
outstanding results. In contrast, one of the panel members kept stressing on the
purchase of used machinery with years of useful life & maintenance records could save
huge costs.
Taxes
Company is free from paying taxes on Fuel reimbursement. They have a contract with
their fleet providers/distributors that they will give them fuel cards and pay fuel expenses
themselves in order to save sales tax on Fuel.
Besides this, company pay almost 60% taxes over a revenue of 100%. Out of this 60%,
38% is corporate tax, 5% is Employee participation tax and 17% is Sales tax.
Logistics
Distribution channel is very strong at EFL. They are closely working with their
distributors to save costs especially of fuel which is one of the highest cost related factor
in its logistical network. Standardizing the truck speed, focusing safety and related
aspects, efficient utilization of time and transportation of maximum goods to the
destinations is the main focus to optimize EFL logistics network.
At the plant docks, current time of offloading the goods is 4 hours, causing redundancy
in vehicle utilization & time resource, Management at EFL is working hard and has an
estimate of 3 months to bring this time to 1 hour. Current Fixed cost of transportation is
Rs. 150,000 per month.
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Graphical Cost Comparison
Conclusion
After conducting Delphi sessions with experts at Engro Foods Limited, it has been
concluded that “Energy” is considered as the most important and significant variable in
cost diminution technique and company is working hard to accept day to day challenges
related to save their
Energy Cost. According to Arifeen from Lahore School of Economics “The rising cost of
production in terms of both raw material and energy are major concerns for producers
with the larger challenge these days, being inadequate supply of electricity in the
country”. As energy has a vital role in production and operational process, thus this
factor needs intense care and monitoring over extended period. Solar Panel project is in
pipeline of the company as an alternative source of generating electricity may have
positive impact on its presence in Pakistani market. On the other hand electricity & tax
factors need also to be addressed by Government of Pakistan on a serious note.
Proceedings of 27th International Business Research Conference
12 - 13 June 2014, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-53-5
Acknowledgements
Thanks to Almighty Allah (swt) for everything then, and then would like to acknowledge
the patronage of my employer King Fahd University of Petroleum & Minerals, Dharan,
Saudi Arabia, for encouraging & supporting me to undertake this study, presentation &
publication. I also would like to appreciate the efforts of Syed Arsalan Hussain & Mr. M.
Wajahat Raffat of Iqra University Gulshan campus Karachi Pakistan for helping develop
the contact with Special thanks to Mr. Salman Goheer –Director Supply Chain, Mr.
Mushir M. Syed – Manager Quality Systems & Mr. Umar Sharif – Manager Commercial
from Engro Foods Limited. Besides, special thanks to my PhD supervisors Dr. Philip
Brabazon University of Portsmouth UK who helped me guide through the whole case
study preparation with his timely input & also thanks to Prof. Dr. Ashraf Labib of
University of Portsmouth for needed advice.
References
Ahmed et al, 2012; The role of extension in changing the dairy industry in Pakistan: A
review; The Journal of Animal and Plant Sciences, 22(2 Suppl.): Pg. 114 2012
Arifeen, Shehla Riza; 2012; Frozen Food Products Marketing and Distribution
Challenges in a Developing Country; International Growth Center
Cornish, E., (1977). The study of the future. World Future Society: Washington, D.C
Linstone, H.A. and Turoff, M. (1975), The Delphi Method: Techniques and Applications,
Addison-Wesley, London
Okoli, C. and Pawlowski, S.D. (2004), “The Delphi method as a research tool: an
example, design considerations and applications”, Information and Management,Vol.42,
pp. 15-29
Wissema, J.G. (1982). Trends in technology forecasting. R & D Management, 12(1), pp. 2736
Delphi sessions with, Mr. Salman Goheer –Director Supply Chain, Mr. Mushir M. Syed –
Manager Quality Systems, Mr. Umar Sharif – Manager Commercial; Engro Foods
Limited, 6th Floor, the Harbour Front Building, Marine Drive Clifton Block 4, Karachi.
http://www.engro.com/
http://www.engro.com/our-businesses/engro-foods-limited/
http://www.fao.org/docrep/014/al750e/al750e00.pdf; Pg 11.