Engro Foods

Supply Chain Management at Engro Foods 1

THE ORGANIZATION About Engro Foods Engro Foods Limited is subsidiary of Engro Chemical Pvt. Ltd. which is one of the most reputed enterprises in Pakistan with more than 40 years of diversified business operations in the areas of fertilizer and chemicals. Engro Chemicals, formerly known as Exxon, was taken oven by the employees and reamed Engro. Since then, it has diversified into many fields owning and operating subsidiaries like Engro Asahi, Engro Vopak, Engro Pak tank, Engro Chemicals and Engro Foods. Engro Foods started its business operations in March 2006 and it hasn’t looked back ever since its inception.Within a very short span of 2 years, it has become the house of four quality dairy milk brands: Olpers Milk, Tarang, Olwell, and Olpers cream. Engro Foods has already set up two processing plants at Sukkur and Sahiwal. While research and development, production, marketing and finance do play a crucial role in the success of any company, supply chain management is very crucial in stabling backward and forward linkages between the company and its suppliers and its customers. Without supply chain management, the company can not ensure that the basic raw material reaches the plant and then leaves the plant to the clients.

Why Engro Foods’ supply chain management process? Dairy is one of the growing segment of livestock sub-sector and important component of Pakistan’s economy. Pakistan is the fifth largest producer of milk in the world.. Milk production in Pakistan has seen a constant increase during the last two decades and this has finally translated into a mushrooming of newer entrants into the Milk Processing industry of this country in the new millennium. Engro Foods is one of the latest dairy milk processing ventures along with Shakarganj with its ‘Good Milk’. Thus the fact that Engro is a newly established organization in a field where perishability of milk makes it imperative for supply chain to be managed well, made this organization the hands-down choice for this project. A new entrant and the challenges it has to face could be discovered this way. Another reason for choosing Engro is the fact that this is one organization that has carefully planned and executed the supply chain. This is evident from the fact that the milk processing plants are located in Sukkur and Sahiwal i.e both the provinces of Pakistan. The dairy farms mostly independently owned have been linked and are suppliers of Engro that are closely located to ensure the supply of milk on time without any delay or detriment to the milk. Thus it was only natural that an organization that considers supply chain management as so crucial and actually works hard to improve upon it was selected by us for the term report.

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SUPPLY CHAIN MANAGEMENT AT ENGRO FOODS

The above chart depicts the overall supply chain management process at Engro Foods (Pvt) Ltd. These activities can be divided into three all encompassing categories as well: • • •

Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. Operations: the processes of transforming inputs into finished products and services. Outbound Logistics: the warehousing and distribution of finished goods..

Objective of Supply Chain Management at Engro Foods As per the Supply Chain Development manager at Engro Foods Mr. Umair Nagi, the primary objective of supply chain management at Engro Foods is “ Fulfilling our customer’s demands in the optimum way” And as he himself pointed this out, it can be stated that optimization is the key word. Thus cost reduction is definitely on top of the priority list for Engro but fulfilling customer’s demands is just as important. Thus the goal of these activities is to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. Supply Chain Strategy at Engro Foods The supply chain strategy is obviously in line with the objective for supply chain management which in turn is in line with the overall mission and values of the organization, all of which have been stated above. So when narrowing down to the strategy, Mr. Nagi said that it is “A give-away between “the service factor” and low cost”

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So if we link it to the theoretical concepts that have been taught to us in this Operations Management course, the basic approach towards a competitive advantage over the competitors, some established other newer entrants is a combination of low cost and rapid and flexible response. As this report shall unravel most of the details regarding this claim, right now it would suffice to state that an example of low cost strategy would be the location of the plants near the abundant sources of supply, farms and farmers so as to reduce the transportation cost and cost of milk deterioration and subsequent losses. An example of response would be the use of third party logistics to ensure that These primary activities at Engro are supported by: • • •

The infrastructure of Engro: organizational structure, control systems, company culture, etc. Human resource management: employee recruiting, hiring, training, development, and compensation. Technology development: technologies to support value-creating activities.

RAW MATERIAL PROCUREMENT

Raw material procurement plays the most integral part in the success of any supply chain. The reason being, that it is the elementary level activity and if there are flaws in it, the effectiveness emphasis on the quality of the raw materials obtained and at the same time establishing and maintaining long term relationship with their suppliers. This way Engro Foods is playing an important role to produce and market a range of high quality dairy in a country where a huge quantity of this commodity is wasted each year due to an inefficient farm-to-market infrastructure. Raw material The various kinds of raw materials required for the milk and cream production at Engro foods include: • • • Raw Milk

Raw Milk Other ingredients like SNF and fats Packaging material

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The raw milk which is further processed in the manufacturing plants at Sahiwal and Sukkur is the core raw material at Engro Foods because their product portfolio encompasses all dairy based products. The raw milk which is mainly the buffalo milk is obtained from the various dairy farms across the country with most of these dairy farms being located in Sindh and Punjab region.

Other ingredients There are several other ingredients that are added at the various stages of the production process at Engro Foods and their respective quantities depend on the recipes of the products being manufactured. These include SNF that are solids not fats and fats which are adjusted to achieve the desired levels. For instance, the Olpers milk consists of 3.5% fat whereas, Tarang milk which is the tea whitener and more creamy in nature has 7% fat, therefore, during the production process, more fat is added to the milk to produce Tarang. Furthermore, SNF in milk is to be maintained at 8.9% which is also adjusted during the process depending on the quality of milk. Another product of Engro Foods, Olwell milk which is high calcium and low fat milk targeting the health conscious segment, requires high calcium level that is modified during the process.

Packaging material The packaging material used by Engro Foods is supplied from Tetra Pak Ltd. It is in the form of rolled sheets of aseptic packaging arriving at the manufacturing plant directly from the supplier. The aseptic packages are sterilised prior to filling of UHT (Ultra Heat Treated) milk, resulting in a 6-layered Tetra Pak Brick Aseptic packaging, with a 3 months shelf life.

Sources of milk supply At Engro Foods the supply of raw milk, that is the way milk collection is done can be divided into: • •

Direct Sources Contactor based collection

Direct Sources: The method of milk collection through direct sources can be defined as milk collection done through various dairy farmers residing in different villages. A villager called “Dhoti” is responsible for collecting milk from his respective area and delivers milk every morning and evening to the Milk Collection Centre. The volume of milk supplied by the dairy farmers varies immensely depending on both the size of the are covered by the dairy farmer and the availability of milk and at times could be as low as two litres a day.

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The method of milk collection from direct sources is the most preferred one by Engro Foods mainly because of the low probability of adulteration of the milk by dairy farmers. The reason accounting for this is that it is easier to identify adulteration in low volumes of milk as opposed to high volume provided by the other method. However, the overall quantity of milk collected through this method is very limited.

Milk Collection Centre: Engro Foods maintains a full fledged Milk Collection Department to manage milk collection through direct sources. It started off with hundred Milk Collection Centres in March 2006 and now in 2008 has over five hundred and fifty Milk Collection Centres operating across the country. Today, Engro Foods can be regarded as having one of the largest milk collection networks in the country which is unmatched in size, productivity and efficiency to meet the selfimposed commitment to quality. The vast network comprises of village milk centres which are equipped with chillers to preserve the quality prior to long hauls to the factories served by specially designed tankers.

The main objective of Milk Collection Centre is to deal with small quantities of milk provided by the village dairy farmers. On one hand, it has proved a regular source of income for farmers through an assured and growing income resulting from the sale of their milk, and on the other, it has enabled Engro Foods to collect better quality milk in the quantities it needs. At the Milk Collection Centre a trained milk collection agent who tests and records every supply for quality and fat content collects the milk and rejects the milk that does not conform to their quality standards or is adulterated.

Contractor Based Collection: The contractor based milk collection involves collecting milk from approved suppliers who are aware of the quality standards adopted by the firm. The contractors are responsible for milk collection from a large area and can bring about ten thousand litres of milk a day from dairy farmers. This method of contractor based collection contributes the most to the overall quantity of milk collection. However, the company fears adulteration on part of contractors because it is harder to investigate when the volume is high. Once this milk is tested for the protein, lactose and butterfat content it is sent to the chiller containers which protect milk from air, light and heat. This milk is then transported to the plant. These chiller containers are aseptically cleaned before milk is stored in them.

Transportation of raw milk:

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The raw milk is transported from the milk collection centre to the manufacturing plants via insulated tankers. The insulated tankers maintain the temperature of milk around four degrees Celsius. The reason why the tankers are insulated is to prevent the milk from getting hot in the summer or freeze in the winter. The reflecting surface of the trucks also provides protection against infrared rays and reduces the degree of heat on the tank. Also the cool temperature stops the production of bacteria while the milk is transported over long hauls to the manufacturing site. Normally the capacity of the regular tankers used for the transportation of milk from the milk collection centre to the plant varies between 10,000 and 35,000 litres. The transportation fleet at Engro Foods is partly owned and partly contracted that is they make use of third party logistics. Moreover, the transportation routes from milk collection centres to the manufacturing sites at Sahiwal and Sukkur are designed in a way to avoid overlapping of routes which otherwise would add up to the increased cost of transportation. The raw milk is normally transported between four to six hours to avoid loss of quality.

MANAGING THE SUPPLY CHAIN Supply chain management (SCM) is a broadened management focus that considers the combined impact of all those involved in the production of goods and services, from suppliers to manufacturers to wholesalers to retailers to final consumers and beyond to disposal and recycling. The supply chain philosophy ensures that customers receive the right products at the right time at an acceptable price and at the desired location. A fundamental premise of supply chain management is to view the network of facilities, processes, and people that procure raw materials, transform them into products, and ultimately distribute them to the customer as an integrated chain rather than as separate players working together. Supply chain management plays a large part in reducing costs, improves efficiency and customer service. Depending on the industry, companies leading in supply chain performance achieve savings equal to three to seven percent of revenues compared with their median performing peers. Effective supply chain strategies often require changes in processes and traditional roles. All members of the supply chain must be open to new methods and ideas and must show a high degree of flexibility. Supplier-Relationship Management (SRM) at Engro Foods There are various methods that can be used to achieve the goals of supply chain management. Engro Foods believes in making its suppliers’ partners in the firm’s strategy to be able to satisfy an ever-changing market place. It believes in forming long-term partnering relationships with its

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suppliers rather than engaging in price wars and procuring raw materials on a short-term basis. It endeavors to achieve its goals by strengthening relationships within the links of the chain. Engro Foods procures fresh milk from both informal and formal sources. The informal sources include traditional milk collectors, small, medium, and large-scale dodhis. The formal sources include third-party milk collectors who not only supply milk to Engro Foods but also to various industry players including Haleeb Foods and Nestle. This results in cutthroat competition amongst the major players to obtain adequate quantity of milk to meet the projected level of sales. Companies engage in different competitive practices, like price wars, especially when demand for milk and milk products is high, usually during the summer season. During the summer season, demand for milk exceeds the supply so companies foresee great opportunity to increase their sales and profitability given that they are able to acquire enough supply of milk to meet the forecasted demand. Since supply of milk is limited contractors prefer to sell to those companies who not only offer the best price but who also treat them as an integral part of the supply chain.

Engro Foods reinforces its strategy of forming long-term relationships with its suppliers by winning their trust and loyalty. It does so by helping its farmers when they are going through a difficult time i.e. during the ‘flush season’. In the flush season farmers have an excessive supply of milk whereas the demand for milk is low. It usually happens during the winter season when supply of milk tends to exceed the demand. Since fresh milk is a highly perishable item it demands prompt and efficient collection from milk producers for use by consumers and manufacturers of milk products. Therefore are increasingly concerned about their milk supply. Engro Foods relieves the farmers by purchasing milk from them when no other company is willing to do so. Since processed milk has a shelf life of three months Engro Foods processes the raw milk and stores it in “buffer tanks” for later use. Another strategy employed by the company to reduce the imbalance between demand and supply and make effective use of this milk is to convert it in powdered form. Powder milk has a shelf life of 2 years so they can store it for a longer time period this way. When demand for milk tends to increase in the market they utilize the powdered milk by dissolving it and converting it back to its liquid form. This builds a mutual relationship of trust and loyalty between the milk farmers and Engro Foods since this strategy is beneficial to the farmer since it creates a steady channel for their excessive supply of milk in the flush season. This approach has proven favorable for Engro Foods as well, since the farmers have now become loyal to their company and are willing to supply them at the best possible price.

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Vendor development Pakistan is one of the largest producers of milk in the world. About 20 million tonnes of milk is produced in Pakistan whose value comes up to a total of around Rs 150 billion annually, which is much higher than Rs 100 billion for cotton and Rs 40 billion for sugarcane. The per capita availability of milk at present is 185 liters, which is the highest among the South Asian countries.

Although the figures seem quite impressive but if we compare Pakistan’s productivity of milk with other countries it is still very low. The low milk-yield in our country is evident from the fact that while it has more buffaloes and cows than North America it produces less than quarter of milk than the latter. Pakistan, with dairy animal population of 18 million, produces just 20 billion liters of milk animal as compared to 86 billion liters produced in North America, which has a dairy animal population of 17 million. Pakistan’s yield per animal is also very low as compared to countries like Australia where the yield per animal is around 20 liters where as in Pakistan it is just around 4-5 liters per animal. Helping the farmers to help increase the average milk yield is all the more necessary as milk surpasses all other commodities. The low yield per animal in Pakistan can be largely attributed to the extreme lack of knowledge and awareness amongst our local farmers regarding the treatment of livestock. Our farmers fail to cater to the needs of animals since don’t they feed the animals well and don’t give them enough water. The farmers fail to understand that animals too have different requirements and they should be provided as such only then can the productivity be enhanced. The supply chain management team at Engro foods is highly dedicated to vendor development and is involved in providing education and training to farmers regarding better treatment and handling of livestock. The team also assists dairy farmers in vaccination of livestock, improved breeding and animal husbandry practices and provision of high quality fodder seed. This has resulted in the creation of a mutually beneficial relationship with the farmers translating into opportunities for the rural population in Pakistan, which despite being the seventh top milk producer of the world suffers from low productivity.

This assistance makes all the difference in a country like Pakistan where dairy farming is more a social activity than commercial, particularly in the rural areas like interior Sindh and Punjab where the major source of milk are the households which keep an average of just 3-4 buffaloes. The supply chain development team has successfully been able to change the traditional beliefs and attitudes of farmers who valued milk as something to be kept only for the family and not for selling purposes. By changing the beliefs of dairy farmers, Engro Foods has not only created a

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source of supply for its milk products but has also created a consistent source of income for the farmers.

THE PRODUCTION PROCESS

Chilling and Storage

The production process at Engro Foods consists of four steps. Firstly, raw milk is collected from milk collection centers by tankers and brought to plants for processing. On arrival, the milk is tested for appearance, smell and temperature, and a sample is taken for analysis in laboratories. A series of tests are carried out relating to the compositional and hygienic quality of the milk. Subject to the satisfactory completion of these tests, the milk in the tanker is then unloaded into a silo. The milk processing factories cool the raw milk at a temperature of 5°C or less into cooling tanks prior to being passed through heat treatment facilities. The chilling process helps to curb bacterial growth in milk. Pasteurization Next comes the pasteurization stage, which is the process of boiling the milk and then immediately cooling it to a lower temperature. The milk is pasteurized at 85oC, which helps to kill 98% of the germs present in the milk. Pasteurization serves as the separation point of raw milk into different products, which include Tarang, Olpers and Olwell. At this point the cream and fat are removed from the milk and other special ingredients are added along with it to the

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milk as per the requirements of each product. For example, Tarang is a high-fat tea whitener and therefore it needs more cream content and different ingredients as compared to a product like Olwell, which is low fat and requires less cream. The milk after pasteurization is then standardized as prescribed by the Pakistan Pure Food Laws at 35% Fats and 8.9% SNF (solid non fats).

UHT Treatment The pasteurized milk is then passed through the UHT (Ultra Heat Treatment). This is the most sophisticated and advanced stage in milk processing. In this process the milk passes through 140 degree centigrade in the first 3 seconds and it is then immediately cooled to 20 degree centigrade in the next 5 seconds, which in turn kills all the bacteria. The UHT process can be achieved either through indirect or direct heating systems. In the indirect method the milk is heated by steam passing through stainless steel pipes outside milk tanks. In the direct method either the steam is directly injected into the milk or the milk is forced through a fine nozzle into a tank filled with steam. Engro Foods makes use of the direct system for the UHT process. Packaging Following the heat treatment, the milk is cooled in a sterile vacuum chamber. After the heat treatment the milk is cooled and packed in Tetra Pak cartons as soon as possible to prevent contamination. The packaging process is also carefully monitored. The packages undergo stringent controls to check that they are sterilized. The milk is then filled into the cartons under aseptic conditions. The cartons are filled automatically and continuously under completely sterile conditions and then heat-sealed

FINISHED GOODS Storage of finished goods Now that the Engro foods’ products have been produced and have assumed the form of finished goods, the next step involves the immediate transfer of the products to the warehousing facility maintained right next to each of the production plants.

Distribution

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Sales The sales of Engro foods’ products are divided into : 1. Primary Sales 2. Secondary Sales Primary Sales refers to the sales of the batches of products by the manufacturer to the distributors. Secondary Sales refers to the sales by the distributors to the retailers from where the goods are eventually sold to the ultimate consumer. So Engro Foods is following the traditional channel of distribution that involves some intermediaries between the transfer from producer to the consumer.

Logistics For the sake of transportation of the finished goods right from the Engro Foods maintained warehouses that are situated right next to the facility uptil the distributors, a fleet of trucks is maintained by Engro Foods themselves while part of the transportation has also been outsourced, employing a tactic known as third party logistics. A third-party logistics provider is a firm that provides outsourced or "third party" logistics services to companies for part, or sometimes all of their supply chain management function. Third party logistics providers typically specialize in integrated warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials (Wikipedia)

As far as the responsibility for distributing the goods is concerned, the outreach of the Engro Foods’ and the third party logistics is limited to the distributors only. Engro Foods has almost 200 distrbutors all over Pakistan. Some of the distributors deal with larger areas and larger orders while others are the smaller ones. For the larger orders, the finished goods are transported directly to the distributors’ agreed upon point of delivery while for the smaller distributors, goods are also being delivered and deposited in warehousing facilities maintained by Engro Foods in some important locations all over Pakistan, and it is from there that the smaller orders for the distributors are processed and either delivered or picked by the distributors themselves. The network of distributors is very extensive and extends all the way to Afghanistan.

Continuous Improvement

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Feedback and its integration in the supply chain is essential to the continuous improvement of an organization that places so much importance on supply chain management. Engro Foods ensures feedback is obtained from all possible sources. As a result, contact is maintained with distributors regarding the consumers’ reaction or any complaints that they may have. In fact, any bad products or bad batches of products, if the consequence of any supply chain management glitches, are accepted back by the company and exchanged for new good stock free of cost. Feedback is also collected directly from the consumers via the company website, which allows consumers to lodge any complaints, put forward any queries, or just drop by their comments. The same information is also collected through the presence of the company address and phone number on all the packages, thus making the organization very accessible to the consumers.

QUALITY CONTROL AT ENGRO FOODS It goes without saying that Engro Foods is committed to providing the best quality of products to the consumers at the lowest possible costs. In other words, it is a company that believes in the virtues of cost leadership and its prioritization for quality maintenance and control is reflected in stringent quality checks that are carried out both before and after the processing of the milk. Before Processing Quality control procedures are introduced right at the point of milk collection, that is at the milk collection centres. Lab tests are conducted in order to check the milk for any adulteration and in fact the dhodhis are also educated to avoid adulteration of milk. An expert is stationed at these MCCs to ensure that the tests are conducted properly. Once the milk is approved and dispatched within 6 hours to either the Sahiwal or Sukkur plant, the next Quality check is carried out right at the time of milk reception at the plant where it is once again examined by qualified Chemists and Micro Biologists by conducting various tests. It is only after the milk clears certain tests that the Quality Control department accepts it and transfers it to the cooling plants. After Processing Quality control experts are involved throughout the production process. After the packaging process is complete, Quality control resurfaces this time not only to ensure that the packages are sterilized but also to ensure that the milk packages are of the prescribed weight. And after a final approval, the milk products are considered fit for delivery and transferred to the warehouse. The organization strives to achieve even better and better quality of the products which is why it collaborates with various research agencies to work on the development of the products.

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BENCHMARKING AT ENGRO FOODS Engro Foods certainly believes in benchmarking in order to achieve a better standard of performance. When the organization was being established back in March 2006, the company and in particular its dynamic supply chain team had two options regarding the benchmark for the company operations. It had a choice between Nestle’s extensive and well reputed Milk Collection Centre system, or Haleeb Foods’ contractor based milk collection mechanism. It chose Nestle as a benchmark and therefore set up its own milk collection centres based on the layout and approach adopted by the well entrenched Nestle. However, today Engro Foods considers itself in no need of a benchmark anymore since it has actually surpassed the performance of its competitors and therefore now it is viewing its own previous performance as the standard to work against.

ISSUES AND CHALLENGES Supply chain management in a country grappling with numerous uncertainties and that too in the dairy milk industry is replete with difficulties, challenges and bottlenecks. Engro foods is no exception and the supply chain team has to deal with various issues and challenges day in day out. Demand Supply Imbalances The first challenge that Engro Foods has to deal with is the reconciliation between demand and supply, where the two are following different patterns throughout the year. While demand reduces during the winters and increases during the summer, the supply chain team in its quest for establishing trust and harmony with the dhodhis, has to accept milk throughout the year. Thus in order to ensure that the all year round supply is utilized well, Engro Foods actually converts the excess supply into powdered milk, which is much easier to store and much more resistant to deterioration over time as compared to liquefied milk. Hence, this is a challenge that Engro is attempting to meet to the best of its resources and capabilities. Lack of Control over Distribution Channels The distribution of goods to the retailer who then sells it to the final consumer is a responsibility that is not directly under Engro Foods but rather being handled by the approximately 200 distributors Engro Foods supplies to. This leads to a difficulty in exercising control and supervision of the overall distribution activities. Accurate information with regard to sales, proper storage, timely delivery, and appropriate marketing procedures cannot be obtained easily.

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However, Mr. Nagi insists that even though third party logistics and secondary sales are being employed, feedback is being collected nevertheless and contact is maintained with the distributors as much as possible. Lack of Knowledge amongst Farmers A major issue that is faced on the raw materials procurement side is the lack of awareness and insufficient knowledge that is common amongst various small farmers in the villages milk is collected from. These farmers not only lack knowledge about ways to optimize the milk extracted from their animals but also are unaware about the ways to take care of the animals. This leads to lower productivity and smaller quantities of milk being produced. However, Engro Foods is trying to make a difference by spreading awareness amongst these farmers through education, training while also organizing vaccination programs that can make the livestock resistant to various diseases. Infrastructure Issues The two plants are located in the interior areas of Punjab and Sindh and the villages from where the milk is procured, whether in adjacent or far-flung areas, mostly lack proper roads and highways that would enable milk to be transported easily and in lesser time. As a result, delays may occur which might disrupt the overall production process. But these problems are addressed by the maintenance of adequate supply at the premises at all times in the form of powdered milk in order to deal with any sort of contingency situation. Limitations of the Research This report has been compiled entirely on the basis of the interview we conducted of Mr. Umair Nagi, Supply Chain Development Manager, Engro Foods and some secondary research which was largely internet based. No documents were shared with us by the company. A major constraint for the research was the inability of the team to visit the actual plant which is situated far away from home in Sahiwal and Sukkur, while the Milk Collection Centres that form a significant part of supply chain management at Engro Foods also could not be observed because of their hard to access locations. Thus, the report has been prepared with these constraints in tow at every juncture.