DEEP PROCUREMENT: How has it been used? NESTLÉ: DIRECT SOURCING TO DRIVE SMALLHOLDER PRODUCTIVITY35, 36
BUSINESS CASE
VALUE DELIVERED
SUCCESS FACTORS
Problem: Nestlé, the world’s largest milk purchaser, sources about 12 million tons of fresh milk annually from 30 countries.
Private sector partner: By 2004, Nestlé had nearly 260,000 small-scale dairy farmers supplying Nestlé factories directly, delivering an estimated 33% of Nestlé’s fresh milk supply in that year.
Large, established, and wellcapitalized companies have an advantage in building deep procurement networks, which can be expensive depending on the product being sourced, its scale, and producer locations.
Growing disposable income levels in developing countries have begun driving significant global dairy demand. The majority of the world’s milk is produced by developing countries’ small farmers, but many regions could not increase output to meet demand, and nearly all lacked efficient milk collection systems. Solution: Nestlé applied its “milk districts” model in strategic emerging markets like Brazil, Mexico, India, and China beginning in the late 1980s. Establishing a milk district involved negotiating farmer agreements for twice-daily milk collection; building chilling centers and collection points near farmers; arranging transportation from the collection center to a regional factory; and implementing locally driven program to improve milk quality.
Milk district output volumes experienced average growth of 2-5% annually, with some districts seeing growth rates as high as 10%. Smallholder farmer: Between 2001-2004 milk sales per farmer increased by 30% and the milk supply experienced an overall improvement in quantities, composition, and bacteriological quality. In Brazil, for example, milk producers almost doubled their daily output, from 405 to 978 liters per day, between 1989 and 2004.
Producer incentives, like providing extension and linking prices to milk quality, effectively built farmers’ loyalty to Nestlé and limited side-selling. Rigorous market and geographic analysis ensured that the network’s potential production quantities and potential farmer returns could be balanced to create a sustainable milk district.
Increased milk quality and sales drove income gains; in China milk sales per farmer increased by 30% from 2002-2005, and farmers received an average $300 per month—twelve times the national average farm income.
“Growing Business with Smallholders: A Guide to Inclusive Agribusiness.” GIZ, November 2012. http://www.agribusiness-with-smallholders.net/fileadmin/user_upload/ publications/Guide-Growing_Business_with_Smallholders_large.pdf. 36 Goldberg, Herman. “Nestle’s Milk District Model.” Harvard Business School Case 906-406. 8 March 2006. http://hbr.org/product/Nestle-s-Milk-District-Mo/ an/906406-PDF-ENG. 35
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FROM SMALLHOLDERS TO SHAREHOLDERS: A Guide to Optimizing Partnerships with the Private Sector for Smallholder Impact