Vinamilk's Supply Chain and The Small Farmers' Involvement: Luc Thi Thu Huong
Vinamilk's Supply Chain and The Small Farmers' Involvement: Luc Thi Thu Huong
5E (2016) 23-31
Abstract: Supply chain management is the critical success factor in the food processing industries in
general and in dairy firms in particular. This article tries to analyze the current state of the supply chain
of Vietnam Dairy Products Joint Stock Company (Vinamilk), the leading player in the country’s dairy
industry. Along with the supply chain’s description and analysis, this article also illustrates the
challenges of fresh milk procurement activities for the multiple small farmers in the country. The article
ends up with some solutions for improving the effectiveness and efficiency of Vinamilk’s supply chain
as well as for the higher participation and benefits for the small farmers.
Keywords: Vinamilk, dairy industry, small farmers, supply chain.
2. Literature review the past ten years and has become one of the
fastest growing sectors in the packaged food
The important role of small farmers in the industry of the country. According to the
dairy industry in Asian countries has been market research group Euromonitor
highlighted in many researches [1, 3, 4, 5]. International, in 2014, milk sales in Vietnam
Over 80% of dairy animals in the region are reached VND 75,000 billion, up 20% compared
raised by backyard or small-scale farmers who to 2013. It increased to VND 92,000 billion in
are a critical ingredient in the region’s dairy 2015, up 23% compared to 2014 (Figure 1).
landscape.
Demand for milk and milk products in
Despite their significant role as the primary
producers in the dairy supply chain, these rural Vietnam is growing rapidly due to rising
members of the sector only receive a small incomes, population growth, urbanization and the
share of the value of the final agro-product. young population supported by a shift in
These small-scale farmers, who are a unique consumer habits, including more focus on health
ingredient in the country’s dairy landscape, are and nutrition. The sales growth comes mainly
in need of more support from other big players from milk powder and liquid segments. These two
in the chain as well as from the government. groups combined account for 74% of the total
The existence of a vibrant smallholder-managed market value of milk and related products.
dairy sector combined with a favorable medium Milk consumption per capita in Vietnam
term market outlook is a necessity for poverty has doubled in the period from 2000-2009 from
alleviation and sustainable growth of Vietnam’s 12 kg/year, to 15 kg per/year in 2011 and
dairy industry [5, 6]. eventually reached 18 kg/capita last year
In Vietnam, much like in other countries of (2015). However, milk consumption per capita
Asia, milk is produced mainly on specialized in Vietnam (18 kg) is still relatively lower than
small-scale farms and the entire milk output is most regional peers such as China (23 kg),
usually sold to one dairy processor. Formal Thailand (28 kg), Myanmar (30 kg), Malaysia
outside options are very limited. Hence, small- (51 kg), South Korea (55 kg) and India (69 kg).
scale dairy farmers who have undertaken It is also very far from the world average milk
relationship-specific investment have little consumption of 108 kg per person per year at
bargaining power compared to large dairy the end of the year 2015. It is expected that the
processors [1, 7]. dairy volumes in Vietnam will grow 5-6%
Currently, Vinamilk, the formerly state- annually over the medium to long term.
owned enterprise, has contracted more than H
3. Methodology
Figure 1. Vietnam’s dairy market size
and growth rate, 2010-2015.
The dairy industry in Vietnam is a dynamic
Sources: FAO, 2015 and Euromonitor
field that has shown continuous growth during International, 2015 [8].
L.T.T. Huong / VNU Journal of Science: Education Research, Vol. 32, No. 5E (2016) 23-31 25
However, the retail price of milk in Vinamilk has been the largest dairy
Vietnam is one of the highest in the world, company in Vietnam for the past 40
especially in the powdered milk segment. The consecutive years. It is also the largest company
reason is simple as Vietnam mainly depends on in the private sector in 2015 on the Vietnam
imports to meet domestic demand for dairy Stock market [9]. The company was founded in
products. The country is the 20th most 1976 as the state-owned Southern Coffee-Dairy
important importer of dairy products in the Company. In 2003, following its IPO to the
world. The local raw milk production is able to HCMC Stock Exchange, the company legally
provide only 30% of the domestic demand. This changed its name to Vietnam Dairy Products
implies that Vietnam’s dairy products’ market JSC (Vinamilk). The principal activities of
has a high potential for future growth, both Vinamilk are to produce and distribute
through increased domestic production and condensed milk, powdered milk, liquid milk,
imports. High demand for milk and milk soya milk, yogurts, ice-cream, cheese, fruit
products in Vietnam creates incentives for juice, coffee and other products derived from
different actors in the dairy supply chain to take milk. The company’s business performance is
advantage of the emerging opportunities. presented in Table 1.
Currently, the segment “liquid milk” still The company’s average growth rate of total
occupies the largest market share in Vietnamese revenue, gross profit and profit after tax in the
dairy consumption demand thanks to its high two nearest years are 14.3%, 42.8% and 28.1%
nutritional value and easy usage. However, due respectively. The gross profit margin had
to high consumption demand and limited local widened from 32.3% in 2014 to 40.4% in 2015,
supply source, producers mainly import a big leap for just one year thanks to a
powdered milk from abroad and turn it into downturn of world milk prices. Export sales
“fresh” milk. Meanwhile, the market information contribute about 13% of the total revenue. At
is not clear among various milks (real, fresh, or the end of 2015, Vinamilk has exported to more
reconstituted), leading to the indifference in price than 40 nations with its traditional markets
of these totally different kinds of milk. This being in the Middle East and South East Asia.
negatively affects the benefits of consumers and With impressive development, Vinamilk aims
the dairy farmers as well. to achieve a total revenue of VND billion
44,560 in 2016 and to be ranked in the Top 50
4. Vinamilk’s Business Description and its biggest dairy companies in the world by the
supply chain year 2017.
Vinamilk’s current market share occupies foreign brands such as Abbott, Friesland
over 50% of the dairy industry. It is now Campina, and Mead Johnson. In liquid milk,
fighting fiercely in four key segments: Vinamilk faces a similar situation, fighting
condensed milk, liquid milk, powdered milk, against Friesland Campina and even smaller
and yogurt. It was recently reported that players such as TH True Milk, Moc Chau, Long
Vinamilk now accounts for 90% of the market Thanh, and IDP.
share in condensed milk, 48% in liquid milk, In addition to its existing competitors,
24.6% in powdered milk, and 68% in yogurt. It Vinamilk may also have to face major dairy
can be seen that the key to Vinamilk’s faster enterprises in the region as the ASEAN
growth in the coming years will lie in its ability Economic Community (AEC) is enacting now
to expand its market share in the segments of and from the TPP countries as well. A large
liquid milk and powdered milk, in which it will market of nearly 92 million people such as that
face tough challenges. In powdered milk, for of Vietnam is certain to catch the eye of
instance, especially the children’s segment, the regional players. The supply chain of Vinamilk
habit of Vietnamese people to prefer foreign consists of five activities, namely: input
products is a major barrier for Vinamilk to ingredients, raw milk production, processing,
overcome in order to improve its market share. distribution and consumption (Figure 2).
Its main competitors in this segment are strong
F
Breeds, feed, veterinary, vaccine,
milking machines, cooling system...
8,000 91
farmers collection
95,000 cows centers Schools,
VINAMILK hospitals
13 factories
End consumers
5 cold 2 warehouses
storage centers 1.6 million tons/year
6.000 workers Supermarkets and
convenience store
200 products
(2,184 points)
Cool transport to factories within 3h • liquid milk
• powder milk
• condensed milk
Fonterra, Hoogwegt, • yoghurt
Pertima, Tetra Pak...
Imported Wholesalers
milk powder
3 branches
74 showrooms Groceries
Imported facilities
243 distributors and small outlets
and machinery for production
(212,000 points)
Activity 1: Input ingredients has grown significantly over the last years. This
Inputs include the import of dairy breeds for growth has been the result of increased milk
husbandry and the purchasing of raw milk demand and government’s policies to promote
powder ingredients for processing activities. efforts to develop the domestic dairy industry.
Cow raising requires high technique and But the situation is changing now. In early
investment which are not available in Vietnam. 2016, prices of milk sourced from cow farmers in
To set up a standard dairy farming system, Vietnam were about VND 12,000-14,000 (US$
Vinamilk must import technology, materials 0.54-0.63) per kilo, nearly double that of milk
and equipment. Currently, dairy cattle for the shipped from the U.S., Australia, New Zealand,
local herds are mainly imported from Australia and European countries, which sold for about
and New Zealand. VND 7,000-9,000 ($0.3-0.4) per kilo. Therefore,
The imported milk powder comes mostly priority is given to buying milk powder from
from New Zealand, Australia and USA which these countries over fresh milk from local
includes Whole milk Powder (WMP) and Skim farmers. As the global milk prices have dropped
milk powder (SMP). It is estimated that the significantly in recent times, cow farmers are
imported milk powder materials account for 63% finding it difficult to sell their products.
of the demand for the final milk products of the By the end of March 2016, Vinamilk was
company. Dependence on imported raw material operating 7 cow farms with a combined herd of
sources is one of the company’s weaknesses 15,000 cattle. Vinamilk’s cow herd, including
which strongly affects the sustainable the owned farms and that of contracted farmers,
development and the gross profit of Vinamilk. now totals over 110,000 head and has the
Activity 2: Raw milk production ability to supply nearly 600 tons of raw milk
each day. With the plan to develop new farms,
This activity includes dairy cattle
the company intends to raise the number of
husbandry, milking and milk maintenance. The
cows in their herd as well as from farmers to
source of raw material is one of the important
about 140,000 cows by 2017 and 180,000-
issues of the dairy company but this activity is
200,000 by 2020. This means that the planned
still the weakest one in the company’s supply
volume of raw milk in 2020 will be doubled,
chain as it is now facing many difficulties.
equivalent to 1,000-1,200 tons per day.
Vinamilk collects raw milk from dairy farms,
Vinamilk is still the leader among dairy
both from small farmers and from its in-house
producers in terms of herd size, outnumbering
industrial farms.
Friesland Campina by 32,000 cows from
For Vietnamese farmers, dairy cattle are not contracted farmers, TH True Milk by 45,000
traditional animals and rather new on their head of in-house farms, and IDP by 58,000
farms. Smallholders have dominated the dairy head in outsourcing schemes with the farmers.
industry with up to 95% of dairy farming
Activity 3: Processing
households (with fewer than 10 cows per
family). Small dairy herds have low outputs per In this part, Vinamilk collects raw milk
animal and produce inconsistent quality milk. from dairy farms and buys powdered milk from
Furthermore, animal-keeping smallholders are foreign partners (Fonterra, Hoogwegt…), then
associated with increased production costs and processes and packages for the various final
the spread of animal diseases. The lack of grass products. The company now operates 13
in Vietnam and the huge capex outlay necessary factories across the country including two mega
are also major challenges for dairy farming. The factories. The company’s production
amount of natural and grown grass only infrastructure is capable of processing 1.6
satisfies about 30% of the forage needs of the million tons of milk per year to meet the rising
dairy cattle. Still, dairy production in Vietnam market demand. It also has 2 logistics
28 L.T.T. Huong / VNU Journal of Science: Education Research, Vol. 32, No. 5E (2016) 23-31
enterprises in HCMC and in Hanoi to operate heavily in upstream development to expand its
the warehouses and transportation of raw cow herd as a key factor to survive the
materials and finished goods. intensifying market. Though other local liquid
Activity 4: Distribution milk manufacturers such as FCV, TH Milk,
Moc Chau Milk and IDP are also increasing
Vinamilk has a strong and nationwide
their herds of dairy cattle, Vinamilk still
distribution network. The traditional channel of
occupies the leading position in this segment
Vinamilk totals 243 exclusive distributors, that
with a market share of 48%.
cover over 212,000 outlets in all cities and rural
areas, which generated about 80% of domestic ● In the powdered milk segment,
revenue in 2015. The rest was from the modern consumers tend to have higher brand loyalty on
trade through direct deals with 1,609 small and products that satisfy their children’ appetite and
big supermarkets, as well as with 575 nutrition and they are willing to pay a premium
convenience stores across the country. The price for the strong foreign brands such as
strong channel development is partly Abbott, Mead Johnson and Nestle. This
attributable to its information technology tool segment is a most profitable market that is
ERP which has helped switch the firm from dominated by the foreign enterprises which
wholesaler to retailer, manage its inventory have up to 75% of the market share. Vinamilk
more precisely and improve its sale teams’ is still lagging behind its foreign competitors
efficiency. The firm is now trying to expand its and is still competing in the low-end and mid-
channel to acquire more market share, end products with brands Dielac and RiDielac.
especially in rural areas and small urban areas. ● In the yogurt segment, Vinamilk has a
Activity 5: Dairy consumption huge advantage due to its nine yogurt factories
across the country combined with an extensive
Milk is a vital and essential good for health
distribution channel and large system of cool
and nutrition thus consumers’ decisions are
storage. Thus the firm claims to own up to 68%
influenced much by product quality and safety.
of the market share in 2015.
Another important factor that impacts the
Vietnamese customers’ behavior is retail price,
and the high price of dairy products deprives
many Vietnamese of the opportunity to use 5. Assessing the challenges of fresh milk
them. Spending for milk in cities is much procurement activities at Vinamilk
higher compared to rural areas, but it is getting
saturated. Meanwhile the milk consumption in Vinamilk’s main strategy for the
rural areas is continuously growing at a double development of raw milk supply is
digit rate. Vinamilk is well serving the domestic “Establishing a network high-technology dairy
market in all four key segments. farms in order to meet the demand for safe,
quality raw milk as the main input for the
● In the condensed milk segment, Vinamilk
company’s diversified products; refining the
has been dominating the market with two well-
purchasing system to ensure raw milk sales for
known brands “Sua Ong Tho” and “Ngoi Sao
farmers across the country on the top of the
Phuong Nam” which make up to 90% of the
development of industrial milk farms”.
local market share. This category used to be the
core product of Vinamilk long ago, however the The Vietnam Dairy Cow Co. Ltd. was
market is becoming saturated and it accounted established in 2006, as a subsidiary enterprise
for only 13% of the total revenue in 2015. of Vinamilk, in order to fulfill this ambitious
strategy, both in terms of quantity and quality
● In the liquid milk segment, local
of the raw milk input. Since then, Vinamilk has
consumers tend to prefer fresh milk to
begun its investment into cow breeding directly
reconstituted milk, thus Vinamilk is investing
L.T.T. Huong / VNU Journal of Science: Education Research, Vol. 32, No. 5E (2016) 23-31 29
through building their own industrial dairy been actively working with cattle companies to
farms with a total capital of more than VND invest in facilities as large as 100-200 cows
500 billion at that time. The figure increased to with modern shed design and advanced
VND 1,700 billion in 2015 with 7 big cow technologies. These partnerships are set to play
farms of 15,000 head that successfully apply a a strategic role in securing the company’s
quality control system in accordance with ISO material supply. Moreover, in the beginning of
9001:2008. The in-house farms supplied 37,595 September 2014, Vinamilk officially
tons in 2015, up 27.56% from the previous year cooperated with Duc Long Gia Lai Group to
(29,472 tons). invest VND 11,000 billion into farms with
For the purpose of increasing the local 80,000 dairy cows that are expected to be taken
source of raw material from the current rate of for milk in 2017.
37% up to 50% in 2020, Vinamilk has made big Along with its in-house industrial dairy
investments in dairy cow development in all farms and the partnership with cattle
areas, from planting grass, building breeding companies, Vinamilk still relies on a large
facilities, preparing feed for cows to preparing supply network of smallholder farmers which
veterinary medicine and monitoring often supplies more than 82% of its raw milk
surrounding environment. source (Table 2). In 2015, Vinamilk purchased
Vinamilk continues moving forward to 178,890 tons of raw milk from farming
develop large-scale input sources. Vinamilk has households, an increase of 15.83% from 2014.
Table 2. Local raw fresh milk supply
(Unit: tones) 2013 2014 2015 Ratio in 2015 Growth vs. 2014
Vinamilk’s in-house farms 23,952 29,472 37,595 17.37% 27.56%
Collection from farmers 132,610 154,440 178,890 82.63% 15.83%
Total raw fresh milk supply 156,562 183,912 216,485 100.00% 17.71%
Vinamilk has 91 collection centers milk collectors’ contract with farmers to collect
throughout the country which are often located and sell milk to Vinamilk (Figure 3).
near its factories. The collection centers belong However, the quality testing system is
to 3rd party companies which require considered as a major constraint in the
significant investment in a collection grid, Vinamilk procurement system. On a daily basis,
cooling facilities and transportation trucks for external Vinamilk staff deployed at the
the deliveries to Vinamilk factories. Roughly 90 collection centers take milk samples
farmers supply an average collection center individually for each farmer. One sample per
which carries out the following tasks: collection week is randomly selected and analyzed in the
and handling of the milk twice a day, sampling dairy plant employing sophisticated laboratory
of the milk, initial testing of quality (through methods. Payment is made directly to farmers
external staff employed by Vinamilk) and cool based on the result of the quality test (fat,
delivery of the raw milk to Vinamilk’s nearest protein, total solids, bacterial count and absence
factory within 3 hours. There are two types of of antibiotics etc.) by Vinamilk. The system
contracts in the Vinamilk procurement system: tests and pays each farmer for the quality and
Farmers contract directly with the processing quantity of milk delivered. Milk prices are set
factories of Vinamilk to sell their raw milk; and by Vinamilk according to milk quality and for a
given period (twice per month).
30 L.T.T. Huong / VNU Journal of Science: Education Research, Vol. 32, No. 5E (2016) 23-31
Vinamilk
5 cold storage centers
Sending sample
Sending sample
for testing
for testing
91 collections 8.000 small
centers Milk delivery twice a day dairy farmers
Milk prices are adjustable depending on the set by Vinamilk, not by the farmers, the dairy
market price. The collection centers receive farmers bear all the risk of production.
only a collection fee who centralize the
production of a large milk basin into tanks 6. Conclusions and implications for Vinamilk
where the milk from various farmers is mixed. and small farmers
The centers are not highly trained in quality It is obvious that there are some barriers
control which sometimes results in a large which Vinamilk has to overcome to
spoilage of milk in the supply chain as dairy competitively supply growing markets in the
materials are very sensitive to food hygiene and future and to be always the No.1 dairy company
safety issues. in Vietnam. Dependence on imported raw
This process is beneficial to Vinamilk by material sources is one of the company’s
reducing investment in collecting points. biggest weaknesses and challenges. Therefore a
However, farmers and owners of the milk prerequisite for success is to be completely self-
collection centers think that the system is unfair controlled in managing input sources,
because the testing of milk quality is done at the especially in the liquid milk segment.
dairy plants and not at the collection points. The Small dairy farmers play an important role
farmers are therefore unable to follow and in Vinamilk’s raw milk supply system. Thus the
check the testing process and results, but have company should focus more resources and
to accept the decisions and prices metered out capability to nurture the development of family-
by Vinamilk. In fact, as reported by the farmers, run cow farms. Vinamilk should elaborate its
the unclear quality testing system of the contract farming relations with smallholders so
company sometimes degrades the quality of that it shows the credible signal of long-term
their milk, which reduces income from milk commitment to the selling farmers. In order to
significantly. increase the number of farmers signing
In the general sourcing scheme, Vinamilk contracts and supplying quality fresh milk, the
does not depend much on fresh milk (37%) but Vinamilk company needs to continue its
on imported milk powder (63%), while the supporting system, transferring technical
dairy farmers depend on the company. Hence, training and providing information to farmers.
the small-scale dairy farmers have little Since milk quality is considered a major
bargaining power compared to this large dairy bottleneck in the absence of the standardized
processor. And with the milk procurement price
L.T.T. Huong / VNU Journal of Science: Education Research, Vol. 32, No. 5E (2016) 23-31 31
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