When the Levy Breaks: The European Union Milk Quota
The lifting of the European Union milk quota has sent shockwaves through the dairy supply chain. But could these fears be laid to rest by having the right technology in place? Henri Beringer, managing director of Quintiq France, explores how companies within the dairy supply chain can take action before the levy breaks
On the 1st April 2015, the European Union milk quota was scrapped after more than three decades of effort to prevent overproduction in the milk industry. The system was brought to an end so dairy businesses in the European Union could compete with international rivals who supply to developing regions in Asia and Africa. Milk quotas were first introduced on 2 April 1984 under the Dairy Produce Quota Regulations 1984, which reflected the then European Economic Community's Common Agricultural Policy. Originally they were to run until 1989, but had been extended several times.
Since the lift, countries across Europe have reacted differently. For example, Ireland, France and Germany raced into increasing their production, while the UK has been cautious. Ahead of the quota lift, Romuald Schaber, President of the European Milk Board, warned of the market being put under strain due to not being able to cope with the significant expansion of production.
While the European Commission believes that the changes will not bring back the 'butter mountains' and 'milk lakes' seen in the past, there is always the risk that supply will outweigh demand. This is why planning ahead and reacting quickly to change is imperative.
But how can companies in the dairy industry prepare for this potential surge? Could technological innovation be the answer, and is now the right time to invest in transforming planning processes? The answer to all three is yes and here is why.
Meeting profitable demands: suitable technology
It is an open secret that traditional planning tools cannot address challenges in milk-based production, especially with the market being so volatile. This unpredictability makes it difficult to know what the product mix will be due to the variations seen in the quality and quantity of milk. Demand from customers can also be varied meaning that milk producers have to work with different time horizons. Moreover, the short shelf life of dairy products tightly constrains the milk product supply chain, strictly limiting the safety stocks.
Companies need to be prepared to meet new and profitable demand. This is where suitable technology is best placed to help.
The correct driver(s) to supply chain planning should be the most significant constraint(s) on profitability. These drivers could be product mix, profit margins, stocking constraints, transportation costs, production lead times, shelf life or demand patterns. For example, a milk-based products manufacturer should look at their lead times and shelf life, but in the wake of the lift of the milk quota, demand patterns could also pose a threat in a reshuffled competitive landscape.
Maintaining efficient operational processes and meeting tight deadlines are the key requirements for businesses to ensure that they meet the demand of customers. Using a solution that provides greater visibility across the milk production supply chain will enable better planning and help prevent wastage. This will ensure that 'milk lakes' and 'butter mountains' remain firmly in the past.
Real-time, future-looking and accurate reporting
When companies assign products to plants and warehouses and delivering to customers, do they factor in all the data available to arrive at the most well-informed decision? There are many intricacies involved in the milk-based products industry. Take, for example, the production of fat-free strawberry yoghurt. From start to finish there are many intermediary stages that all need to be taken into account as part of an efficient production chain, with fully utilised resources and optimised stocks.
In my experience, it is rare to see an accurate model for recording and forecasting stock and then there is the added complexity in identifying storage capacity and delivery to customers. Companies use a variety of methods to forecast stock such as traditional safety stock calculations, which uses fixed quantities, or the 'days of supply model' to create a dynamic link between safety stock and demand.
But these methods do not allow planners to use the data generated from the production cycle or their soft knowledge. This makes it difficult for companies to correctly anticipate every demand spike or 'what if?' scenario that may happen. Without this, they run the risk of incurring high storage costs or producing stock that will expire before it is needed, especially when working with raw materials.
With a dedicated milk production planning solution, planners are better equipped to optimise all processes and resources, from when the raw materials come in, through to storing and deliver. This will help in addressing any potential surge on the day of operation and various other time frames.
Future outlook: the dairy supply chain model
It will be interesting to see the impact that the lift of the quota has had on certain markets and companies. Will the UK fall behind in the export market due to their cautious approach or will Ireland, France and Germany over-produce and incur the result of increased wastage?
But taking a step back, should there be a shift in the dairy supply chain model? Taking responsibility for contributing to a sustainable supply chain is important, especially with achieving total food security being a goal of the United Nations. While we live and breathe in a developed world, organisations in the supply chain should not take anything for granted and must strive to make the most of the raw materials provided to them.
What is clear to me is that organisations in all these markets need to make sure they have the right technology in place or they risk falling behind their global competitors and wasting raw materials. Tools that allow planners to view and use relevant data, simulate demand scenarios and anticipate irregularities will save dairy production companies from drowning if the levy breaks.